UK: Ongoing Scheme Funding - Refunds Of Surplus To Employer - Pensions In 30 Podcasts, Episode 12

There are circumstances in which a defined benefit pension scheme may have a funding surplus. In episode 12 of Pensions in 30 Podcasts, we look at the challenges of refunding surplus, both on wind-up and in an ongoing scheme.

Download podcast

Subscribe via iTunes

Download the fact sheet here.

Key points

  • There are circumstances in which a defined benefit pension scheme may have a funding surplus.
  • Refund of surplus to an employer is permitted if certain requirements are met, which differ depending on whether the scheme is ongoing or in wind-up. The requirements include:

    • Ongoing scheme: power in the rules, refund within limit specified by actuary, in members' interests to exercise power, 3 months' notice to members.
    • Scheme in wind-up: power in the rules, scheme liabilities fully discharged, any power to pay surplus to others considered, 3 months' notice to members.
  • Section 251 of the Pensions Act 2004 provides that, for an ongoing scheme, the refund or surplus power is lost unless the Trustees pass a resolution meeting the requirements of section 251 to retain the power by 5 April 2016.  In practice, this means Trustees must have given written notice of their intention to make such a resolution to members and employers by 4 January 2016.
  • Under the Finance Act 2004, a refund of surplus payment will attract a 35% tax charge payable by the Trustees, which should be deducted from the surplus payment before it is paid.

Main sources

  • Pensions Act 1995 - refund of surplus requirements
  • Pensions Act 2004 - retaining refund of surplus powers
  • Finance Act 2004 - tax on surplus
  • Occupational Pension Schemes (Payments to Employer) Regulations 2006

Funding a pension scheme

Employers have a number of legal obligations to support their occupational pension scheme. In a defined benefit (DB) pension scheme, the sponsoring employer will usually agree with the trustee the level of contributions it is required to make in order to fund the scheme to a level that will allow it to meet its liabilities. Most DB schemes have a funding deficit and so a recovery plan is put in place and the employer will make additional deficit reduction contributions.

Occasionally a DB scheme may have a funding surplus, for example, where a scheme's investments exceed expectations for a number of years. Where this occurs an employer will be keen to ensure that any excess contributions it has paid to the scheme can be returned.

Refunding surplus

Until 6 April 2006, if a pension scheme had a surplus the trustees were required to eliminate that surplus. One way to do this was to repay the surplus to the employer. Certain requirements must have been met before the surplus could be repaid, including the requirement to apply a specific increase to all pension benefits.

The obligation to eliminate a surplus was removed on 6 April 2006 (under the Finance Act 2004) as a result of tax simplification measures to remove out-dated HMRC restrictions on over-funding of pension schemes. A refund of surplus to an employer is still permitted, but only if certain legislative requirements are met. The requirements differ, depending on whether the scheme is ongoing or in wind-up.

Refunding surplus in an ongoing scheme

For an ongoing scheme set up prior to 6 April 2006, the requirements include:

  • there must be a power to pay a refund to an employer in the rules of the scheme;
  • the refund must not exceed the maximum amount specified in an actuarial certificate; and
  • the trustees must be satisfied that it is in members' interests to exercise the power and must have given members at least 3 months' notice.

Section 251 of the Pensions Act 2004 provides that any pension scheme with a power to return surplus to an employer will lose that power unless the trustees pass a resolution to retain it by 5 April 2016 (this deadline was  extended from 6 April 2011). Any such resolution must meet the specific requirements of section 251.

Where there is no power to pay a refund of surplus in the rules of the scheme the power cannot be added unless the scheme's power of amendment is wide enough to permit this. If the power of amendment prohibits such a change the power cannot be added and the surplus cannot be paid to the employer.

But in any event, a resolution would have had to be made as above.

Where the Trustees of an ongoing scheme pay a refund of surplus they are required to notify The Pensions Regulator of the payment within one week of making it.

Note that for schemes set up after the introduction of Pensions Act 2004, Section 251 does not apply and it is still possible for a payment to an employer from scheme funds without a Section 251 resolution.

Refunding surplus on wind-up

The legislative requirements for a refund of surplus to an employer where a scheme is in wind-up include:

  • there must be a power to pay a refund to an employer in the Rules of the scheme;
  • the scheme's liabilities must be fully discharged;
  • the scheme's power (if there is one) to distribute assets to a person other than the employer must have been considered, and either exercised or not; and
  • the trustees must have given members at least 3 months' notice.

The notice given to the members of a scheme in wind-up must invite them to make representations in relation to the proposal to the Trustees, the employer, or ultimately to The Pensions Regulator if the member does not consider that the legislative requirements are met. The Pensions Regulator may issue a notice to the Trustees or the employer that the payment must not be made until it has confirmed it is satisfied that the legislative requirements are met.

A refund of surplus payment from an occupational pension scheme (including both an ongoing scheme and a scheme in wind-up) will attract a 35% tax charge, payable by the Trustees (as the administrators of the scheme). This is a free standing tax charge and so no off-sets can be made from it.  The Trustees should deduct the tax charge from the surplus payment before it is paid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
14 Sep 2017, Seminar, Birmingham, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

18 Sep 2017, Seminar, London, UK

Our annual event as part of the London Design Festival is now in its fifth year. We would be delighted if you are able to join us again.

21 Sep 2017, Seminar, London, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.