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Surplus: Preserving powers to make payments to employers
Prior to the Finance Act 2004, exempt approved occupational pension schemes were required to keep any actuarial surplus within certain parameters. One of the ways in which surplus could be reduced was via a payment to the employer (taxable at 35%).
The actuarial surplus requirements were removed on A-Day (6 April 2006) and, as a result, the power in the Pensions Act 1995 (PA95) to permit such payments was revised to remove the reference to the previous tax legislation. Since A-Day, a return of surplus can be made to an employer from an ongoing scheme only if:
- the scheme rules permit such a payment;
- the power is exercised by the trustees; and
- certain prescribed conditions are satisfied.
The transitional provisions under the Pensions Act 2004 are broadly drafted and appear to prevent any payment being made to an employer out of scheme assets unless an appropriate trustee resolution has been passed. Therefore trustees should consider passing a resolution to cover, for example, a power to return surplus on either an ongoing basis or on wind-up.
Trustees have until 6 April 2011 to decide whether to preserve or revise their power to make payments to the employer. If no decision is made before then it would appear that any such power under the scheme rules effectively disappears.
Statement from Department for Work and Pensions (DWP)
Following representations from many in the industry (including Sackers), the DWP has written to those who contacted the department to explain that it intends "to amend [section 251] when a suitable opportunity arises, in order to ensure that it operates in a sensible and proportionate way". In particular, it will make clear that the provision only applies to payments which are covered by section 37 of the PA95 (essentially a payment of surplus to an employer from an ongoing scheme). The DWP also proposes to extend the deadline for action by trustees by 5 years, to 6 April 2016.
What should trustees do?
Schemes will generally fall into two camps; those currently with a section 37 power (Type A) and those without (Type B).
Type A schemes
Type A schemes will be caught by even a modified section 251. As such, if they have already notified their employer and members of their intention to pass a resolution there is no reason to continue the process to its conclusion. Those who are still on the starting blocks have a choice:
- press ahead with a notice if there is a ready-made vehicle for it (for example, an annual popular report); or
- wait until the legislation is published and take advantage of the extension of the deadline.
As the scheme employer stands to lose out if the requirements of section 251 are not met, its view should probably be sought here.
Type B schemes
Type B schemes should no longer need to pass a section 251 trustee resolution. However, with no amending legislation currently in sight and the time for issuing the notice fast running out, some trustees (and some employers in particular) may wish to err on the side of caution by proceeding with the section 251 notice.
As the appropriate course of action therefore depends on the scheme's specific situation, trustees should discuss the latest developments with their advices as soon as possible.
Author: Georgina Jones