Employers must raise the issue of the repayment of surplus funds with their trustees now to avoid missing the 6 April 2011 deadline, warns Hogan Lovells.

The law firm said a little known provision of the 2004 Pensions Act, section 251, states that repayments of surpluses in pension schemes to employers are only permissible if the trustees have made a resolution to do so.

The record of the inclusion of the provision, which was added as the Bill passed through Parliament, suggests that it was 'rushed and that inadequate time was available for proper scrutiny of the drafting', Hogan Lovells said.

While the potential for surpluses have been effectively wiped out by the financial crisis, dealing with these funds have slid down the agenda for most managers and trustees. However, any surplus repayment may only be put into use before 6 April 2011, and if that date is missed, the scheme may then be prevented from paying out to a sponsor.

Section 251 applies to any scheme that contained a power to make payments from scheme funds to the employer, was subject to the Inland Revenue limits on the amount of surplus that could be held in the scheme, or at that date was not in winding up, as at 5 April 2006. Therefore, many defined benefit schemes established before 6 April 2006 will be affected.

The power to repay surplus is important as, although surpluses are few and far between, circumstances may change in the future. In addition, under IAS 19, a power to repay surplus may have a significant effect on the reporting of pension assets on the balance sheet.

Trustees may resolve if the current power only allows payments of surplus in order to comply with Schedule 22 (which intended to prevent excessive funds from benefitting from the tax advantages of being invested through pension arrangements - it was revoked as part of A-Day), or if the current power is wider than is necessary to comply with Schedule 22.

Prior to making a resolution under section 251, trustees must give three months' written notice to the employer and members.

Share Story: