Pensions Update - July 2010

Urgent steps required to preserve surplus repayment powers

The Pensions Act 2004 introduced a new requirement for schemes which contain a power to pay surplus to an employer while the scheme is ongoing. The power will become invalid unless the trustees pass a resolution preserving the power before 6 April 2011 after giving at least 3 months' notice to members and the employers. Although the legislation is clearly not intended to impact on any return of surplus on a wind up, shortcomings in the way it has been framed mean that it is also prudent to go through this process if an existing power for repayment of surplus on wind up is to be preserved.

The power to repay surplus will be lost unless the trustees co-operate in its retention. The trustees must decide whether the retention of the power would be in the interests of members, although it is legitimate for the Trustees to take into account the fact that a change to the options for use of surplus would be a change to the terms of the scheme and the balance of powers as previously understood and intended by the employers and accepted by the trustees and members.

There is no reason in principle why retention of a power to repay surplus should not be in the interest of members. Otherwise, there would be no point in the new law leaving the decision to retain the power in the trustees’ hands. In particular, trustees may feel that the interest of members is better served by encouraging employers to fund their schemes as strongly as possible. The more barriers there are to employers deriving any benefit from surplus, the greater their incentive to ensure no surplus arises by negotiating relatively weaker technical provisions or longer recovery periods.

The conclusion reached by the trustees will depend on the circumstances of their scheme. The trustees of a scheme where the power to set the contribution rate vests solely in them may judge the issues differently from the trustees of a scheme where the rate is set by agreement between the employer and the trustees.

Trustees have the option to preserve the power, but with restrictions on how and when it can be used. Where the power states that it can only be used where there is excessive surplus under the HMRC practice applicable before A Day, the trustees can widen the circumstances where it can be used.

The need for 3 months’ notice before trustees can pass a resolution to preserve a surplus repayment power means that trustees and employers should be considering this issue now so that the process can be completed by 6 April 2011.

That date is also a deadline for schemes which want to preserve the earnings cap and Revenue limits as they existed before A Day. If these restrictions have not been formally incorporated into the rules of a scheme by 6 April 2011, the restrictions will automatically cease to apply as the transitional provisions under the Finance Act 2004 which preserved them for a limited period will then fall away. Many schemes have already made the necessary amendments. For those which have not, time is running out.