Proposals on Surpluses in Occupational Pension Schemes (Dec. 1998) - Report of the Pensions Board

PROPOSALS ON SURPLUSES IN OCCUPATIONAL PENSION SCHEMES REPORT OF THE PENSIONS BOARD

THE MINISTER FOR SOCIAL, COMMUNITY AND FAMILY AFFAIRS

December, 1998

1. Introduction

2. Summary of Conclusions and Proposals

3. Background

4. Detailed Proposals

5. Appendices

1. INTRODUCTION

1.1 This matter was raised by the Minister in his letter dated 15 July 1996 to the Chairperson of the Board as a Priority 1 item. His letter indicated that

"This issue [treatment of surpluses] was raised during the passage of the recent Bill and an undertaking was given that it would be referred to the Board as a matter of priority. It was indicated that this was a very complex issue and one which needs to be considered fully and in some depth by the Board".

1.2 The matter is item 4 of the Boards Policy Programme.

1.3 It has been discussed by the Policy Committee at various meetings between 18 October 1996 and 22 October 1998. The Committee has agreed this paper and its proposals.

1.4 The paper was approved by the Board at its meeting of 6 November 1998 for submission to the Minister.

1.5 The proposals are recommended by the Board for approval by the Minister to be incorporated (following the necessary detailed drafting) into the next Pensions Bill and, as appropriate, into Regulations.

2. Summary of Conclusions and Proposals

Conclusions

2.1 While existing statutory requirements and recommended good practice go a considerable way to ensuring reasonable treatment in scheme wind-ups and transfers on employer merger/acquisitions, experience would indicate that scope remains for a measure of additional regulation and statutory requirements in order to clarify the duties of trustees and protect the rights of scheme members.

2.2 The results of an informal survey undertaken by the Board indicate that

Surpluses in wind-ups are usually used to augment basic benefits,
and
The most common way of dealing with a surplus in ongoing schemes is by means of a reduction or complete suspension of contribution payments for a period. In most cases the reduction or suspension of contributions is extended only to the employer.

2.3 The number of cases which have been brought to the Board's attention involving contention over a surplus seems to indicate that contention over surplus is not a widespread phenomenon. There have, however, been a small ongoing number of cases (typically of scheme wind-up and company take-over/restructuring/scheme transfers) in which a concern for members interests arose.

2.4 The Board's assessment of the overall situation based, inter alia, on its own casework and the findings of its informal survey would suggest that

the existence of ongoing surpluses may not present a problem; they may enhance members security (by providing a cushion against adverse unforeseen circumstances in a scheme, resources for discretionary ongoing indexation and augmentation on wind-up)
but
difficulties can arise in particular cases, on wind-ups and company sale/purchase especially (where involving transfers of scheme funds); though proportionately small in number, difficulties, in cases in which they arise, can be serious.

2.5 The introduction of any measures to deal with areas of difficulty would need to balance the fact that difficulties, while they can be serious where they occur, seem to arise in only a minority of cases with

the potentially adverse impact of any measures on the funding of defined benefit schemes generally with ultimate undesirable impact on financial security of their members.

Proposals

2.6 In the light of the preceding conclusions, the proposed measures are confined mainly to circumstances of scheme wind-up and amalgamation/transfer of scheme funds. Their main thrust is the introduction (in these areas) of mandatory disclosure and consultation together with limited statutory provisions governing trustees action on treatment of surpluses.

Proposed Measures

2.7 Disclosure during Currency of the Scheme
The amendment of the Disclosure Regulations to require that basic scheme information (explanatory booklets) contain a statement concerning the application of the scheme's resources on a winding-up, to include use of surplus and treatment of deficit.

2.8 Winding Up

2.8.1 Priorities on Winding-up

The introduction of legislative provisions to govern the treatment of surpluses in scheme wind-ups. Under the proposal, where excess assets remain following the discharge of the liabilities of the scheme in accordance with the rules and, where applicable, section 48 of the Pensions Act, 1990, before any excess resources are paid to the employer -

members then in employment must be provided with preservation and revaluation of benefits accrued prior to 1991,
and
members with deferred entitlements must be provided with revaluation (based on the revaluation percentage prescribed under the Pensions Act) in respect of those members full deferred pension.

2.8.2 Disclosure on Winding-up

The introduction of a legislative requirement for disclosure and consultation, where applicable, to take place prior to the finalisation of a scheme wind-up. Under the proposal, members must be advised of the proposed application of the resources of the scheme, given an opportunity to make observations in relation to any proposed application (under a discretionary power) of a surplus by the trustees or treatment of a deficit. Any discretionary action, on the part of the trustees, involving a payment of all or any part of the surplus to the employer, or which involves the distribution of the resources in the context of a deficit, is restricted until due consideration has been given by the trustees to any observations received or, in any event, until the expiration of the period specified.

2.9 Amalgamation/Transfer of Funds (Bulk Transfers)

The proposals below cover

full or partial bulk transfers in circumstances of sale/purchase of a company or business,
and
bulk transfers where otherwise occurring.

2.9.1 Proposal No. 1

The introduction of a legislative provision to the effect that a bulk transfer to the receiving scheme with the consent of the members being transferred (whether or not the consent of those members is required under the rules of the scheme) cannot be made unless -

disclosure to all members takes place prior to the giving by the transferring members of consent to the bulk transfer,
and
a certificate is provided by the actuary to the transferring scheme concerning the rights of the remaining members in the transferring scheme so as to protect those rights.

2.9.2 Proposal No. 2

The introduction of a legislative requirement for

disclosure to all members of the receiving scheme, and
the provision of a certificate by the actuary to the receiving scheme concerning the rights of the members in the receiving scheme so as to protect those rights, prior to a bulk transfer.

2.9.3 Proposal No. 3

The introduction of a legislative provision to the effect that where, under the rules of the transferring scheme, the consent of the members being transferred is not required in order to effect a bulk transfer to the receiving scheme (and the consent of those members is not otherwise obtained), a bulk transfer cannot be made unless -

disclosure to and consultation with the transferring members takes place,
disclosure to the remaining members of the transferring scheme takes place,
a certificate is provided by the actuaries to both the transferring and receiving schemes concerning the rights of the transferring members so as to protect those rights,
and
a certificate is provided by the actuary to the transferring scheme concerning the rights of the remaining members in the transferring scheme so as to protect those rights.

2.10 Changes in scheme rules to be null and void in certain circumstances

The introduction of a legislative provision that changes in scheme rules within a specified period before or after a bulk transfer or sale and purchase agreement or before a wind-up are null and void in specified circumstances where their effect is to materially alter the balance of interest between the members or between the members and the employer.

2.11 Exercise of discretionary power to augment members benefits to be null and void in certain circumstances

The introduction of a legislative provision that any exercise of a discretionary power, under the rules of a scheme, within a specified period before or after a bulk transfer or sale and purchase agreement or before a wind-up, that has the effect of augmenting a member's (or members) benefits is null and void in specified circumstances where its effect is to materially alter the balance of interest between the members or between the members and the employer.

3. Background

3.1 Definitions

Scheme Winding-Up

3.1.1. There is a strict legal view that a surplus can only arise on scheme wind-up when the rights of the beneficiaries crystallise. Until then, as assets cannot be withdrawn except so far as authorised by the trust deed or by law or by agreement of all the beneficiaries, from a legal viewpoint any surplus is notional.

3.1.2. A surplus would arise on wind-up of a scheme if

the value of the assets on being realised in current market conditions exceeded
the current cost of securing the entitlements of existing pensioners and active members.

3.1.3. Conversely, if (i) falls short of (ii), the scheme would be in deficit on wind-up.

Ongoing Scheme

3.1.4. Under a less strict view, a surplus may be considered to arise in an ongoing scheme based on actuarial valuation of assets and liabilities. This valuation can be on either of the following two assumed bases:

a discontinuance basis under which the actuary values the ongoing scheme's assets and liabilities accrued up to a given date as if the scheme had been wound up (as at 3.1.2 above) on that date. (This basis of assumed wind-up reflects the view that an actual surplus/deficit can only arise on wind-up);
or
an ongoing basis under which the actuary estimates, on the assumption that the scheme continues in future years, in relation to liabilities accrued up to a given date, the present (discounted) value of the future payment of such liabilities (taking account, for example, of assumed future salary increases) and, in relation to assets accumulated to that same date, the present value of future income (inclusive, for example, of assumed future investment returns).

Surplus/Deficit?

3.1.5. Whether an ongoing scheme is in deficit or surplus will depend on which of the above two bases the actuarial valuation is carried out. (That at 3.1.4(ii) is usually accepted as being more onerous than that at 3.1.4(i)).

3.1.6. It will also depend, inter alia, on

what funding objective the scheme sets itself and by reference to which the results of the actuarial valuation are judged
and
the nature of the technical actuarial assumptions, relatively minor alternations in which could, in some cases, make the difference between a surplus and deficit result.

3.1.7. The valuation basis required under the Minimum Funding Standard in the Pensions Act, 1990 is the discontinuance basis. While schemes are required to conduct a valuation on this basis under the Act and not to be in deficit on this basis by reference to the funding objective specified in the Act, many schemes would themselves also have a funding objective related to an actuarial valuation on an ongoing basis.

3.2 Existing Statutory Provisions

General

3.2.1. There is no statutory definition of surplus in Irish law. As stated, there is a strict legal view that a surplus can only arise when a scheme is wound up and the rights of the beneficiaries crystallise. On this basis, any surplus in an ongoing fund is notional only. However, even in the case of an ongoing fund, scheme members have rights that the law will protect. They have an interest in the fund itself and a right to ensure that the assets are applied and invested in accordance with the provisions of the trust deed and the requirements of the law. The question of pension scheme surpluses has been considered in the context of ongoing schemes in a number of UK and Commonwealth decisions. To date, the Irish Courts have dealt with only one case concerning the ownership of a surplus (Irish Pensions Trust Ltd. v. First National Bank of Chicago (1989)) and that in the circumstances of scheme wind-up.

Pensions Act, 1990

3.2.2. Essentially, there are no provisions in the Act governing surpluses. In particular,

the Funding Standard (in Part IV) is a minimum requirement and, once met, does not intervene in how resources are treated above that level subject to the trustees being in compliance generally with section 59. (This section specifies the duties of trustees as trustees).
the Act (in section 48) specifies the priorities in which liabilities for various categories of benefits are to be discharged on winding-up of a scheme. To the extent to which resources remain after those priorities have been met, the Act does not intervene;
while there is a reference to surplus in the Disclosure Regulations, it is not sufficient to constitute a substantive provision governing surpluses per se. The reference (in article 14) requires members to be informed as to how any surplus has been dealt with in a winding-up.

Comment

3.2.3. The absence of any substantive provisions governing surpluses in the Pensions Act, 1990 and the reference to surpluses in the disclosure requirements regarding winding-up is consistent with

the strict view that surpluses may arise only at scheme wind-up,
and
the fact that the Act generally was intended to lay down minimum requirements regarding the main aspects of pension scheme activity.

Revenue Rules

Scheme Winding-Up

3.2.4. Under Revenue rules (para. 14.5 of the Manual), scheme rules must provide that, on winding-up, any surplus remaining after benefits (including additional benefits within Revenue limits) have been paid, must be returned to the employer in whose hands it is liable for tax. Revenue rules therefore recognise a surplus on winding-up.

Ongoing Scheme

3.2.5. Revenue rules also recognise the possibility of a surplus arising in an ongoing scheme. Para. 5.3 of the Manual requires that where a valuation of an ongoing scheme (on an ongoing basis) discloses a surplus in excess of 10% of the value of fund assets, the matter should be brought to the attention of Revenue.

3.2.6. In such cases, the Revenue may require that the surplus be disposed of. The employer/trustees can do so either by augmenting benefits within appropriate limits or by reducing or suspending contributions. In exceptional cases, part of the surplus may have to be returned to the employer in whose hands it is treated as a trading receipt and can be liable to tax as such.

Comment

3.2.7. In addition to a surplus in an actual winding-up, Revenue rules clearly recognise the reality of a surplus arising in an ongoing scheme. The recommended action to deal with such a surplus may involve actual expenditure of the surplus e.g. by augmentation of benefits or refund to employer (reduction or suspension of contributions is an indirect but also real financial effect in terms of saving to the employer/members and income reduction to the scheme fund).

Trust Deed and Rules

Scheme Winding Up

3.2.8. Scheme documentation will usually contain provisions dealing with treatment of a surplus or deficit on wind-up.

3.2.9. If a surplus remains after the priorities specified in Section 48 of the Pensions Act 1990, if applicable, have been satisfied, its treatment will depend on scheme trust deed and rules. Under these

the trustees may have absolute discretion, whether or not in consultation with the employer, to apply any surplus assets as they see fit i.e. whether to increase benefits or pay the surplus to the employer or a combination of these two options;
the trustees may have the discretion to increase benefits but only with the agreement of the employer;
the trustees may have no choice in the matter i.e. the rules lay down whether they have to pay the surplus to the employer or use the surplus to increase benefits.

3.2.10 In the event of a deficit on winding-up, the trustees will be required under the Pensions Act, 1990 to discharge the liabilities according to the rules of the scheme and, where applicable, the priorities specified in section 48 of the Pensions Act, 1990 starting with pensions in payment, until all scheme assets are used up.

3.2.11 In the event of a deficit on winding-up, there are two limited statutory protections

under the Protection of Employees (Employers Insolvency) Act, 1984, where the employer is insolvent a limited payment may be made from the Social Insurance Fund in respect of unpaid pension contributions;
under the Companies Acts and Bankruptcy Act, in the case of corporate or unincorporated employers respectively, unpaid pension contributions are a preferential debt in a liquidation or receivership.

3.2.12 It might be noted that, after augmentation, if appropriate, a surplus on scheme winding-up, where the employer company has already been wound-up, must under the State Property Act, 1954 be paid to the Exchequer.

Case Law

3.2.13 Apart from the unreported High Court case of Irish Pensions Trust Ltd. v. First National Bank of Chicago (1989), there is no body of case law in Ireland on treatment of surpluses. The main issue in the 1989 case was whether or not a surplus on winding-up was payable to the employer. The question was determined in favour of the employer by reference to the trust deed. In the context of that case, there also arose the possibility that if the members were granted the benefit of the surplus the trustees, actuaries and consultants could be sued for negligence in allowing a surplus to arise in the first place.

3.2.14 Appendix 5.1 includes an account of U.K. case law. The conclusions are that

Case law in the UK has shown that, in deciding how discretion in respect of a surplus should be exercised the Courts are influenced by three factors:

the trust deed and rules
the fact that beneficiaries of a pension scheme are not volunteers in the sense that the beneficiaries under a traditional trust are
whether the surplus exists in relation to an ongoing scheme or one that is being wound up.

Case law shows that the Courts have found it difficult to decide who should receive a surplus. The question would appear to depend on the view taken of the nature of the pension bargain between the employer and the employee. Decisions of the UK Courts have demonstrated a readiness on the part of the Courts to review decisions of trustees and employers. This has resulted in a degree of uncertainty for schemes.

Transfer of Undertakings Regulations

3.2.15 The European Communities (Safeguarding of Employees' Rights on Transfer of Undertakings) Regulations, 1980 (which implement the provisions of the EU Acquired Rights Directive (77/187/EEC) protect employees' statutory and contractual rights in the event that the business of the employer is transferred as a going concern. Regulation 4(2) of the Regulations provides that the transfer (effected by the Regulations), from the vendor to the purchaser, of the rights and obligations arising from employment contracts, shall not apply to rights to old age, invalidity and survivors benefits under supplementary or inter-company pension schemes. However, the transferee must ensure that the interests of employees and of persons no longer employed in the transferor's business at the time of transfer, under company pension schemes, are protected.

3.2.16 Transferee employers are obliged, under regulation 4(2) of the Regulations, to ensure that the interests under pension schemes are protected on a transfer. While the meaning of regulation 4(2) has never been tested in an Irish court, the accepted view appears to be that the Regulations require a purchaser to ensure that accrued pension entitlements calculated on a discontinuance basis, only, are protected; the purchaser is not under an obligation to continue (by accruing pension entitlements into the future) the pension arrangements enjoyed by the transferring employees whilst employed by the vendor.

3.2.17 The scope of the Regulations regarding the circumstances to which they apply is not entirely clear. Case law has, however, been developing considerably in this area. It would appear that, while the Regulations definitely do not apply in cases of transfer of control of companies by purchase/sale of share ownership, their application otherwise has been broadened to cover most other cases.

Comment

3.2.18 While the Transfer of Undertakings Regulations would seem to apply in many of the types of cases with which the Policy Committee is concerned, it would appear that they cover only accrued entitlements on a discontinuance basis and not any element of surplus above that level. Neither do they include any mechanisms, such as statutory disclosure or consultation with members and actuarial certification, by which the provisions specifically in relation to pension entitlements are to be implemented.

The Pensions Board Trustee Handbook

3.2.19 The Handbook, published by the Board, is intended to provide guidance to trustees of occupational pension schemes in relation to

their duties under the Pensions Act, other relevant legislation and trust law generally, and
recommended good practice in the operation of schemes.

3.2.20 Amongst the matters included in the Handbook are distribution of surplus on wind-up and trustees' responsibilities in company merger and acquisition situations.

3.2.21 The Handbook regards the distribution of surpluses (i.e. funds in excess of what is needed to meet members' benefit entitlements on wind-up) as "an area that is fraught with difficulties and potential conflicts of interest". The Handbook identifies the actions which must (by law) be taken by the trustees as being to follow the procedures set down in scheme rules. This may involve consulting, or obtaining the agreement of, the employer.

Actions regarded as good practice would include, where trustees were required to obtain the agreement of the employer, presentation of a case for augmentation of benefits if the trustees believed that such a course was warranted.

3.2.22 In the case of a merger or acquisition between employers, the Handbook identifies the (legal) duties of the trustees as being

to act at all times in accordance with trust deed and rules
to remember that their primary duty is to the beneficiaries of the scheme and
in that regard to act fairly as between employees already in the scheme and those coming in or as between those remaining and those leaving.

3.2.23 Where transfers of scheme members/assets, on acquisition, are taking place, the Handbook identifies the (legal) duties of trustees as being

to satisfy themselves that what is proposed is in accordance with scheme rules and that the interests of members and other beneficiaries are being adequately protected,
and (in the case of trustees of the receiving scheme) to ensure that the rights of existing members are not being jeopardised before agreeing to the transfer

Trustee actions regarded as good practice, in transfers, would be to seek legal/actuarial advice before agreeing to the transfer.

Comment

3.2.24 While existing statutory requirements and recommended good practice as indicated in the Trustee Handbook go a considerable way to ensuring reasonable treatment in scheme wind-ups and transfers on employer merger/acquisitions, experience would indicate that scope remains for a measure of additional regulation and statutory requirements in order to clarify the duties of trustees and protect the rights of scheme members.

3.3 CURRENT PRACTICE

Scheme Winding-Up

3.3.1. As mentioned, given that there are no substantive statutory provisions governing the treatment of surplus on wind-up (after the priorities in Pensions Act, 1990, if applicable, have been complied with), the provisions of trust deed and rules will apply. Similarly, in event of a deficit on wind-up, after available resources have been applied in compliance with the priorities in the Pensions Act, 1990, if applicable, only the limited statutory provisions set out in 3.2.11 above exist in addition to trust deed and rules.

3.3.2. As already noted, no body of Irish case law exists.

3.3.3. In terms of Pensions Board information

given that, based on first actuarial funding certificates received, the vast bulk of schemes are fully funded (in respect of post and pre 1991 benefits) on a winding up assumption, the incidence of deficits on wind-ups is unlikely to be significant;
there have, over the years, been a small ongoing number of enquiries from members regarding scheme wind-up situations. Apart from the fact that these enquiries may have arisen from the disclosure requirement that on wind up members be notified of any surplus or deficit, they may have no special significance. They have tended to involve cases in which a surplus arose from which, for whatever reason (in particular scheme rules), the members were unable to benefit. (There may, of course, have been other cases in which members did benefit and which did not come to the Boards attention).

3.3.4 It might be noted that the Board has issued an information booklet on scheme wind-up and company merger/acquisitions entitled "What happens when your pension scheme is wound-up or when a merger/acquisition takes place".

Ongoing schemes

3.3.5. Revenue (RBD) have advised, informally, that there is a steady flow (about one a month on average) of reports to them (as required under their Practice Notes) of schemes with a surplus in excess of 10% of the value of fund assets on an ongoing valuation basis. These cases (of surplus in ongoing schemes) generally involve circumstances of company take-over and/or redundancy packages as well as higher than expected investment returns.

3.3.6. There have, over the years, been a number of cases, (relatively small - 1 to 2 a year) brought to the Boards attention, of complaints arising from how a surplus was treated in an ongoing scheme. These have tended to involve company redundancy packages and company take-overs/scheme transfers. Again, in some instances, there was a concern about members interests.

3.3.7. It has been reported to the Committee that in a number (about 6) of cases in recent years, mainly sale and purchase, circumstances have arisen in which a scheme surplus has been part of the vendor/purchaser negotiations without due regard for the interests of scheme members.

Incidence of Surpluses

3.3.8. During Summer 1997, the Board gathered information from its panel of expert advisers. A total 337 schemes were surveyed by 3 panel members; these were schemes for which these panel members acted as actuaries. The figures in the following tables (except where otherwise stated) are aggregates of the figures prepared by each of consultants.

