27 October 2023 Pensions

UK Pensions - Returning surplus to an employer

As funding levels across the UK’s defined benefit pension schemes improve, with many schemes now in surplus, trustees’ decisions on how surpluses should be distributed are becoming a hot topic. A recent Pensions Ombudsman determination considered the process trustees should follow when making such decisions and provides helpful guidance for others in this position.

Background

The case related to the Bristol Water plc Section of the Water Companies Pension Scheme. Following its decision to buy-out and wind-up the Section, the trustees proposed that the surplus of approximately £12 million should be returned to the sponsoring employer, Bristol Water plc. This was in exercise of its powers under the scheme rules, which provided as follows:
 
“If any Appropriate Assets [defined as assets of the Section] remain after complying with the relevant requirements of the Pensions Act 1995, the Trustee may in consultation with the relevant Designated Employer [namely, Bristol Water] increase all or any of the benefits or provide additional benefits to any extent that it considers just and equitable … Any Appropriate Assets then remaining will be paid to the Employer, in such proportions as the Trustee determines acting on actuarial advice and after consulting the Designated Employer. The requirements of Section 76 of the Pensions Act 1995 (excess assets on winding up) must be satisfied before any payment is made to the Employers.”
 
Mr S objected to the proposed return of surplus to Bristol Water, arguing that it was “morally indefensible”. He subsequently complained to the Ombudsman.

Decision

The Ombudsman decided not to uphold the complaint. In doing so, he reiterated that trustees should follow the correct process when reaching their decision. Specifically, they need to:

  • follow the requirements of the scheme rules;
  • interpret the scheme rules correctly;
  • take into account the appropriate factors in reaching their decision; and
  • make a reasonable decision (broadly, a decision which is not so unreasonable that no reasonable person acting reasonably could have made it).

The Ombudsman considered each of these points in turn:

  • Following the requirements of the scheme rules and interpreting them correctly: The Ombudsman concluded that the trustee had followed the requirements of the scheme rules and interpreted them correctly. The rules gave the trustee a discretion, after consultation with Bristol Water, to augment benefits and it was open to them to decide not to augment benefits. Bristol Water was the only employer, so the question of allocating the surplus between employers did not arise. In addition, the question of whether the requirements of Section 76 had been satisfied fell outside the Ombudsman’s jurisdiction (being a matter reserved to the Pensions Regulator).
  • Taking into account the appropriate factors: The Ombudsman concluded that the trustee had taken into account all relevant matters and no irrelevant ones in reaching its decision. These included the views of Bristol Water, the source of the surplus, member expectations, the fact that members’ benefits had been secured in full, the fact that there had been augmentations to members’ benefits in the past, and the fact that Bristol Water had made significant additional contributions to the scheme to accelerate the trustees’ de-risking strategy.
  • Making a reasonable decision: The Ombudsman concluded that the trustee’s decision was not unreasonable or perverse to the extent that no other reasonable decision-maker could have made it.
Comments

This case highlights the risk of complaints to the Ombudsman about surplus decisions, with members’ emotions often running high in such cases. The key point for trustees is to ensure that the decision-making process they follow is as robust as possible. As underlined by the Ombudsman, trustees need to ensure they act within the scope of their powers under the scheme rules, give proper consideration to matters which are relevant (and exclude from consideration those which are irrelevant), and not act perversely. 

Perhaps one of the most interesting features of this case is that it became very public, having been raised with the Work and Pensions Select Committee, so the trustees had to articulate their thinking about the relevant factors in a public forum as well as to the Ombudsman. Their letter to the Committee provides good insight and is available here.

Of course, the factors which are relevant will differ from scheme to scheme, although many of those discussed in this case will be of general relevance when making surplus decisions (such as the source of the surplus and member expectations). 

Trustees also need to ensure the statutory requirements under Section 76 of the Pensions Act 1995 are met before any surplus is returned to the employer. If these requirements are not met, trustees may also face the risk of complaints to the Pensions Regulator.

We acted for the trustee in this case.

For more information, please speak to your usual Linklaters contact.