Surplus - the saga continues

Nigel Moore

You might be forgiven for thinking that all of the issues in relation to surplus that could have arisen would have been dealt with by now. However, as some recent court cases and the Myners Review show, questions about the use of surplus are still cropping up.

Wrightson - partial winding-up rules and bulk transfers

One interesting recent case on the use of surplus is the UK Privy Council decision in the New Zealand case, Wrightson v Fletcher Challenge. This case looked at the amount of money which the trustees should have transferred out of the scheme under a partial winding-up rule when a participating employer left the scheme. The rules provided that the amount was to be determined at the trustees’ discretion and the provisions of the full winding-up rule applied so far as appropriate. The question arose as to whether the trustees should have transferred a share of the surplus when an employer left the scheme.

The Privy Council said that the trustees’ discretion was a wide one. They declined to limit it by saying that the appropriate starting place for the trustees’ deliberations was a share of fund transfer. The Trustees should approach the determination of the part of the fund attributable to a departing employer with an open mind. In addition, the Privy Council held that a provision in the winding-up rule providing for payment of surplus (with the consent of the Government Actuary) to employers could not be relied upon as an indication that the trustees must allocate part of the surplus on a partial winding-up.

In addition, they made some useful comments about the nature of surplus in general and said that "the members have no proprietary interests in the scheme funds; they are merely security for the payment of benefits to them. Secondly, while the scheme is a continuing one, the surplus is merely an actuarial valuation which may be falsified by events and which does not represent any sum to which either the employer or the employees as a body has any legal right without the consent of the other".

Barclays Bank v Holmes - use of final salary surplus to meet money purchase employer contributions

This case looked at the use of a final salary surplus to meet employer contributions due to a money purchase section. A member of the final salary section complained to the Pensions Ombudsman that this constituted maladministration. Relying on the earlier case of Kemble v Hicks (see our LawNow website for a summary), the Pensions Ombudsman upheld the complaint on the basis that the money purchase section was a separate trust.

On appeal the High Court held that, as a matter of law, an employer could set up a pension scheme which had a money purchase section and a final salary section (and this is acknowledged explicitly in pensions legislation). Whether there are two separate trusts or merely two sections of the same trust will turn on the exact wording of the documentation used (and, accordingly, whether there is power to use surplus to meet money purchase contributions). In this case it was held that there was a single trust and Barclays could legitimately use a surplus in the final salary section to offset employer contributions to the money purchase section.

The case illustrates the importance of getting the wording of scheme documentation right and making sure it says exactly what the parties intend.

The judge also acknowledged the commercial reality of what Barclays did as follows: "It does not seem very likely that, by introducing the [money purchase section], the Bank intended to lose the right which it had previously had to debit surplus with part or the whole of its contribution to the Fund. ... Furthermore, it is not as if surplus is in some way beneficially owned by any of the employees or pensioners under the [Scheme] ... the result of concluding that an employer was shut out from lawfully using surplus in a pension scheme, could well be that it might cause employers to take decisions with regard to pension schemes which would not be beneficial for employees. After all, an employer is not obliged to provide a pension scheme, and it seems to me in the public interest that employers should be encouraged to provide pension schemes, and, indeed, relatively generous pension schemes, rather than otherwise."

Airways Pension Scheme - meaning of "disposable surplus"

Another recent case to look at surplus issues involved the Airways Pension Scheme. One of the questions which arose was the meaning of the phrase "disposable surplus" in the context of a rule which required the actuary to certify the amount of any deficit or disposable surplus attributable to each employer. The court said that when the actuary was considering whether there was a disposable surplus, he must exercise his professional judgement and could make allowances by way of reserves against either general contingencies or more specific factors, so as to reduce the amount available to be considered as "disposable surplus". However, he should not take into account what would actually be done with any disposable surplus although he could consider the sort of provision which the trustees might make. In addition, where the actuary had an element of discretion as to how a disposable surplus was used, he must have regard to the interests of all concerned, including the employer.

National Grid and International Power - use of surplus to offset monies already owed to the scheme

No discussion of surplus would be complete without a reference to the House of Lords decision in National Grid. This case concerned arrangements made by the employer to use surplus to reduce employer contributions, including contributions which the employer owed in respect of arrangements for a redundancy/early retirement arrangement. The House of Lords decision in favour of the employer turned on the specific wording of the scheme documents. One point worthy of general note is that in the House of Lord’s view the release of a debt owed by the employer to the scheme (in this case the contributions owed to the early retirement/redundancy arrangement) did not amount to a payment to the employer out of scheme monies and the earlier High Court decision in British Coal was overruled.

Myners Review

Finally, the Myners Review makes two recommendations in relation to surplus, as in his view: "employers with a clear entitlement to part of the surplus are more likely to continue providing defined benefit schemes; and they are more likely to give those schemes the resources they need to be managed effectively".
The recommendations were that:

• the tax rate on the withdrawal of surplus (currently 40%) should be reduced, possibly to match the rate of corporation tax; and
• the Law Commission should be asked to review whether the objective of maximum clarity over ownership of the surplus can be achieved through legal change. In relation to the first proposal, payments made to employers after 11 May 2001 will now be taxed at 35% instead of 40%.

On the second proposal, it is hard to see how any eventual parliamentary consideration would serve to clarify an area which has already received so much judicial consideration and which inevitably turns on the particular terms of each pension scheme. Indeed the Pension Law Review Committee was asked almost a decade ago to review the surplus ownership issue but they were (through no fault of their own) unable to offer any further clarity on the issue.