Surplus on a discontinuance basis

The estimated proportion of schemes in which, at the last valuation, and on a discontinuance basis, showed a surplus, in relation to scheme liabilities.

Funding Level	% of Schemes
> = 100%	93
< 100%	7

[100% = full funding on a discontinuance basis]

Two consultants provided the following further analysis on schemes with a funding level greater than 100%.

Funding Level	% of Schemes
100 - 150%	33
150 - 200%	43
> 200%	21

Surplus on an ongoing basis

The estimated proportion of schemes for which, as at the last valuation, and on an ongoing basis, showed a surplus, in relation to scheme liabilities.

Funding Level	% of Schemes
> = 100%	44
< 100%	56

[100% = full funding on an ongoing basis].

The breakdown above 100% funding level, by two consultants in relation to 314 schemes, was:

Funding Level	% of Schemes	Funding Level	% of Schemes
100 - 110%	21	101 - 120%	35
110 - 130%	21	> 120%	14
> 130%	18

Usual Practice

3.3.9. The consultants also provided information on their experience regarding surpluses in various circumstances. The following is an amalgamation, in summary form, of usual practice in dealing with surplus in scheme wind-ups.

Usual Practice in Scheme wind-up

3.3.10 The practice regarding the surplus on the wind-up is very much dependent on the following:-

The Scheme Rules on wind-up
The attitude of the Employer
The financial circumstances of the Employer

3.3.11 The scheme rules would vary between deeds, which require any amount not needed to provide entitlements of members and beneficiaries to be paid to the sponsoring employer, and deeds, which require that the total assets be used to augment benefits, subject to Revenue limits. Most schemes rules fall between the two extremes according to trustees some discretionary power over the surplus, either complete discretion or discretion subject to consent of, or consultation with, a third party (usually the employer).

3.3.12 Surpluses in wind-ups are usually used to augment basic entitlements. Augmentation would often bring basic entitlements up to accrued service on a projected salary basis. In the view of one consultant, in a majority of cases, all the surplus is so used. It is, of course, a requirement of the RBD that any surplus not disposed of for the benefit of the members must be refunded to the employer.

3.3.13 There have been instances where the employer has taken the view that surplus above strict entitlements should be returned to the company (if rules allow) in order to improve the financial stability of the company. A surplus would be likely to revert to the employer in full, and without question, only where the Trust Deed clearly so required.

Usual practice in dealing with surplus on ongoing basis

Contribution Holidays

3.3.14 The most common way of dealing with a surplus (in 70% to 90% of cases) has been by means of a reduction or complete suspension of contribution payments for a period. In most (say three-quarters of) cases, the reduction or suspension of contributions is extended only to the employer, not to the members. However, in some cases the contributions of existing members were suspended or reduced, while new entrants paid the standard, defined level of contributions. In others, the suspension extended to both. In cases in which a surplus has been reported to Revenue, the most usual way of dealing with it has been a reduction or suspension of contributions.

Benefit Improvements

3.3.15 In general the terms of a pension scheme would be a subject for negotiation within the normal industrial relations machinery of an employer and it is unlikely that most employers would volunteer improvements in scheme benefits on a purely ex-gratia basis simply because there was a surplus. The existence of a surplus may make an employer more willing to concede benefit improvements in the course of actual negotiations if he realises that the concession may not demand a great increase in the flow of regular contributions to the scheme.

Post-retirement increases

3.3.16 Where the granting of post-retirement increases, which have not been the subject of specific funding/provision in scheme rules, is a feature of the way the scheme is run in practice, granting of such increases will tend to absorb excess assets. This, in turn, makes it less likely that significant surplus will build up within the scheme, as each increase granted must be fully covered by the assets as soon as it is granted.

Usual treatment of surplus (ongoing basis) on sale/take over

3.3.17 The existence of a surplus in the event of a sale/take-over of a company is usually a factor taken into account in determining the sale price of the undertaking concerned. Where the whole business is being sold, and the whole pension scheme being absorbed, the purchase price of the business would generally be adjusted to reflect any pension scheme surplus. Where only part of a business is being sold, the transfer payment to the purchaser's scheme generally has no allowance for surplus. It would appear that employers who complete agreements to transfer members from one scheme to another usually do not wish any part of a surplus to be transferred with them.

Typical perceived issues of contention in relation to surplus (ongoing basis) on sale/take-over

3.3.18 The main areas of contention are as follows:

Discussions between vendor and purchaser as to the true amount of the surplus on an agreed actuarial basis.
Purchaser and vendor agree a deal without taking due account of the trustees responsibilities.
Assets and liabilities are transferred from vendor's scheme to purchaser's scheme but the solvency levels of the two schemes are quite different.

3.3.19 Where a shortfall exists on an agreed actuarial basis, this is normally reflected in the purchase price. Where a surplus does transfer with scheme members, there is usually a corresponding reduction in purchase price.

3.3.20 The trustees in both the purchaser's and vendor's scheme have a responsibility to ensure that members interests are protected. It is felt that these interests have generally been taken into account in sale and purchases.

Conflicts, however, can arise,

if the vendor and purchaser agree a deal without involving the trustees. (In practice, there is normally a catch-all in the sale and purchase agreement which effectively allows the purchaser to seek money from the vendor directly should the trustees of the vendor's scheme not release as much money as might have been anticipated following the negotiations on the agreed actuarial basis),
if the vendor's scheme is well funded and the purchaser's scheme is underfunded, and
there can be contention regarding the method, basis and assumptions to be used in calculating the amount of transfer payment.

3.4 ASSESSMENT/IMPLICATIONS

3.4.1. As at end 1997 there were 2115 defined benefit schemes of more then one member on the Board's register. The panel survey estimated that 44% of schemes were in surplus on an ongoing basis (many in significant surplus). On the assumption that this percentage is reasonably representative, of the 2115 above registered schemes, 931 could be in surplus. In this context, the number of cases (2 to 3 a year) which have been brought to the Board's attention involving contention over a surplus seems to indicate that contention over surplus is not a widespread phenomenon.

3.4.2 As regards wind-ups, the panel survey indicated that surpluses in such circumstances are usually used to augment members benefits and that often all the surplus is so applied. While there are no accurate data on the number of scheme wind-ups, nor wind-ups with a surplus, Pensions Board registration figures indicate almost 229 notifications of wind-ups of defined benefit schemes of more than 1 member since 1991. In this context, the number of contentious cases coming to Board attention seems relatively small.

3.4.3 As regards surpluses in ongoing schemes, the panel survey indicated that the most usual way of treating a surplus, whether at Revenue request or otherwise, is by reduction/suspension of (mainly) Employer contributions. However, in many schemes (44% according to the IAPF benefits survey for 1997) increases are granted, on a discretionary basis, to pensions in payment. As these are likely not to have been the subject of formal funding, it seems likely that they may often be financed from ongoing surpluses before the question of reduction/suspension of contributions arises.

3.4.4 In relation to company sale/take-over, the panel survey indicates that sale and purchase agreements, with built-in price adjustment for scheme surpluses and provisions where scheme trustees do not act as anticipated, usually operate effectively. Based on statistics compiled under the Mergers Act by Department of Enterprise, Trade and Employment, there were 201 notified mergers/take-overs in 1997. Of these, 62 came within the Mergers and Take-Overs (Control) Acts, i.e. each of the companies had an annual turnover of £20m or more and assets of £10m or more. Of these, 61 named cases were allowed to proceed. A cross check with the Boards Register would suggest that in at least 25 of these 61 cases, a defined benefit scheme was involved. The number of cases of reported contention concerning a surplus needs to be placed in this context.

3.4.5 While the proportion of contentious cases may be small, it is in this area, the panel survey suggests, that conflicts can arise. In cases where they do, members interests can be at risk.

Implications of Official Action

The above assessment would suggest that

the existence of ongoing surpluses may not present a problem; they may enhance members security (by providing a cushion against adverse unforeseen circumstances in a scheme, resources for discretionary ongoing indexation, and augmentation on wind-up)
but
difficulties can arise in particular cases, on wind-ups and company sale/purchase especially where involving transfers of scheme funds; though proportionately small in number difficulties can be serious.

3.4.6 Reasonable measures to deal with areas of difficulty would range across

improved disclosure (i.e. additional disclosure requirements to be effected by Regulations)
guidelines (i.e. Pensions Board guidelines/codes of practice on disclosure and conduct)
legislation (i.e. fresh legislation overriding scheme rules so as to lay down, at least, minimum requirements)

3.4.7 The introduction of any such measures would need to balance

the fact that difficulties appear to arise in only a minority of cases
with
the likely impact of any measures on the funding of defined benefit schemes generally.

3.4.8 On the later point, if measures to restrict the use of surpluses led to a change in funding approach so as to ensure that schemes generally remained only in equilibrium (without any surplus accumulation), members security would arguably be diluted. In balance of cost schemes, in particular, employers attitude to funding would be likely to change if treatment of any surplus which might emerge were pre-determined by official requirements. If these consequences materialised, the improved protection of some members would have been achieved at the expense of a dilution of the security of members generally; the case for operating a defined benefit as distinct from a defined contribution scheme would be further eroded.

4. Proposals

General

4.1 In the course of its deliberations, the Policy Committee considered the nature and incidence or circumstances involving surpluses in occupational pension schemes, the various options for official measures, and the appropriate balance of the measures to be recommended. It was mindful of the need both to,

promote necessary regulation to counter undesirable practices to the extent arising, and
not to adversely affect the overall satisfactory position, and funding, of schemes in general.

4.2 The scope of the recommended measures contained in the remainder of this section is confined mainly to circumstances of

scheme wind-up
and
amalgamation/transfer of scheme funds.

It is felt that these are the circumstances in which regulation of surpluses is most needed. Apart from these circumstances (i.e. wind-up and transfer) the treatment of surpluses in the normal circumstances of an ongoing scheme is not affected by the proposed measures. The main reasons for this approach include

the absence of any identifiable problems in general in relation to surpluses in ongoing schemes in normal circumstances
the potential for official intervention governing surpluses to adversely affect the funding position of such schemes, in particular employers preparedness to contribute in balance of cost schemes, with adverse ultimate impact on members financial security
the nature of surpluses per se which, strictly, only arise when entitlements crystallise, and scheme assets, which can otherwise fluctuate, are realised, at time of scheme wind-up.

4.3 The proposed measures contain what is felt to be an appropriate mix between

new statutory provisions governing the distribution of surpluses,
and
new requirements governing disclosure and consultation regarding surpluses.

The main thrust of the proposed measures is the introduction of mandatory disclosure and consultation, together with limited statutory provisions governing trustees action on surpluses, in certain circumstances.

