The UK Government's announcement of planned legislation to let sponsoring employers more easily access defined benefit pension scheme surpluses has generated a great deal of debate in recent weeks. The agenda itself, first set out by the Government's predecessor in 2023, is straightforward enough: helping employers to help themselves (with a little help from the trustees) to drive growth, and help the rest of us too.
It remains to be seen which levers the Government will pull, but wholesale reform seems unlikely, if only because it has been made clear that Trustee agreement would be needed. Trustee agreement, of course, would have to be underpinned by member wellbeing. And, suddenly, we have some parameters.
So, within this existing legal framework, what are the levers? Or rather, what barriers actually exist that might reasonably be expected to fall?
- Member notification seems unlikely to fall, having been a core feature of the system since the Pensions Act 2004 entered force. A cynic might ask what value such a notice can bring (and the requirement to issue certainly gives pause for thought in our experience) but ultimately notification and consultation are the modern way and ultimately employers and trustees only need to consider any responses, not follow them.
- The Rules of some schemes with older origins expressly prohibit employer payments, but in the 1970s the tide of official thinking changed. Until its abolition in 1997 the Occupational Pensions Board could disapply such Rules; views differed, but a typical requirement for such a modification order was that 50% of the surplus over 105% must go to the members, subject to Revenue Maximum. If the powers-that-be have long enough memories, they might vest something similar in TPR. But it seems more likely, if action is taken in this direction, that trustees will be given an overriding power.
- Under section 251 of the Pensions Act 2004 surplus payments from ongoing schemes are only permitted if the trustees had passed an enabling resolution by 5 April 2016. In our own experience at least, these resolutions were almost universally granted at the time, but for what it's worth, this restriction seems likely to topple.
Which brings us to the existential question – what qualifies as a surplus for this purpose anyway? Speculation abounds as to whether a softer standard than full buyout funding might be allowed, before trustees can agree to open the coffers. However, trustees are duty-bound to put the interests of their members first.
The Government has said that trustees could “assess the suite of options available in striking a deal with employers on how best scheme members can also benefit – linked to improving member outcomes.” The lure of benefit improvements has certainly worked in the past. But some trustees will inevitably be uncomfortable with anything significantly lower than full buyout, or low dependency with a good covenant.
Further details of the government's plans are not yet available, but more are anticipated in the spring – most likely on 26 March 2025, which has been set for the Chancellor's Spring Statement.
If you would like to discuss anything raised in this blog in more detail, please get in touch with a member of the pensions team or your usual Brodies contact.
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