A quirk of legislation (Section 251 of the Pensions Act 2004 (“Section 251”)) will block certain payments from defined benefit pension plans to employers, unless trustees pass a resolution preserving the powers to make such payments on or before 5 April 2016.
Action is needed now (if trustees have not already passed a valid resolution) to enable the 5 April 2016 deadline to be met.
Not all employer payments will be blocked, for example, payments to employers on a pension plan wind up and some employer payments made for the purposes of the management or administration of a pension plan will fall outside the scope of Section 251. In addition, not all pension plans will be affected – Section 251 does not apply to money purchase pension arrangements or pension plans that have come into existence since 6 April 2006.
We recommend that trustees and employers associated with defined benefit pension plans check the rules that govern those plans, identify the employer payment powers that they wish to preserve and/or amend, and ensure that the necessary resolution is passed. Trustees will need to be satisfied passing the resolution is in the best interests of the pension plan members. Employers will clearly have a vested interest in ensuring that any surplus assets in the pension plan do not become “trapped” particularly given the significant contributions that they make to fund their defined benefit plans. There may also be accounting implications if a potential surplus could not be recovered by an employer.
Trustees will have to give at least three months’ notice to members and employers before passing the resolution. If they haven’t already fully addressed Section 251, given the impending deadline and the notice requirement, trustees and employers cannot now afford to delay and should take action as soon as possible before the opportunity to do so is lost.
Note: This is not a “new issue”. Many pension plan trustees will have passed a similar resolution before April 2011 under the original Section 251, which was wider in scope and has since been amended. Where a resolution has already been passed, trustees do not need to pass a further resolution unless they would like to amend the original resolution or there are concerns about the validity of the process that was followed at the time.
If trustees or employers would like to discuss the action that should be taken in relation to their pension plans, please contact any of the partners listed below or your usual contact in the Squire Patton Boggs Pensions team, without delay.