4.4 While aspects of the proposals related to disclosure could in theory be implemented on their own by Regulations, to be effective and coherent the proposals as a whole need implementation together. As the main thrust of the proposals will require primary legislation, the recommended course is for the proposals as a whole to be implemented via provisions in the forthcoming Pensions Bill which will, inter alia, implement the NPPI related measures. Any aspects of the proposals which may be appropriate to Regulations would be implemented by amendment to the Disclosure Regulations at the same time as enactment of the Bill.

4.5 DETAILED PROPOSALS

4.5.1 Disclosure during currency of the scheme

Proposal:

That the Disclosure Regulations be amended to include a requirement that basic scheme information (explanatory booklets) contain-

a statement as to how the resources of the scheme are required to be applied in the event of a winding up;
a statement as to how any surplus which may result on a winding up of the scheme may, or (if applicable) is required to, be applied, and
a statement as to how the trustees must apply the resources of the scheme should a deficit occur on the winding up of the scheme.

Implementation:

This proposal would be implemented by an amendment to Schedule C to the Disclosure Regulations (giving a reasonable lead in time for compliance purposes). Trustees of schemes are obliged, under article 9 of the Disclosure Regulations, to give members, employees likely to become members, their spouses, other scheme beneficiaries and trade unions certain basic information about the scheme. This information must be provided in writing and is usually contained in an explanatory booklet or document. The information that must be given is specified in Schedule C to the Disclosure Regulations.

It would not be necessary to amend the Pensions Act, 1990.

Winding up

4.5.2 Priorities on winding up

Proposal:

The introduction of legislative provisions to govern the treatment of surpluses in scheme wind ups, such legislation to provide that where excess resources remain following the discharge of -

the liabilities of the scheme in accordance with the rules of the scheme and, where applicable, section 48 of the Pensions Act, 1990,

before any excess resources are paid to the employer and to the extent that (i) and (ii) below are not already provided and the remaining resources permit -

members then in employment must be provided with preservation and statutory revaluation, from the date of wind-up, in respect of benefits accrued prior to 1991, and
members with deferred entitlements under the scheme must be provided with revaluation (based on the revaluation percentage prescribed under the Pensions Act) from the date of the wind-up to the date of commencement of pension in respect of those members' full deferred pension

The liabilities at (i) and (ii) above to have equal priority.

Implementation:

This proposal would be implemented by an amendment to the Pensions Act, 1990.

4.5.3 Disclosure on Winding up

Proposal:

The introduction of legislative provisions requiring disclosure and consultation, where applicable, as prescribed, to take place prior to the finalisation of a scheme wind-up. The purpose of these requirements would be to put trustees' consultation with scheme members on a comparable basis to that with the schemes sponsoring employer. (In many cases, the trustee is obliged, under the scheme rules, to consult with the employer before applying surplus assets. It is intended that the inclusion of the employer in the parties to be notified under the requirements set out below would satisfy any requirement under the scheme rules to consult with the employer.)

Under the requirement, where a decision has been made to wind up the scheme, or an event has occurred requiring the scheme to be wound up, the trustees must -

as soon as possible, but in any event not later than 4 weeks after such decision has been made or the date on which the trustees first become aware that such an event has occurred, notify all members (i.e. active members, deferred pensioners and pensioners), authorised trade unions, the employer and the Pensions Board of the decision or event;
as soon as practicable after an estimate of the value of the resources of the scheme remaining (if any) after the liabilities of the scheme have been fully discharged has been made, notify those in (i) of -

a description of members' entitlements under the rules of the scheme and, where applicable, section 48 of the Pensions Act, 1990 and any other liabilities of the scheme as well as the trustees' estimate of the resources required to discharge those liabilities;
the extent to which remaining assets will allow the trustees to provide additional benefits required under (i) and (ii) of the proposal set out at 4.5.2 (priorities on winding up);
the trustees' estimate of the value of the resources of the scheme remaining (if any) after the liabilities of the scheme under (a) and (b) above have been fully discharged;
how the trustees propose to deal with any deficit in the resources of the scheme;
the extent and nature of the trustees' discretion in applying the undistributed resources of the scheme (if any);
a detailed explanation of how the trustees propose to exercise the discretion referred to at (e) above;
the name and address of the person to whom queries and/or observations on the proposals in (d) or (f) should be sent (in writing) within 2 months of the date on which notice is given;
the fact that a second notice will be given if any modifications to the proposals in (d) or (f) are proposed;
the requirements of (iii) and (iv) below;

in the event of any modifications to the proposals at (ii)(d) or (f), issue a second notice to those in (i) containing the information referred to in (ii)(d) (or (f));
take no discretionary action which would involve a payment of all or any part of the surplus to the employer, or which would involve a distribution of the resources in the context of a deficit, until due consideration has been given by the trustees to any observations received by the trustees or, in any event,

until at least 3 months after the issue of the notice referred to in (ii), or
in the event that a second notice is required under (iii), until at least 1 month after the issue of the second notice;

as soon as practicable after the resources of the scheme have been applied, furnish those in (i) with an explanation as to the manner in which any surplus or deficit in the resources of the scheme has been dealt with and the extent to which this differs from the proposals set out in (ii)(d) or (f) (or (iii), if applicable)).

Implementation

This proposal would be implemented by

an amendment to the Pensions Act, 1990 requiring consultation, as prescribed, to take place and making the exercise by the trustees of the action referred to at (iv) above subject to the conditions specified, and
an amendment to the requirements of article 14 of the Disclosure Regulations (which prescribes the information to be made available on the wind-up of a scheme).

Amalgamation/Transfer of Funds

4.5.4 Proposals

Background

The proposals set out below encompass

full or partial amalgamation/transfer of pension scheme funds in circumstances of sale/purchase of a company or business, and
bulk transfers of pension scheme funds where otherwise occurring.

Where, in these circumstances, a scheme wind-up takes place, the requirements below would not replace the disclosure requirements for normal scheme wind-up.

A definition of "bulk transfer" would be specified for the purposes of proposals 1, 2, and 3 set out below.

This definition would encompass transfers where -

Transfers are being made from the transferring scheme to the receiving scheme in respect of a grade, group or category of members, and
either-

the transferring scheme and the receiving scheme apply to employment with the same employer,
or
the transferring scheme and the receiving scheme apply to employment with different employers, and
(a) the transfer is a consequence of a financial transaction between the employers, or
(b) the employers are affiliated employers (within the meaning of the Occupational Pension Schemes (Preservation of Benefits) Regulations, 1992).

Specific proposals

2.5.4.1.Proposal No. 1

Disclosure to all members where the transferring members consent to the bulk transfer is obtained, and Certification to the remaining members in the transferring scheme.

disclosure takes place prior to the giving by the transferring members of consent to the bulk transfer (the purpose would be, inter alia, to ensure that the members are in a position to make an informed decision),
and
a certificate is provided by the actuary to the transferring scheme concerning the rights of the remaining members in the transferring scheme so as to protect those rights.

Under the requirement, where a bulk transfer is proposed, the trustees of the transferring scheme must, before taking any action which would involve a bulk transfer -

notify all members (i.e. active members, deferred pensioners and pensioners) authorised trade unions and the employer, at least 2 months prior to the last date on which members consent to the bulk transfer can be given;
notification to include -

an outline of the event giving rise to the proposed bulk transfer and details of the proposed transfer;
a statement, signed by the actuaries to both the transferring and receiving schemes, as to -

whether, on the basis of the proposal, the transfer credits to be acquired for each transferring member under the receiving scheme in respect of past service (or, where the transfer is to a defined contribution scheme, the value of such credits) are, broadly, no less favourable than the rights being given up in the transferring scheme in respect of the same service;
whether, in the event of the discontinuance of the receiving scheme immediately following the transfer, the transferring members' rights (including under the legislative proposals at 4.5.2) would not be materially less favourable than they would have been in the event of the winding up of the transferring scheme immediately before the transfer;
where it is the established custom for discretionary benefits or increases in benefits to be awarded under the transferring scheme, whether there is reasonable cause to believe that the award of discretionary benefits or increases in benefits under the receiving scheme will (making allowance for any amount by which transfer credits under the receiving scheme are more favourable than the rights to be transferred) be, broadly, no less favourable;

a certificate, signed by the actuary to the transferring scheme, that in the event of the discontinuance of the transferring scheme immediately following the transfer, the rights of the members remaining in the transferring scheme (including under the legislative proposals at 4.5.2) would not be materially less favourable than they would have been in the event of the winding up of the transferring scheme immediately before the transfer;
a statement, signed by the actuary to the transferring scheme, containing the actuarys estimate (including allowance for projected salary increases to NPA) of the funding level in the transferring scheme both immediately prior to and immediately following the transfer having regard to -

the most recent actuarial valuation, and
any significant changes in scheme membership, benefit terms or any other factors materially affecting the funding level of the scheme since the valuation, and
in relation to the funding level immediately following the transfer, the proposed transfer,
and,
where the funding level exceeds 100%, whether the proposed transfer includes any part of this excess in respect of the members being transferred, and

a statement, signed by the actuary to the receiving scheme, containing the actuarys estimate (including allowance for projected salary increases to NPA) of the funding level in the receiving scheme immediately following the transfer having regard to -

the most recent actuarial valuation,
any significant changes in membership, benefit terms or any other factors materially affecting the funding level of the scheme since the valuation,
and
the proposed transfer.

satisfy themselves that, at the date of the bulk transfer, there is no material alteration in the information included in the notice at (i).

4.5.4.2. Proposal No. 2

Disclosure to members of receiving scheme, and Certification to members of receiving scheme

(The introduction of a legislative requirement for disclosure to take place prior to the bulk transfer and for the provision of a certificate by the actuary to the receiving scheme, concerning the rights of the members of the receiving scheme, so as to protect those rights.)

Under the requirement, where a bulk transfer is proposed, the trustees of the receiving scheme must -

notify all members (i.e. active members, deferred pensioners and pensioners), authorised trade unions and the employer , at least 2 months prior to the proposed bulk transfer; notification to include -

an outline of the event giving rise to the proposed bulk transfer and details of the proposed transfer;
a certificate, signed by the actuary to the receiving scheme, that -

in the event of the discontinuance of the receiving scheme immediately following the transfer, those members' rights (including under the legislative proposals at 4.5.2), would not be materially less favourable than they would have been in the event of the winding-up of the receiving scheme immediately before the transfer;
the actuary's estimate (including allowance for projected salary increases to NPA) of the funding level in receiving scheme both immediately prior to and immediately following the transfer having regard to -

the most recent actuarial valuation,
and
any significant changes in membership, benefit terms or any other factors materially affecting the funding level of the scheme since the valuation,
and
in relation to the funding level immediately following the transfer, the proposed transfer.

satisfy themselves that, at the date of the bulk transfer, there is no material alteration in the information included in the notice at (i).

