Guest comment: Repayment of surplus

While the reduction in the tax charge on repayment of surplus from 35 per cent to 25 per cent in April 2024 will be welcome news for some employers with defined benefit (DB) schemes, it is likely to be of little incentive to many because of the vagaries of their scheme rules.

Some scheme rules have an absolute prohibition on surplus being repaid to the employer, while for others it can be at the trustees’ discretion and often only on wind-up and after they have decided whether to augment members’ benefits.

It is worth remembering, these schemes rules were drafted when there were very different funding and tax regimes in place.

The recent Pensions Ombudsman’s decision in a complaint relating to the Water Companies Pension Scheme – Bristol Water plc Section confirms that trustees can decide to pay all the surplus to the employer, notwithstanding that they have discretion to use it to increase members’ benefits.

However, as that case also demonstrates, such a decision could expose trustees to complaints from members.

The government has promised to consult on changes to the rules on repayment of surplus.

If the government is going to incentivise employers to run on their schemes, at the very least, it needs to: (i) introduce a statutory override to amend scheme rules exercisable at the employer’s request; and (ii) allow surplus to be repaid while a scheme is ongoing but only if the scheme is funded to, say, buyout.

We await the consultation with interest.



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