With interest rates having reached a 15-year high, some employers participating in defined benefit pension schemes have suddenly found that instead of gloomily contemplating a large deficit, they are sitting on a surplus.  

Many of these are dusting off their scheme rules to find out whether they might be in line to receive some or all of the surplus.  

Scheme administrators and trustees are also refreshing their collective memories on these rules. Local Government Pension Scheme (LGPS) funds are increasingly being required to exercise their discretion about surpluses as housing associations, charities and others take advantage of favourable conditions to leave.

A recent Pensions Ombudsman decision has provided a useful reminder of what pension scheme trustees need to consider when exercising their discretionary powers around paying out a surplus. 

The decision

The Central & Cecil Housing Trust Pension Fund decided to use 50% of a surplus of close to £1 million to enhance members' benefits and paid out the other 50% of the surplus to Central & Cecil Housing Trust.  

In making that decision, the trustees took into account factors including:

• the source of the surplus (employer & member contributions and investment returns);
• the interests of the members of the fund and representations made by them;
• the interests of Central & Cecil Housing Trust as the employer;
• the fact that member benefits had been secured in full;
• the level of inflation protection provided; and
• the fact that Central & Cecil Housing Trust had made significant deficit recovery contributions of nearly £4 million.

One of the members complained that the whole of the surplus should have been used to enhance member benefits.

The Pensions Ombudsman looked at whether the trustees of the fund had:

• interpreted the rules of the scheme correctly;
• followed the rules;
• made a reasonable decision; and
• taken into account the appropriate factors in exercising their decision.

It decided that the trustees had followed the rules, made a reasonable decision and taken into account relevant factors.  It therefore rejected the complaint.

Commentary

The Pensions Ombudsman decision provides a useful illustration of what factors could be relevant when deciding what to do with a surplus and how any challenge to a decision is likely to be viewed.

Although the rules are different in the Local Government Pension Scheme to those in this decision, LGPS funds also have discretion about whether to pay out some or all of a surplus to exiting employers in the form of an exit credit.  

Many of the factors considered by the trustees in this decision will also be relevant for LGPS administering authorities in making their decision.  

We're aware that some LGPS funds have quite prescriptive policies about when they will pay out a surplus.  This decision suggests that those policies may well need reviewing.

For advice on making decisions about surpluses or making representations about how a surplus should be distributed, contact Doug Mullen.