4.5.4.3 Proposal No. 3

Disclosure/consultation and certification to members of transferring scheme where, under the scheme rules, the consent of the transferring members to the transfer is not required and is not otherwise obtained.

disclosure to and consultation with the transferring members takes place,
disclosure to the remaining members of the transferring scheme takes place,
a certificate is provided by the actuaries to both the transferring and receiving schemes concerning the rights of the transferring members so as to protect those rights, and
a certificate is provided by the actuary to the transferring scheme concerning the rights of the remaining members in the transferring scheme so as to protect those rights.

Under the requirement, where a bulk transfer is proposed, the trustees of the transferring scheme must -

notify all members (i.e. active members, deferred pensioners and pensioners), authorised trade unions and the employer; notification to include -

an outline of the event giving rise to the proposed bulk transfer and details of the proposed transfer;
a certificate, signed by the actuaries to both the transferring and receiving schemes, that -

on the basis of the proposal, the transfer credits to be acquired for each transferring member under the receiving scheme in respect of past service (or, where the transfer is to a defined contribution scheme, the value of such credits) are, broadly, no less favourable than the rights being given up in the transferring scheme in respect of the same service;
in the event of the discontinuance of the receiving scheme immediately following the transfer, the transferring members' rights (including under the legislative proposals at 4.5.2) would not be materially less favourable than they would have been in the event of wind-up of the transferring scheme immediately before the transfer;
where it is the established custom for discretionary benefits or increases in benefits to be awarded under the transferring scheme, there is reasonable cause to believe that the award of discretionary benefits or increases in benefits under the receiving scheme will (making allowing for any amount by which transfer credits under the receiving scheme are more favourable than the rights to be transferred) be, broadly, no less favourable:

a certificate, signed by the actuary to the transferring scheme, that in the event of the discontinuance of the transferring scheme immediately following the transfer, the rights of the members remaining in the transferring scheme (including under the legislative proposals at 4.5.2) would not be materially less favourable than they would have been in the event of the winding-up of the transferring scheme immediately before the transfer;
a statement, signed by the actuary to the transferring scheme, containing the actuarys estimate (including allowance for projected salary increases to NPA) of the funding level in the transferring scheme both immediately prior to and immediately following the transfer having regard to

the most recent actuarial valuation,
and
any significant changes in scheme membership, benefit terms or any other factors materially affecting the funding level of the scheme since the valuation,
and
in relation to the funding level immediately following the transfer, the proposed transfer
and, where the funding level exceeds 100%, whether the proposed transfer includes any part of this excess in respect of the members being transferred;

a statement, signed by the actuary to the receiving scheme, containing the actuarys estimate (including allowance for projected salary increases to NPA) of the funding level in the receiving scheme immediately following the transfer having regard to

the most recent actuarial valuation,
and
any significant changes in scheme membership, benefit terms or any other factors materially affecting the funding level of the scheme since the valuation
the proposed transfer

the name and address of the person to whom queries and/or observations on the proposals in (a) should be sent, by transferring members only, in writing, within two months of the date on which notice is given;
the fact that a second notice will be given if any modifications to the proposals in (a) are proposed;
the requirements of (ii) and (iii) below

in the event that any modifications to the proposals in (i) (a) are proposed, issue a second notice to all in (i) containing the information referred to in (i) (a), (b), (c), (d) and (e),
and
take no action which would involve a bulk transfer until

due consideration has been given by the trustees to any observations received, or, in any event -

until at least 2 months following the issue of the notice referred in to in (i),
or
in the event that a second notice is required under (ii), until at least 1 month after the date on which the second notice is given, and

the trustees have satisfied themselves that, at the date of the transfer, there is no material alteration in the information included in the notice at (i) or, if applicable, (ii).

Implementation

Proposal Nos. 1, 2, and 3 above would be implemented by

amendments to the Pensions Act, 1990 requiring, disclosure, as prescribed, to take place in the circumstances specified, and consultation, as prescribed, to take place in the circumstances specified, and restricting the exercise by the trustees of the power to make a bulk transfer until disclosure (including, where required, the provision of certificates) and/or consultation, where required, had taken place.

Provision could be made for certification by the actuary to the scheme to be made in accordance with a specified Guidance Note issued by the Society of Actuaries in Ireland subject to Board approval.
Amendment to the Disclosure Regulations in relation to the matters to be prescribed

4.5.5 Changes in scheme rules to be null and void in certain circumstances.

The introduction of a legislative provision that, without prejudice to the duties of trustees under the Pensions Act and generally, changes in scheme rules within a specified period before or after a bulk transfer or sale and purchase agreement or before a wind-up are null and void in certain circumstances.

The periods covered under this proposal are:

12 months prior to and 6 months following a bulk transfer (see proposed definition of bulk transfer at 4.5.4 above);
(where not otherwise covered under (i)), 12 months prior to and 6 months following an agreement or arrangement relating to or connected with the sale of all or part of the business or interests of the employer of any employees who are members of the scheme;
(where not otherwise covered under (i)), 12 months prior to and 6 months following the purchase of all or part of the business or interests of another person or firm and the trustees of the scheme or the employer concerned propose or are required to take any action in relation to the scheme pursuant to that arrangement or agreement;
12 months prior to the commencement of, or during the course of, winding up of the scheme.

Under this proposal, changes in scheme rules effected by the trustees or the employer in the circumstances and within the periods specified in this proposal would be rendered null and void unless the trustees were satisfied that the following requirements had been complied with -

that the members had consented in writing to the change,
or
that the actuary had certified to the trustees that the change did not materially alter the balance of interest between the members or between grades, groups or categories of members or between the members and the employer,
or
the change was not effected with a view to materially altering the balance of interest between the members or between grades, groups or categories of members or between the members and the employer, for the purposes of or pursuant to the bulk transfer/sale and purchase agreement/wind-up,
and
such other matters as might be prescribed.

This requirement would be additional to and not in place of the duties of trustees under the Pensions Act and generally.

Implementation

This proposal would be implemented by an amendment to the Pensions Act, 1990.

4.5.6 Exercise of discretionary power to augment members benefits to be null and void in certain circumstances

The introduction of a legislative provision, similar to that at 4.5.5, that, without prejudice to the duties of trustees under the Pensions Act and generally, any exercise of a discretionary power, under the rules of a scheme, within a specified period before or after a bulk transfer or sale and purchase agreement or before a wind-up, that has the effect of augmenting a members (or members) benefits is null and void in specified circumstances where its effect is to materially alter the balance of interest between the members or between the members and the employer.

Appendices

Occupational Pension Schemes

Treatment of surpluses the legal position (Ireland)

1. Introduction

The Policy Committee decided, at its meeting of 28 May 1997 that, as a further aid to the discussion on the treatment of surpluses, the legal aspects should be researched.

This note is based on the initial paper prepared by the Executive and circulated to the Committee in advance of its meeting on 28 May, and additional material.

2. Definition of surplus

There is no statutory definition of surplus in Irish law. There is a strict legal view that a surplus can only arise when a scheme is wound up and the rights of the beneficiaries crystallise. On this basis, any surplus in an ongoing fund is purely notional. However, even in the case of an ongoing fund, scheme members have rights that the law will protect. They have an interest in the fund itself and a right to ensure that the assets are applied and invested in accordance with the provisions of the trust deed and the requirements of the law. Not surprisingly therefore, the question of pension scheme surpluses has been considered in the context of ongoing schemes in a number of UK and Commonwealth decisions (but not, to date, by any Irish Court). [ 1] Furthermore, the Pensions Act, 1990 (and Regulations thereunder) and Revenue rules while not providing any definition of surplus clearly recognise the existence of surpluses in schemes, in a number of contexts).

Any analysis of the treatment of surpluses must be presented in the context in which the surplus arises, following a consideration of how a surplus might arise.

3. How might a surplus arise?

Surpluses can arise in defined benefit schemes through such factors as good investment performance, deliberate or unintentional overfunding, declining membership, redundancy programmes, good experience relative to actuarial assumptions. It is not always easy to ascertain how a surplus has arisen. Although it is more unusual, a surplus can also arise in a defined contribution scheme (if, for example, the scheme has a vesting period (a period during which there is no entitlement to benefit from an employers pension contributions in the event of leaving service). On the members leaving service during such a vesting period, the employers contributions will constitute a surplus.)

4. Surplus-Scheme Winding Up

Factors which affect the treatment of a surplus on winding-up

A surplus arises on wind-up of a scheme if the resources of the scheme exceed the amount necessary to discharge the strict liabilities of the scheme on wind-up, as set out in the winding-up provisions of the scheme documentation. The following factors will affect the treatment of a surplus on a winding-up:

5. The Pensions Act, 1990

Section 48 of the Pensions Act, 1990 [ 2] specifies the priorities in which the resources of a relevant scheme [ 3] must be applied in a winding up of that scheme. To the extent to which resources remain after those priorities have been met, the Act does not intervene.

Article 14(b)(ii) of the Disclosure Regulations obliges trustees, where a decision has been made to wind up the scheme, to furnish members with an explanation as to the manner in which any surplus or deficit in the resources of a scheme has been dealt with. (It is stated in Finucane and Buggy , Irish Pensions Law and Practice (p.433) that this requirement would, in practice, make it difficult to return a surplus to the employer without any reference to the members)

6. Revenue rules

Revenue rules also recognise but do not define a scheme surplus in this context.

Paragraph 14.5 of the Revenue Pensions Manual provides that if, on a winding up, the assets available are clearly more than sufficient to provide all prospective benefits in accordance with the rules, the rules may provide additional benefits within approvable limits. Paragraph 14.5 also provides that there must be express provision for the return of any remaining surplus to the employer as soon as the liabilities of the scheme are determined, and satisfied. The returned surplus is treated as a trading receipt in the hands of the employer and can be liable to tax.

7. Scheme documentation

In the case of defined benefit schemes, the question of ownership of a surplus may arise on a wind-up (a surplus will not usually arise in a defined contribution scheme).

If a surplus remains after the priorities specified in Section 48 of the Pensions Act, 1990, if applicable, have been satisfied, its treatment will depend on the scheme documentation. Scheme documentation will usually contain provisions dealing with treatment of a surplus or deficit on a wind-up. (As noted above, schemes must contain certain mandatory provisions for the disposal of a surplus on a winding-up, as a condition of exempt approval) Documentation will differ from scheme to scheme. Depending on the scheme rules, the surplus may be used to augment benefits (subject to Revenue limits), to refund monies to the employer or a combination of both.

Under the scheme documentation. [ 4]

The trustees may have absolute discretion, whether or not in consultation with the employer, to apply any surplus assets as they see fit i.e. whether to increase benefits or refund the moneys to the employer or a combination of these two options.
The trustees may have the discretion to increase benefits but only with the agreement of the employer.
The trustees may have no discretion i.e. the rules provide for how the surplus is to be treated and do not give the trustees any discretion.

