Defined benefit scheme trustees must pass a resolution ahead of April 5 2016 if they wish to retain their current power to repay surpluses to their employer sponsors.
While pension scheme surpluses appear out of reach for many UK DB schemes, trustees of well-funded schemes will lose the ability to refund surpluses in ongoing arrangements if they fail to pass what is known as a section 251 resolution before April 5 next year.
Section 251 action points
Trustees have a specific process to go through before a resolution can be passed:
Agree the proposed resolution;
Give three months’ notice of the proposed resolution to the employer and the members;
Pass the resolution after the three months’ notice period has expired.
Sponsoring employers making significant contributions into DB arrangements have a vested interest in ensuring trustees take action ahead of the April deadline.
Trustees failing to respond ahead of the deadline raise the spectre of future surplus funding becoming trapped, making it more difficult for sponsors to recover excess funds in a tax-efficient way.
Back on the radar
A provision of the Pensions Act 2004, section 251, requires trustees to pass a resolution to return surplus funds to employers.
The more I think about section 251, it is up there with one of the most pointless pieces of legislation the government has come out with
Lesley Browning, Norton Rose Fulbright
A deadline of April 5 2011 was initially established for trustees to take action, but following new legislation that same year the deadline was stretched out to 2016.
Catherine McKenna, global head of pensions at law firm Squire Patton Boggs, said some trustees may have tackled this issue ahead of the initial deadline but the impending 2016 cut-off has put it firmly back on the radar.
“Trustees must remind themselves of what action they did or didnt’t take in 2011 when the deadline was extended,” said McKenna.
“If they haven’t dealt with it they need to consider what they need to do about the issue.”
Maintaining the status quo
McKenna said trustees opting to pass a resolution are effectively maintaining the status quo while inaction will result in trustees losing the power to refund surpluses on an ongoing basis.
“[Trustees] don’t want to discourage the employer from funding the scheme appropriately,” she said.
Sue Tye, partner at law firm Baker & McKenzie, shared McKenna’s view.
"There aren't that many schemes out there in surplus," said Tye. "But in terms of funding requirements it encourages employers to fund at a higher level,” adding she had not come across any trustees refusing to pass the required resolution.
The Pensions Regulator’s revised DB funding code encourages trustees and employers to work collaboratively to increase the likelihood of reaching a scheme funding outcome that balances the trustees’ requirement to pay benefits, while minimising any adverse impact on the sustainable growth of the sponsor.
Pointless legislation
Lesley Browning, partner at law firm Norton Rose Fulbright, said there was little point in having a deadline to “reconfirm or lose” the power, a proposal which has irked a number of her employer clients.
“The more I think about section 251, it is up there with one of the most pointless pieces of legislation the government has come out with,” she said.
Browning said communications to members notifying them of the resolution need to be very carefully drafted to avoid sparking undue concern.
“It’s rather a depressing exercise brought by unnecessary red tape,” said Browning. “But any [schemes] that haven’t done it, and wish to, need to get on with it.”
