Payments of surplus to the scheme employer – is your scheme power about to lapse?

Written on 16 Sep 2015

Where a defined benefit pension scheme has a power in the trust deed and rules allowing payment of surplus funds in the scheme back to the employer, it may be necessary to take action prior to 6 April 2016 to retain this power.

Section 251 of the Pensions Act 2004 requires schemes that had such a power in the scheme documents before 6 April 2006 to pass a trustee resolution to preserve that power, prior to 6 April 2016, or otherwise it will lapse. The trustees must be satisfied that the resolution is in the best interests of scheme members and notice must be given to the scheme employer and to scheme members at least three months before the date from which the resolution is intended to take effect. Therefore, action will be required now for affected schemes that have not already addressed this.

This issue was widely considered in 2010 and many schemes will have addressed this already. However, the deadline was extended to 6 April 2016 and some affected schemes that have not already acted may need to act now.

The issue is likely to be raised by the scheme employer who has a vested interest in a power to have surplus funds paid to it. However trustees should also proactively consider this as retaining this power may well be relevant for scheme funding negotiations, since an employer may be less willing to provide generous scheme funding if there is no prospect of trapped surplus ever being returned to it.

This only applies to a power to pay surplus funds to the employer on an on-going basis; it does not apply to a power to pay out surplus funds to the employer on a winding-up of the scheme.

If you believe your scheme may be affected, please get in touch with your usual OC contact.