The Government has this week made a welcome if rather belated announcement in relation to a problematic issue which had arisen in relation to section 251 Pensions Act 2004 dealing with the retention of powers under pension schemes to make payments to employers.

The background

When the former Inland Revenue statutory surplus requirements were scrapped at "A Day" the conditions on refunds to employers were changed.  As a result, section 251 of the Pensions Act 2004 introduced transitional provisions to deal with scheme rules on surplus distribution in place at April 2006. 

The intention of section 251 was that where a scheme had the power to refund ongoing surplus to the employer, trustees were given five years in which to pass a resolution allowing that power to be retained, after which any such power would lapse.  This resolution would have to be passed before 6 April 2011, but crucially all members (including pensioners and deferreds) and employers had to be given at least 3 months' advance notice and trustees had power to restrict the circumstances and conditions in which a payment could occur.

The problem

However, the drafting of the section is unsatisfactory.  Read literally, arguably it applies to any scheme that was ongoing on 6 April 2006: even if it only had the power to refund surplus on a winding-up or to make administrative payments to an employer.

While hopeful that the DWP would clarify the position, we have generally advised that the only safe approach - given the wording of the legislation, timing issues and the consequences if such powers lapsed - was for any potentially affected scheme to seek to pass the appropriate resolution before 6 April 2011.  Indeed, earlier this year DWP communications indicated agreement with a wide reading of section 251.

The DWP's new statement

In a letter circulated this week to industry bodies, the DWP now accepts that the intention of the legislation was limited to dealing with the potential repayment of surplus by an ongoing scheme, and not refunds on wind-up or other permitted payments to employers.  It intends to amend the legislation accordingly, "when a suitable opportunity arises" and as part of that exercise the legislation will extend the deadline for action by trustees with a power to refund surplus in an ongoing scheme for a further five-year period, i.e. to 6 April 2016.

We welcome this.  By acknowledging that the legislation needs correction, we believe it justifies the careful approach that schemes, of necessity, have had to take to date.  Going forward, it gives scope for trustees to review their position.

However, as the issues are complex, circumstances of schemes differ, and complete certainty can only be obtained when the ink is dry on the statute book, we recommend that you speak with your usual adviser at CMS Cameron McKenna before any further substantive decisions are taken on this issue.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 15/10/2010.