Where no discretion is given

Where the scheme rules specify a course of action the trustees must follow that course of action and the treatment of the surplus will be relatively straight forward.

Where discretion is given

Where the trustees are given discretion as to the disposal of the surplus, they must act within the ambit of that discretion. The ambit of the discretion will depend on the wording of the trust deed and rules of the scheme.

8. Case law

Irish case law:

The question of ownership of a surplus has been considered in only one Irish case; Irish Pensions Trust Limited v. First National Bank of Chicago [ 5] . The main issue was whether or not a surplus in the pension fund on winding up was repayable to the employer. The question was determined in favour of the employer by reference to the trust deed.

UK case law:

There is a body of case law in this area which can be summarised as follows:

If consent of the employer is required for the application of surplus to increase benefits, it cannot be dispensed with. [ 6]

If the trustees discretion is merely subject to consultation with the principal employer, then the duty is to consult and no more. Once consultation has taken place and due weight has been given to the representations made, the discretion of the trustees is unfettered. [ 7]

Trustees, if they have a discretionary power to augment benefits on a wind-up, must exercise this power in a just and equitable manner. A Trustee should not decline to exercise such a power solely on the ground that the employer was under no legal obligation to provide the surplus. (Thrells Limited (1974) Pension scheme (In Liquidation) v. Lomas) [ 8] . In his decision Nicholls V. C. referred to the approach adopted by Warner J. in Mettoy Pension Trustees Limited v. Evans [ 9] . In that case, Warner J., in considering the question of a discretionary power to augment pensions on a winding-up of a scheme stated One cannot in my opinion, in considering a provision in the rules of a balance of cost pension scheme relating to surplus, start from the assumption that any surplus morally belongs to the employer.

Nicholls V. C. stated, in the Thrells case:

When a scheme so provides, members have a reasonable expectation that if the scheme funds permit, namely, if there is a surplus after providing for the estimated liabilities, or in a winding up, for the actual liabilities, the trustee will exercise that power to the extent that is fair and equitable in all the circumstances, having particular regard to the purpose for which the power was conferred.

The Vice Chancellor, having reviewed the overall size of the surplus, the effect of the costs of winding up on it, and the impact of section 11(3) of the Social Security Act 1990, concluded after these had been provided for that limited price indexation should be provided for deferred pensioners and anti-franking should take place with effect from the date of the winding up and that the balance should be returned to the employer. Nigel Inglis-Jones the Law of Occupational Pension Schemes [ 10] comments it is of interest to note that the effect of the Vice chancellors judgement, which he described as a happy coincidence, (but was it?) was that after section 11(3) was given effect to, the liquidator and the beneficiaries under the scheme shared the surplus almost equally.

Finucane and Buggy in their treatment of this subject in Irish Pensions Law and Practice conclude [ 11] :

The view of the English Courts would appear to be that, if there is a discretion given to either the trustees or the employer under the trust deed to augment benefits out of surplus on a wind-up, due regard must be given to that clause. It follows that if the employer does not wish surplus to be applied, at least in part, to augment members benefits, then it should ensure that no such discretion to augment is included in the trust deed. An alternative formulation would be for the winding up clause to provide that the trustees shall not augment benefits unless the employer should decide otherwise. This removes the matter from the discretion of the trustees but does not oblige the employer to make a decision.

9. Resulting Trust

Where a surplus remains after the satisfaction in full of the interests of all beneficiaries the surplus will normally revert to the settlor as the person who provided the unexhausted funds (i.e. there is a resulting trust in favour of the settlor). The question to be determined in each case is whose money has led to the surplus. Some UK and Commonwealth decisions have shown a tendency on the part of the judiciary to regard surplus, in a balance of cost scheme, as representing over-funding by the employer, to whom it therefore belongs ( Re Courage Groups Pension Schemes [ 12] and Davis v Richards & Wallington [ 13] . However, other decisions indicate that Courts, even in the case of a balance of cost scheme, might find that that surplus has not resulted from the employers over- funding and that it might be due in part at least to successful investment and to the reduction of the workforce (Mettoy Pension Trustees Limited [ 14] and Re UEB Industries Ltd. Pension Plan [ 15] ).

(In view of Revenue requirements for exempt approval, a resulting trust is unlikely to arise, in practice)

10. Bona Vacantia

After augmentation, if appropriate, a surplus on scheme winding-up, where the employer company has already been wound up, must, under the State Property Act, 1954, be paid to the Exchequer.

A surplus may also form bona vacantia if there is an absence of express or implied provisions under the scheme providing what is to happen to the surplus and, either the law of trust does not apply (so that there is no resulting trust) or, if it does, as it almost always will, no resulting trust is imposed by law. In view of the Revenue requirements for exempt approval, the question of surplus funds forming bona vacantia is unlikely to arise in this context. Similar Revenue rules together with section 77 of the Pensions Act, 1995 have, in the UK, rendered the possibility of surplus pension funds being subject to a resulting trust or forming bona vacantia remote. (Section 77 deals with cases of winding up where there is no power under the scheme rules to distribute the assets to the employer. In such a case the trustees must use the surplus to provide additional benefits or increase the value of any benefits subject to the prescribed limits, and then the trustees may distribute any excess to the employer).

11. Deficit on Winding-Up

The trustees will be required under Section 48 of the Pensions Act, 1990, if applicable, to discharge the liabilities according to the priorities set out in the Pensions Act, 1990, as amended, until all scheme assets are used up.

In the event of a deficit on winding-up, there are two limited statutory protections

under the Protection of Employees (Employers Insolvency) Act, 1984
under the Companies Acts and the Bankruptcy Act, 1988.

(In addition, under the Pensions Act, 1990, as amended, the Pensions Board has the power to apply to the High Court for an order for payment from the employer to a scheme of unpaid member and employee contributions (where the latter have been deducted from pay by the employer).

12. Surplus - Ongoing scheme

Under a less strict legal view (see 2 above), a surplus may be considered to arise in an ongoing scheme based on actuarial valuation of assets and liabilities. This valuation can be on either of the following two assumed bases:

a discontinuance basis
an ongoing basis (this basis is usually accepted as being more onerous than that at (a)).

The valuation basis required under the Minimum Funding Standard in the Pensions Act, 1990 is that the discontinuance basis.

The question of a surplus will generally arise in the context of the following:

13. Revenue Rules

Para. 5.3 of the Revenue Rules requires that in any case where a valuation discloses a surplus in excess of 10% of the value of the fund assets, the matter should be brought to the attention of the Revenue. In such cases, the Revenue may require that the surplus be disposed of by augmenting benefits within approvable limits or by reducing or suspending contributions to the scheme. Where the Revenue take the view that a surplus will be retained in the scheme without any reasonable prospect of being significantly reduced by contribution holiday or benefit improvement, a refund may be required (such a refund is liable to tax in the hands of the employer). A refund may only be made where the rules of the scheme permit. (Under UK legislation, where there is insufficient power in the trust deed, it may be possible to apply to OPRA for a modification Order) [ 16] .

14. The Acquisition and Disposal of Companies & Businesses

The question of a surplus in this context has not yet been addressed in any Irish case. There is however a body of UK and Commonwealth case law in which the meaning of surplus, in this context, has been considered.

The following two main situations can arise (these are identified in Finucane & Buggy, Irish Pensions Law & Practice)

Sale and Purchase of Shares
Sale and Purchase of a Business

In (i) the purchaser acquires all of the shares of the target company. If there is a pension scheme, the target company will continue as employer.

In (ii) a purchasing company may purchase a business representing part of its total activity from another company and, if there is a pension scheme, a portion of the scheme fund referable to the employees in the business being purchased may be transferred in a bulk transfer to a new or existing scheme of the purchasing company.

A variation of (i) and (ii) can arise where, on a share purchase, the company being purchased is part of a group of companies pension scheme. This situation may in practice be similar to (ii) above with the bulk transfer being made in respect of the transferring employees. A further variation is a management buyout in which a situation comparable to either (i) or (ii) may arise depending on whether a company or a business is being bought out.

Sale or purchase agreements (of either (i) or (ii)) will tend to take into account whether the pension scheme is in surplus or deficit. The agreement may contain a balancing provision to adjust the agreed sale price depending on the funding position of the scheme. If the scheme is found to be in deficit the sale price may be reduced or if the sale has been completed the vendor may be required by the agreement to make a balancing payment to the purchaser. In case of surplus, the sale price may take into account the value of any prospective contribution holiday or, if the sale is completed, the purchaser may be required to make a balancing payment to the vendor.

Whilst the vendor and purchaser may seek to negotiate pension scheme related aspects of a sale and purchase agreement, the trustees of the pension scheme will not be party to this transaction, in their capacity as trustees, and will therefore not be bound by terms agreed between the vendor and the purchaser. The trustees will be under a duty to carry out the terms of the trust deed and rules and to consider the interests of members in the context of any proposed treatment of the surplus.

15.

The question of a surplus might also arise in the context of other situations, for example, a redundancy programme or where an employer wishes to take a contribution holiday.

16.

Factors which affect the treatment of a surplus in an ongoing scheme

17. Scheme Documentation

The question of how a surplus in an ongoing scheme may be dealt with, in the context of a Revenue requirement, a sale and purchase or any other situation will depend on the provisions of the scheme documentation. As stated above, the trustees will also be under a duty to carry out the terms of the trust deed and rules and to consider the interests of the members in the context of any proposed treatment of the surplus.

18. The Pensions Act, 1990.

The Pensions Act, 1990, while it clearly recognises the existence of a surplus in the context of an ongoing scheme, does not make any specific provisions in this respect. The existence of a surplus is recognised in the following two situations;

As mentioned at 12 above, the Act requires schemes (other than defined contribution schemes or schemes which have become frozen before 1 January 1993) to comply with a Minimum Funding Standard (on a discontinuance basis).
Subsections 29(7) and 30(6) of the Act also make an implicit reference to surpluses (in the context of preservation). These Subsections provide that if a scheme receives a transfer amount in respect of accrued rights from another scheme, where such rights result from the termination of the employment to which that other scheme applied, the long service benefit provided in the receiving scheme in respect of the transfer amount must be preserved in full for the early leaver whether

the transfer amount was received before of after 1 January, 1991,
or
relates to rights accrued before or after 1 January, 1991 in the other scheme.

It is provided at paragraph 114 of the Guidance Notes on Preservation of Benefits that it is not a requirement of the legislation that the value of the additional long service benefit granted in the receiving scheme (which is then preserved on subsequent termination of relevant employment) must equate to the transfer amount where such an amount exceeded the actuarial value of the benefits to which the member was entitled on termination of the previous employment, although this equivalence in value would normally be provided for under the rules of the scheme except in certain circumstances such as the payment of a bulk transfer value.

