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Resolving to govern the use of pension surplus

Section 251 of the Pensions Act 2004 will prohibit payments of surplus to an employer from a defined benefit (DB) scheme after April 2016 unless an appropriate trustee resolution has been passed. To pass such a resolution, trustees must act by 5 January, 2016 at the latest.

At present, it may seem that comparatively few DB schemes operate a scheme surplus. However, despite recent trends, economic and/or demographic factors may result in significantly improved financial conditions for some DB schemes in the future. Therefore, retaining active control of any surplus remains an important consideration for employers.  

Legislation

Prior to 6 April, 2016, legislation enables trustees to pass a resolution to affirm an employer’s (qualified) right to access surplus funds in an ongoing scheme (Section 251 Resolution). If a Section 251 Resolution is not passed before this date, any such employer right and/or trustee power will lapse. Consequently, any surplus fund will be locked into the scheme, pending wind up.

A Section 251 Resolution is concerned with ongoing schemes only; it will not affect scheme provisions applicable to the wind up of a pension scheme. In addition, it is intended to facilitate the preservation of existing scheme rules; not the insertion of new provisions.

Employers/Sponsors

Employers have a vested interest in preserving the prospect of recovering excess assets, rather than simply accepting the risks of overfunding. Therefore, they should proactively consider bringing this matter to the attention of trustees. Ultimately, however, the power to pass a resolution is the prerogative of the trustees. Although the relevant legislative provisions do exclude scheme administration payments and authorised employer loans etc. from their scope.

Trustees

Trustees, too, may be inclined to protect existing powers. It may be a material consideration in the context of future scheme funding negotiations. An employer may be reluctant to commit to generous scheme funding with no prospect of recovering excess scheme funds in the future, particularly if the benefits of a scheme might become fully funded on a buy-out basis.

Trustees must not derogate from their fiduciary duties to members. The passing of a resolution must not be a perfunctory exercise, but rather a legitimate and reasoned decision.

Accordingly, trustees must be satisfied that passing a Section 251 Resolution is in the interests of the members of the scheme. However, the collective interests of scheme members may be better served by a reliable, committed employer, willing to fund a scheme as fully as able.

Notice

Scheme members must be given at least three months’ notice of an intended resolution. Therefore, action must be taken as soon as possible if compliance with notice requirements is to be achieved. Certainly, a notice must be issued to members no later than 5 January, 2016.

The Resolution

A Section 251 Resolution may only be made once after 3January, 2012. However, trustees may amend or repeal a Section 251 resolution which was made before 6 April, 2011.

Trustees may resolve that a power continues in its existing form in the scheme deed and rules, or that exercise of the power is contingent upon certain conditions and/or circumstances. It is important for trustees to appreciate that such a resolution is not simply a decision to repay a surplus. A resolution is merely required to reserve a power to refund surplus if the conditions are appropriate.

Closing comments

If a Section 251 Resolution is passed, the scheme’s deed and rules may need to be amended in accordance with the scheme’s amendment power, in order to give effect to any modifications to existing rules.  

If you would like to discuss any of these matters further or you believe that your scheme may be affected, please do not hesitate to get in touch with one of our pensions law specialists.

Author: Alan Cadman

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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