Prior to 6 April 2006, to avoid adverse tax consequences, trustees of occupational defined benefit (DB) pension schemes had to reduce any funding surplus in their schemes if it reached a certain level. One of the ways in which such a surplus could be reduced was by making a payment to participating employers.
The requirement to reduce funding surpluses was removed by the Finance Act 2004 with effect from 6 April 2006. A transitional power was put in place following the removal of this requirement. Trustees are allowed to preserve the power to make surplus payments to participating employers in ongoing DB pension schemes , provided that a trustee resolution was passed between 6 April 2006 and 5 April 2011. This deadline was subsequently extended by five years, to 6 April 2016..
Why would trustees pass the resolution?
Scheme funding issues
The consideration of whether to pass a resolution is generally initiated by a scheme’s employers rather than its trustees. At first glance, it seems counter intuitive for trustees to agree to pass a resolution which appears to be entirely in the employers’ interests, when their overriding duty is to scheme members.
However, passing the resolution may mean a more productive experience for trustees in funding negotiations. If an employer knows that a surplus can be repaid to it rather than being locked in to the scheme, it may be more likely to agree to increase contributions and ensure the scheme is better funded.
In addition, the employers’ balance sheets will benefit if the scheme has the ability to repay a funding surplus to participating employers, meaning those employers may be better disposed to funding the scheme to a higher level.
In the longer term, this will have an impact at every funding negotiation. In the short term, the trustees could use their agreement to pass the resolution as a bargaining chip.
In reality, a scheme having a surplus is an unlikely event
A funding surplus may only be paid from a pension scheme to its participating employers where the pension scheme is funded above buy-out level. A rare occurrence these days; most employers and trustees remember wistfully the days when surpluses were the norm.
Use it or lose it
Unless a resolution is passed before 6 April 2016, the payment of surplus from a scheme to a participating employer while the scheme is on-going will not be permitted (even if the scheme rules allow such a payment). Trustees may wish to pass the resolution so that the option remains available to them in the future, for the reasons set out above. Passing the resolution of itself does not commit the trustees to making a repayment of surplus in the future.
Nonetheless, trustees should tread carefully when communicating on this issue with members. Even if the trustees decide after careful consideration to pass the resolution, it is a difficult issue to portray positively to the scheme membership. One of the requirements for passing a resolution (see below for a summary of all the requirements) is giving notice to the membership. Even if the notice is carefully worded and explains how unlikely it is that a surplus will arise or will be paid to the employers, members may still get the impression that their pension savings are being taken away from them and paid to the employers. Members’ reactions may be even more emotional if the scheme is underfunded and/or the employer has recently closed the scheme or changed the benefit structure. Very careful consideration should be given to the drafting of the notice and whether the position can be justified to the members.
Passing the resolution
There are a number of requirements that must be satisfied before the resolution can be passed. In particular, the trustees need to be satisfied that it is in the members’ interests to pass the resolution (trustees may wish to take legal advice in this regard) and at least three months’ notice in prescribed terms should be given to the members and the participating employers (even if the process was initiated by the employers) in advance of the resolution being passed.
Any future repayment of surplus would also need to comply with the set requirements  which include:
- the scheme must contain a power to make payments out of scheme funds to the employer;
- the scheme must not be winding up at the time of the payment;
- the scheme must be in surplus on a buy-out basis; and
- the proposed repayment must not exceed the surplus as certified by the scheme actuary.
A final reminder: If trustees decide that they can agree to a resolution, it must be passed before 6 April 2016, or the power to make repayments of surplus to the participating employers of an ongoing DB scheme will be lost.
 Section 251 of the Pensions Act 2004
 Section 25 Pensions Act 2011
 Section 37 of the Pensions Act 1995