Therefore, to the extent to which any transfer amount exceeds the actuarial value of the benefits to which a member was entitled on termination of relevant employment, that amount need not be preserved.

19. Revenue Rules

(See 13 above)

20. Case law

The question of ownership of a pension scheme surplus in the context of an on-going scheme is complex. As previously stated, there has been no decision of the Irish Courts on this question. However, there is a body of UK and Commonwealth decisions in which this question has been considered. These decisions demonstrate that the matter of ownership of a surplus is not straightforward. Some of the cases have shown a difference of opinion as to whether there is any such thing as a surplus in an ongoing scheme and as to whether the surplus belongs to the employer alone, to the employer and members, or whether in fact it could be stated to belong to any particular group of persons at all.

A broad summary of that case law is as follows.

Re. Imperial Foods Limited Pension Scheme [ 17]

In this case the benefits in the scheme on retirement age were a product of the number of years of membership of the scheme and a fraction of the final salary of the member. The participating employers met the cost of providing the benefits of the scheme in excess of the amounts paid by the members by way of contributions. The members had no right to increases in benefit if the scheme was in surplus, since these could be vetoed by the participating employers. There was not provision, however, for the return of any surplus, which might emerge, on a winding-up of the scheme to the employers. On these facts Walton J. held that a surplus in a scheme was best regarded as temporary surplus funding by the employers.

Re: Courage Groups Pension Schemes [ 18]

In this case, where the scheme contained similar provisions to those in the Imperial case, Millett J. said:

Employees are obliged to contribute a fixed proportion of their salaries or such lesser sum as the employer may from time to time determine.

They cannot be required to pay more even if the fund is in deficit and they cannot demand a reduction or suspension of their own contributions if it is in surplus. The employer, by way of contrast, is obliged only to make such contributions if any as may be required to meet the liabilities of the scheme. If the fund is in deficit, the employer is bound to make it good; if it is in surplus then the employer has no obligation to pay anything. Employees have no right to complain if, while the fund is in surplus, the employer should require them to continue their contributions while itself contributing nothing. If the employer chooses to reduce or suspend their contributions, it does so ex gratia and in the interests in maintaining good relations. From this, two consequences follow. First, employees have no legal right to a contributions holiday. Secondly, any surplus arises from past over funding, not by the employer and the employees pro rata to their respective contributions, but by the employer alone to the full extent of its past contributions and only subject thereto the employees.

In Taylor & Others v. Lucas Pension Trust Limited & Others [ 19] , Vinelott J. said that a pension fund to the extent that it is in surplus belongs to no one. Members and pensioners have an interest in it if and so far as the fund as a whole is capable of being used to improve benefits or to add new benefits. They also have an interest in preserving the fund as security for future payment of benefits, and if and to the extent of that the surplus may have to be applied in improving benefits payable in a winding up.

In Imperial Group Pension Trust Limited v. Imperial Tobacco Limited [ 20] the Court held that a pension scheme operated in the context of the employment relationship. This was a relationship of confidence and there was an implied obligation on the employer, in exercising a power conferred on it by the scheme documentation, not to exercise that power in such a manner as to damage that relationship of confidence.

In British Coal Corporation v. British Coal Staff Superannuation Scheme Trustees Limited [ 21] , an amendment had been made to the rules which entitled British Coal to apply a part of the surplus in the scheme for its benefit. There was a provision enabling the principal employer to make amendments to the scheme, but this was restricted by a provision which forbade alterations which would make any of the moneys of the scheme payable to any of the employers participating in it. The Court held that the rule introduced by amendment had to be construed so as to avoid breaching the restriction on the power of amendment, which on a literal construction it did, and in consequence of this held that the surplus (or putative surplus) in this scheme available to be used for the benefit of the employers could not be used to cancel a debt due from British Coal to the scheme. This would be tantamount to transferring a part of the assets of the scheme to one of the employers participating in it.

There has been much judicial consideration of surpluses in on-going schemes in the context of bargains. In Nigel Inglis Jones The Law of Occupational Pension Schemes it is stated that a stalemate may be reached in the following circumstances. The employer may wish to secure a repayment in circumstances where a repayment of part of the surplus could be made without materially harming the security of the members or their benefits. The beneficiaries would like an increase in benefits from the surplus, but the provisions of the scheme do not permit them to secure this without the consent of the employer. The power of the employer to give or withhold its consent to increases in benefit is usually held by the employer for its own benefit, and is not a fiduciary power. Assuming then, that there is an express power to permit the trustees to repay surplus moneys in the scheme to the employer, a deal may be struck which is mutually beneficial both to employer and member. The employer agrees that part of the surplus may be used to increase benefits, and the trustees agree that a part of the disposable surplus is returned to the employer. It would seem that such a bargain, if genuine, would meet with the approval of the Court (re Courage Group Pension Scheme [ 22] and Taylor & Others v. Lucas Pension Trust Limited [ 23] . Decisions of the Court have shown that in bargaining for the repayment of any part of the surplus in pension schemes a proper appreciation must be made of the balance of power in a scheme by trustees and employers when a bargain is being struck in respect of the return of surplus to an employer (see Hillsdown Holdings Plc. v. the Pensions Ombudsman [ 24] ). Knox J. held in that case that the duty of good faith did not prevent bargaining from taking place so long as the employers had locus standi to bargain, which in the case of Hillsdown Holdings Plc, it did not.

The difficulties of trustees who are also beneficiaries under a pension scheme, in the context of bargains have been increased by the decision of Lindsay J. in Manning & Others v. Drexel Burnham Lambert Holdings Limited & Others. In this case the judge approved a compromise of the trustees claims against the employer and also approved the exercise of discretion to augment benefits on a winding up. The scheme contained no provision that prevented the exercise of discretion by a trustee who was a beneficiary from being questioned on the grounds of his interest in the scheme. The judge applied the principles to be found in Aberdeen Railway Company v. Blaikie Brothers, Regal (Hastings) Limited v. Gulliver & Others and Bray v. Ford. The effect of these are that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has, or can have, a personal interest conflicting with the interests of those whom he is bound to protect (subject to a number of exceptions) (it would appear that the provisions of a Trust Deed can override this principle).

The decision in the Hillsdown Holding case was perceived as marking a significant extension of the limitations imposed on employers by the implied duty of trust and confidence. The decision of Knox J. was thought likely to mean that challenges to decisions of employers and trustees would be more likely to succeed.

The question was most recently considered by the High Court in the National Grid and National Power Cases (June, 1997). In this case the High Court overturned a determination of the Pensions Ombudsman that National Grid was wrong to offset a funding surplus in its section of an industry wide pension scheme against payments required for early retirement pensions resulting from a redundancy exercise. (As the Ombudsmans original determination on National Grid also had implications for the use made by National Power of its surplus, that company sought the Courts endorsement of the action it had taken to reduce surplus, and was successful.)

Walker J., in reaching his decision, dealt with the following two questions

what steps could the company take which were within the scope of the power to make arrangements to deal with surplus? And were those steps restricted by the amendment power?
what contractual, fiduciary or other duties constrained the company in the exercise of its power?

Walker J. held that the Ombudsman was wrong to rely on the decision in the British Coal Staff Superannuation Scheme case in that electricity companies were not required to use the amendment power in order to deal with surplus and, consequently, the restriction on the amendment power was irrelevant and, although payments to employers were not specifically permitted, they were not entirely outlawed.

Walker J. also found that the Ombudsman lost sight of the distinction between a companys duty of good faith and a fiduciary duty. He stated that the duty of good faith does not prevent the employer from looking after its own financial interests, even when they conflict with those of members and pensioners (However, he indicated that the duty of good faith probably has more that one attribute in common with fiduciary duties).

The judge concluded that there was no evidence to justify a conclusion that National Grid was in breach of its duty of good faith and overturned the Ombudsmans determination against National Grid.

The judgement contained three points about how pension fund documentation should be construed. These were that:

the Courts should take a practical and purposive, rather than a detached and literal, approach;
the language of the rules is critical, especially where there are minor points of difference between essentially similar sets of rules; and
the Court can look at provisions of the scheme which have been superseded to aid an understanding of existing rules, but it should be slow to do so and should not generally look at draft rules which were never implemented.

This case has been perceived as tilting the balance of power over surplus back towards employers.

A number of obiter comments made by Walker J. are of interest:

any general exclusion of employers from surplus would tend to make employers very reluctant to contribute to their pension schemes more than the bare minimum that they could get away with. That would be unfortunate, and it would be even more unfortunate if employers were driven to abandon final salary balance of cost schemes and were instead to turn to money purchase schemes which may in the long term prove less advantageous to the beneficiaries.

Walker J. was also concerned that the destination of surplus often depends on arguments which he likened to determining how many angels could stand on the point of a needle: It is a matter of real concern that the destination of surplus should depend, as it often seems to depend, on subtle and complex arguments about the meaning of scheme documents.

It is stated in Occupational Pensions (August 1997):

the issue of the actuarys certification of the reasonableness of a planned use of surplus is still in the air. Bacon & Woodrow restricted itself to giving a purely actuarial view. However, some believe that an actuarial certificate should or could also reflect the fairness of proposals.

(The representative beneficiary in the National Power case is now seeking to show that there is an obvious error in the judges ruling and the two National Grid complainants have lodged an appeal to the Court of Appeal).

21. UK legislation

The Pensions Act, 1995 introduced provisions governing payments from surpluses. While different provisions apply, depending on whether the scheme is being wound up or is ongoing, the main effect of sections 37 and 76 is as follows:

No payment to an employer can be made from a scheme unless provision is made for pensions in payment (and future pensions) to receive certain annual increases.
Notice must be given to members of a proposal to make a payment to the employer.
Both sections also contain other requirements for the notification, and in some circumstances, the involvement of, OPRA.

The Act also introduced new provisions for specified cases where a power is given to a person in a trust deed to deal with surpluses but that person is not the trustee of the scheme. Other references to the 1995 Act are made at 10 and 13 above.

22. Conclusion Surplus on scheme wind-up or in ongoing scheme

Case law in the UK has shown that, in deciding how a discretion over a surplus is to be exercised the Courts are influenced by three factors:

the terms of the trust deed
the fact that the beneficiaries of a pension scheme are not volunteers in the sense that the beneficiaries under a traditional trust are
whether the surplus exists in relation to an ongoing scheme or one that is being wound up. [ 25]

Case law shows that the Courts have found it difficult to decide who should receive a surplus. The question would appear to depend on the view taken of the nature of the pension bargain between the employer and the employee. Decisions of the UK Courts have demonstrated a readiness on the part of Courts to review decisions of trustees and employers. This has resulted in a degree of uncertainty for schemes.

