Trustee refund of pension surplus held to be reasonable | Fieldfisher
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Trustee refund of pension surplus held to be reasonable


United Kingdom

The welcome boost to the funding of many defined benefit pension schemes over the last 18 months has created a new headache for pension fund trustees: what to do with the pension surplus. It may seem a nice problem to have; but the last time there were significant surpluses, back in the 1990's, there was no shortage of litigation about whose surplus it was.

The Pensions Ombudsman has just delivered a decision on one of the first of what may be a new batch of cases about how pension surplus should be used. The trustees had decided to return all the surplus to the employer on a wind-up. The good news for trustees is that as long as they follow the proper process, take account of relevant factors and make a reasonable decision, the Ombudsman will not overrule them, even if a different set of trustees might have made a different decision.

The complaint was brought by a pensioner of the Bristol Water plc Section of the Water Companies Pension Scheme, a segregated scheme for employers in the water industry. The scheme rules gave the trustees discretion to use any surplus arising on a winding up of the Section to increase members' benefits, with any remaining assets being paid to the employers. The section had gone into wind-up and the trustees had informed members of their intention to return the whole of the surplus to the employers. The surplus was around £12 million.

The Ombudsman started by addressing the argument that the duty of trustees colloquially summarised as "to act in the best interests of members" meant that surplus must be used for members' benefit. He confirmed that, at the least, this principle is better formulated as a duty to act in the best interests of beneficiaries, which included the employers where the rules allowed a refund of surplus. But he noted that the High Court had explained that the duty is more accurately expressed as a duty to promote the purpose for which the trust was created. The Ombudsman held that where, as here, members' benefits had been secured in full, it was consistent with the purposes of the trust for the trustees to repay surplus where the rules allowed.

He found that the trustees had taken account of all relevant factors, and no irrelevant ones, in reaching their decision. The relevant factors included:

  • the views of the employer (with whom the surplus rule required the trustees to consult);
  • the source of the surplus;
  • member expectations;
  • the fact that members' benefits had been secured in full;
  • that the employer had made significant additional contributions to accelerate the Section's de-risking strategy;
  • throughout the operation of the Section, all of the "downside" funding risk lay with the employers;
  • the employer contributions had been set in order to fund prudently and it was not fair or appropriate for the employer to be, in effect, penalised for having been willing to facilitate and fund the trustees' prudent approach to reserving for adverse contingencies;
  • most members' benefits were fully inflation-linked, with the remainder being inflation-linked up to 5%;
  • since 2000, the employers had contributed more than five times the amount paid by members; and
  • where overpaid benefits were identified as part of the data cleanse, those benefits were not reduced or reclaimed.

In light of these factors, the Ombudsman felt that the trustees' decision was neither unreasonable nor perverse. It was not a decision that no reasonable board of trustees would make. Another set of trustees might have reached a different decision which was also not unreasonable or perverse. But that did not affect the integrity of the actual decision made.

This case also highlights the importance of trustees taking advice during the process and minuting carefully both their decisions and the factors they took into account in reaching those decisions.

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