Commentary on Sections Payment of surplus to employer Section 250: Payment of surplus to employer, and Section 251: Payments of surplus to employer: transitional power to amend scheme
907.Sections 250 and 251 provide new rules governing payments to an employer from an actuarial surplus in an ongoing occupational pension scheme.
908.To retain tax-exempt status, tax law currently requires an occupational pension scheme to take appropriate steps to reduce an excessive actuarial surplus. The valuation of the scheme’s assets and liabilities must be carried out in accordance with Schedule 22 of the Income and Corporation Taxes Act 1988 (ICTA). This includes Inland Revenue rules which stipulate methods of calculation on an ongoing basis, and the requirement for a plan for the elimination of an excessive surplus to be approved by the Inland Revenue. One of the ways by which a scheme may reduce the surplus is by a payment to the employer, taxable at 35%.
909.Section 37 of the Pensions Act 1995 allows payments to be made to an employer from a tax-approved occupational pension scheme only when it has an excessive surplus according to Revenue rules, and sets out further conditions that must be met before such a payment can be made.
910.The tax simplification measures in the Finance Act 2004 remove the requirement to dispose of an excessive surplus. It remains the case that a payment of surplus to an employer would be taxed at 35%.
911.Section 250 substitutes a new section 37 of the Pensions Act 1995 to govern the circumstances under which trustees may make a payment to an employer from an actuarial surplus, and how such a surplus should be determined.
912.Subsections (1) and (2) of new section 37 repeat relevant provisions at the original section 37(1) and (2), ensuring that such payments can be made from an ongoing scheme only if scheme rules permit the payment of surplus to an employer and providing that any scheme power for the payment of a surplus to the employer must be exercised by the trustees.
913.Subsection (3) of new section 37 prevents trustees from making a payment to the employer unless:
	they have a certificate from a prescribed person that the assets and liabilities of the scheme have been calculated and verified in accordance with prescribed requirements, and stating the maximum amount of the payment that may be made;
	the payment does not exceed the maximum amount given on the certificate;
	the trustees are satisfied that it is in the interests of the members for the payment to be made;
	where appropriate, the employer has requested, or consented to, the payment;
	the Regulator has not issued a freezing order against the scheme under section 23 of this Act; and
	scheme members have been notified in accordance with prescribed requirements.
914.Subsection (4) allows the Secretary of State to make provisions in regulations for:
	the valuation of the scheme’s assets and liabilities;
	the assets and liabilities to be taken into account for the valuation;
	the valuation to be carried out in the prescribed manner by a prescribed person;
	the certificate referred to in subsection (3);
	the duration of the validity of the certificate; and
	the maximum amount of the payment.
915.Regulations made under subsection (5) will require trustees to inform both the Inland Revenue and the Regulator when making a payment.
916.Subsections (6) and (7) allow the Regulator to impose sanctions under section 10 of the Pensions Act 1995 (civil penalties) where these rules are not complied with. Sections 13, 15 and 16 of this Act would also permit the Regulator respectively to issue an improvement notice (e.g. requiring that the procedures be properly followed), to seek an injunction from the Court preventing such a payment, or to require restitution of a payment made improperly.
917.In exchange for the imposition of a higher threshold before a payment to the employer may be made, the new provision does not reproduce the requirement that, before a payment may be made to the employer, 5% limited price indexation (LPI) protection must be extended to all scheme pensions (over and above the protection in respect of rights accrued after 1997 provided by the main statutory LPI provisions). Guaranteed pension increases, as required by the LPI legislation or by scheme rules, would be included in the assessment of liabilities for the purpose of the full buy out calculation, and this will be set out in the regulations.
918.Section 251 introduces transitional powers for trustees to amend scheme rules to take account of the repeal of the Income and Corporation Taxes Act 1988 provisions and the substitution of a new section 37 of the 1995 Pensions Act.
919.In schemes where current rules allow payments to the employer other than in order to comply with Revenue requirements, but which may have been constrained by section 37 of the Pensions Act 1995, trustees may choose to revive their original powers, limit them or leave them un-revived. In schemes where rules are framed so as only to allow payments in circumstances specified under the Income and Corporation Taxes Act 1988, trustees may choose whether and how they wish to take a power to make payments of surplus to the employer. Revenue requirements for tax approval have generally required scheme rules to prohibit payments of surplus except with Revenue approval and in accordance with the Income and Corporation Taxes Act 1988 rules.
920.In both cases, trustees:
	must be satisfied that such a rule change is in the interests of scheme members;
	can only make one such decision,
	must make it within five years of the commencement of these provisions, and
	must give written notice to the employer and scheme members that they plan to change the scheme rules on payments to the employer.
921.In each case, any new rules will be subject to the overriding provisions in section 250.