1 December 2023
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Ombudsman rejects member complaint re payment of surplus to employer

To The Point
(3 min read)

In this article we consider a recent Pensions Ombudsman determination regarding a trustee's decision to pay a pension scheme surplus to the sponsoring employer when the relevant section of the Scheme was wound up rather than using the surplus to increase benefits.  The Ombudsman's decision will be of interest to sponsoring employers and trustees of pension schemes which have a surplus or may do so in the foreseeable future.

The Pensions Ombudsman has dismissed a complaint by a member about a surplus being paid in full to the Scheme's employer when the relevant section of the Scheme was wound up (Mr S CAS-92093-N4D9). The rules of the Scheme gave the Trustee discretion to increase benefits in consultation with the employer, with any assets remaining being paid to the employer. The Trustee decided that, after buying out the Scheme benefits, the net surplus would be paid to Bristol Water plc, the relevant employer. 

The member's complaint

A  Scheme member, Mr S, objected to the Trustee's decision, arguing that the failure to use the surplus to augment benefits was a dereliction of the Trustee's duty to act in the interests of Scheme members. Mr S's arguments included that the Trustee had not taken into account that the employer had taken contribution holidays, that member contributions had previously been increased, and that better than expected investment returns had made a significant contribution to eliminating the Scheme deficit. 

The Trustee's arguments

The Trustee's case was that the employer had paid more than five times the amount of member contributions since 2000, as well as bearing all the downside funding risk, so it was fair and reasonable to return the surplus to it. The contribution holidays had been taken in the 1990s and early 2000s when the law required schemes to reduce prescribed overfunding. The Trustee said that, although there had been an increase in member contributions from 5% to 8%, this had not funded the deficit, and the employer had wholly met the cost of making good the deficit. 

Ombudsman's jurisdiction

Section 76 of the Pensions Act 1995 deals with payments of surplus to an employer on a scheme wind-up.  The Ombudsman noted that findings of fact about whether a person has complied with section 76 were excluded from his jurisdiction.  However, he said that he could decide whether the Trustee had followed the correct process in reaching its decision, specifically whether it had:

  • followed the requirements of the Scheme rules;
  • interpreted the rules correctly;
  • taken into account the appropriate factors in reaching its decision; and
  • made a decision that was not so unreasonable that no reasonable person acting reasonably could have made it.

Ombudsman's decision

The Ombudsman dismissed the member's complaint. He said that it was clear to him that Bristol Water plc as the scheme employer was a potential beneficiary of the Scheme, as the rules provided that it could receive payment of surplus assets.  Thus even on the "simplistic formulation" of the Trustee being under a duty to act in the best interests of the beneficiaries, the scheme employer should be considered alongside other beneficiaries when the Trustee considered its power to distribute surplus.  However, the Ombudsman commented that the courts had moved away from the idea that scheme trustees had a paramount standalone duty to act in the best interest of the beneficiaries.  A scheme trustee's duty was to promote the purpose for which the trust was created.   

The Ombudsman considered that all the factors considered by the Trustee were relevant to its decision.  Factors considered by the Trustee included:

  • that the employer had borne all of the downside risk in relation to the Scheme;
  • that the employer had been supportive of the funding and de-risking strategy adopted by the Trustee.  This involved the employer paying significant additional contributions to fund for prudence, and it did not seem fair to penalise the employer for this;
  • the prudent funding strategy had been key to being able to secure members' benefits in full;
  • most members' benefits were fully inflation-linked;
  • since 2000 the employer had paid in more than five times the amount paid by members over the same period, and for a typical member, the member's lump sum alone would exceed the value of the member's own contributions.

The Ombudsman concluded that the Trustee had followed the requirements of the rules and had considered all the relevant factors and no irrelevant factors, and the decision had not been one that no reasonable decision-maker could have made. 

Our thoughts

The wording of a scheme's trust deed and rules will be key to determining what happens to any surplus on a winding-up.  This case illustrates the importance of following and documenting an appropriate decision-making process in case a decision on surplus is subject to challenge.  It also illustrates that there are circumstances in which trustees may be able to justify a decision to pay all surplus to an employer on a scheme wind-up even where the scheme rules give the trustees discretion to increase benefits.

To the Point 

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