In Nigel Inglis Jones The Law of Occupational Pension Schemes it is stated [ 26] that it may be hard to determine what is fair as a principle of general application and that to provide by legislation that surplus funding must be distributed among the members by way of increased benefits may be unfair to the employers and will, no doubt, cause them to seek to contribute to pension schemes much less generously in the future, if they are able to do so. It might cause them to rethink their policy of having a pension scheme at all.

September, 1997.

OUTLINE OF UK STATUTORY PROVISIONS

Scheme Winding-Up

Goode Committee

1.

The Goode Committee found that the majority of UK schemes expressly provide for surplus (on winding-up) to be paid to the employer subject to any (restricted or unrestricted) discretion to the trustees to augment benefits.

2. The Committee accepted that difficulties could arise both

where scheme documents were silent on distribution of a surplus
and
where the documents do so provide.

The Committee noted the various views on who is entitled to an unallocated surplus i.e.

scheme members exclusively
employer exclusively
members and employer on a shared basis.

They noted that in the case of balance of cost schemes, the preponderant but not unchallenged judicial opinion (in the UK) was that unallocated surplus belongs to the employer.

3. The Committee recommended that

surplus on winding-up should (continue to) generally be dealt with in accordance with scheme rules, and
the discretion of trustees regarding surpluses should be statutorily clarified both where scheme rules were silent (in which case the trustees should have discretion regarding application of any unallocated surplus) and where scheme rules prohibited payment to the employer (in which case trustees should first augment benefits by limited indexation and Revenue approved levels and then have discretion to allocate the balance as they see fit).

Pensions Act, 1995

4.

In Section 76, where an exempt approved scheme is being wound-up and under the scheme power is conferred on the trustees or employer to distribute assets to the employer on a wind-up, that power cannot (statutorily) be exercised until, inter alia,

scheme liabilities have been fully discharged;
where power exists to then distribute assets to any person other than the employer, that power has either been exercised or a decision taken not to exercise it,
pensions in payment have been increased by a stated revaluation amount
members have been notified of the proposed exercise of the power (to distribute to the employer).

5.

In Section 77, where an exempt approved scheme is being wound up, where the scheme prohibits distribution to the employer, and where (i) and (ii) above are fulfilled

the trustees must use any remaining assets to provide additional benefits/increase existing benefits subject to limits,
and
may then distribute any yet remaining assets to the employer.

Comment

6.

These provisions (Section 76 and 77 of the Pensions Act, 1995) essentially clarify statutorily the duties of trustees regarding surplus on a wind up by specifying conditions which must be complied with before any surplus can be distributed to the employer.

Ongoing Scheme

Goode Committee

7.

The Committee outlined the developments as a result of which surpluses in ongoing schemes became an issue in the UK in the 1980s; these included

large growth in real value of income-generating investments,
substantial reduction in workforces,
leading to build-up of substantial surpluses in schemes which, in turn, employers sought to access either by withdrawal of funds from schemes or by winding up. Also, members were frequently, as part of a redundancy package, offered early retirement with augmented benefits financed from the surpluses.

8.

Arising from the tax revenue loss due to perceived over-funding, fiscal provisions were introduced in 1986 and regulatory provisions in 1990. Essentially, these were;

if a surplus, as defined statutorily exceeded 105% of liabilities in a valuation,
it had to be reduced to 105% within, at most, five years by one or more of

payments to the employer
employer and/or member contribution holiday
reduced employer and/or member contributions
improvements of existing benefits/provision of new benefits.

((i) to (iv) would directly/indirectly result in increased exposure to tax)

If not so eliminated, the surplus in excess of 105% would be taxed;
where payments are made to the employer under (i), in addition to Revenue approval

the payment must be either allowed by scheme rules or their amendment as authorised by modification order of the OPB
guaranteed indexation increases must be provided on future pension payment
and where an OPB modification order arose, the OPB required that trustees must be satisfied, on independent advice, that the proposal is in the interests of the beneficiaries, and
members must be given the opportunity to make representations to OPB.

Comment

9.

These statutory provisions gave legal recognition and definition to a surplus as an encashable financial reality in an ongoing scheme and, as the Goode Committee commented contributed to a widespread perception of surplus as an identifiable asset available for distribution.

Other aspects of Goode Committee Report

10.

The Committee, however, held the view that in relation to an ongoing scheme, ownership of surplus does not arise in legal terms (as rights have not crystallised) but that the important question is that of trustee powers (if any) to apply the surplus including possible payment to the employer. In this connection, the Committee felt that, given the members interest in the security of benefits under the scheme, they had an interest (though not a legal entitlement) in the application of a surplus to which interest the trustees are duty bound to have regard.

11.

The Committee made what it clearly regarded as a substantive distinction between

payments to the employer out to a surplus (in an ongoing scheme); these were generally not allowed under scheme rules or required trustee approval, and
contribution reductions/holidays, which could be regarded as consistent with the normal process of adjustment of contribution levels, on actuarial advice, over time.

Recommendations

12.

The Goode Committee concluded that sweeping changes in the law governing surplus [in an ongoing scheme] are not needed. The Committees recommendations, essentially, involved various refinements and clarifications of the then existing provisions designed to enhance members and fund security.

Pensions Act, 1995

13.

Under Section 37 of the Act, where in an ongoing exempt approved scheme there is power to make payments from the fund to the employer and the scheme is in surplus (as defined in relevant fiscal legislation),

even if conferred on a person other than the trustees, the power can be exercised only by the trustees,
and
the power to make such payments can be used only if

the power is exercised in pursuance of a Revenue approved proposal on elimination of surplus (i.e. aimed to reduce the surplus to 105% within, at most, 5 years);
the trustees are satisfied that the payment is in the interests of the members;
where the power under the scheme has been conferred on the employer, he has asked for or consented to its use;
pensions in payment are increased by specified indexation amounts, and
the members have been notified of the proposal to exercise the power.

Comment

14.

14. While the UK legislation on surpluses in ongoing schemes was originally introduced for fiscal reasons, the provisions in the Pensions Act, 1995 seek to refine further the previous regulation of such surplus for pensions regulatory (as well as fiscal) reasons. The effect is to regulate the circumstances, and pre-conditions, subject to which such surpluses can be distributed including to the employer. Enhanced member protected would seem clearly to be an objective.

Transfer of Members accrued rights without consent

Occupational Pension Schemes (Preservation of Benefits) Regulations, 1991, as amended.

15.

Under the UK Occupational Pension Schemes (Preservation of Benefit) Regulations, 1991 (as amended), a scheme may provide for a members accrued rights to be transferred without the members consent only where the following conditions are satisfied

either the transferring and receiving schemes apply to employment with the same employer or the transfer is a bulk transfer (as defined in the Regulations),
and
the actuary certifies to the trustees or managers of the transferring scheme, broadly, that

the members who will be transferred will acquire transfer credits and discretionary benefits or increases in benefits in the receiving scheme broadly no less favourable than those rights and discretionary benefits or increases in benefits given up in the transferring scheme and that there will not be a significant loss of security for members being transferred. Information about the proposed transfer and details of the value of the rights to be transferred must also be furnished to the member not less than one month before the proposed transfer is due to take place.

[1] Irish Pensions Trust Limited v The First National bank of Chigago (Unreported, High Court, February 15 1989) concerned a surplus in the context of a wind-up.

[2] as amended by section 17 of the Pensions (Amendment) Act, 1996

[3] defined as a scheme other than a defined contribution scheme

[4] It is stated in Finucane and Buggy, Irish Pensions Law and Practice, at p.548 some suggest that the better course is that augmentation on a winding up should not be subject to the consent of the employer if the employer is insolvent. Wind-up of the scheme will often arise in the context of an insolvent wind-up of the employer, and in such a case augmentation of members benefits should not depend on employer consent. Others would take the view that disposal of surplus is an employer matter in all cases. The matter can be further complicated in insolvency cases if the employer company is the sole trustee of the pension scheme. The discretion to augment benefits then falls to be exercised by the liquidator on behalf of the company. The duty of the liquidator to act in the best interests of the creditors of the company as a whole would require the liquidator to refrain from exercising the augmentation power on grounds of conflict of interest

[5] Unreported, High Court, 15 February 1989, Murphy J.

[6] Re Forsters Settlement (1942) Ch.199

[7] Re Laker Airways Pension and Life Assurance Scheme (Unreported, 23 July, 1986)

[8] 1992 PLR 233

[9] 1W.L.R.1587

[10] Para. 12-35

[11] at p. 549

[12] (1987) 1 ALL ER 536

[13] (1991) 2 ALL ER 536

[14] (1991) 2 ALL ER

[15] 1992 1 NZLR 294

[16] under section 69 of the Pensions Act, 1995

[17] (1986) 1 WLR 717

[18] (1987) I WLR 495

[19] (1994) O. P. L. R. 29

[20] (1991) I WLR 589

[21] (1993) P. L. R. 303

[22] (1987) 1 WLR 495

[23] (1994) O.P.L.R. 29)

[24] Unreported, 12 and 31 July, 1996

[25] Blackstones Guide to the Pensions Act, 1995

[26] para. 12-09

Proposals on Surpluses in Occupational Pension Schemes (Dec. 1998) - Report of the Pensions Board

CONTENTS

1. INTRODUCTION

2. Summary of Conclusions and Proposals

Conclusions

Proposals

Proposed Measures

3. Background

Scheme Winding-Up

Ongoing Scheme

Surplus/Deficit?

General

Pensions Act, 1990

Comment

Revenue Rules

Ongoing Scheme

Comment

Trust Deed and Rules

Case Law

Transfer of Undertakings Regulations

Comment

The Pensions Board Trustee Handbook

Comment

Scheme Winding-Up

Ongoing schemes

Incidence of Surpluses

Surplus on a discontinuance basis

Usual Practice

Usual Practice in Scheme wind-up

Usual practice in dealing with surplus on ongoing basis

Usual treatment of surplus (ongoing basis) on sale/take over

Typical perceived issues of contention in relation to surplus (ongoing basis) on sale/take-over

Implications of Official Action

4. Proposals

General

Winding up

Implementation

Amalgamation/Transfer of Funds

Specific proposals

Appendices

Occupational Pension Schemes

1. Introduction

2. Definition of surplus

3. How might a surplus arise?

4. Surplus-Scheme Winding Up

5. The Pensions Act, 1990

6. Revenue rules

7. Scheme documentation

8. Case law

9. Resulting Trust

10. Bona Vacantia

11. Deficit on Winding-Up

12. Surplus - Ongoing scheme

13. Revenue Rules

14. The Acquisition and Disposal of Companies & Businesses

15.

16.

17. Scheme Documentation

18. The Pensions Act, 1990.

19. Revenue Rules

20. Case law

21. UK legislation

22. Conclusion Surplus on scheme wind-up or in ongoing scheme

OUTLINE OF UK STATUTORY PROVISIONS

1.

2. The Committee accepted that difficulties could arise both

3. The Committee recommended that

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.