Distributing surplus to an employer – a helpful case for trustees

Just a few years ago, no one would have imagined a world in which trustees would face the dilemma of how to distribute a DB scheme surplus. The trustee of the Bristol Water plc Section (the Section) of the Water Companies Pension Scheme (the Scheme) has had to grapple with precisely that question. 

The trustee's exercise of its discretion to return a scheme surplus of around £12 million to the employer on the winding up of the Section was the subject of a complaint to the Pensions Ombudsman (PO). This was preceded by member complaints to the Work and Pensions Committee and discussions with the Pensions Regulator.

Amongst other complaints, the member argued it was "morally indefensible" that the employer should benefit from investments made with the Scheme’s money. He complained that the trustee’s decision to refund the entire surplus to the employer was not in the best interest of the Section’s members, and it had failed in its duties to members and beneficiaries.

The PO rejected the complaint on the basis that the trustee had followed the correct process in reaching its decision, specifically that it had:

• followed the requirements of the Scheme rules and interpreted them correctly.
  
  The PO emphasised that although the trustee had a discretion, in consultation with the employer, to augment benefits, it did not have to do so.
• taken into account the appropriate factors, and no irrelevant ones, in reaching its decision.
  
  The PO also confirmed that the employer was a potential beneficiary and, therefore, its interests had to be considered alongside those of other beneficiaries. Further, the trustee's obligation to act in the best interest of members is the same as the duty to promote the purpose for which the trust was created. In principle, and subject to the trustee's decision-making process, the trustee would discharge its duty if it returned a surplus to the employer once benefits had been secured in full.
• made a reasonable decision, that is, a decision which was not so unreasonable that no reasonable person acting reasonably could not have made it.

Comment: 

The PO's determination will give confidence to trustees dealing with this situation. However, given the emotive subject matter and number of schemes that have benefitted from recent improvements in scheme funding levels, this is unlikely to be the last we hear on the topic.  Key points for trustees making a decision as to how to allocate surplus include: 

• it is crucial that the trustees' power to allocate surplus is properly understood and that due consideration is given to the full range of options.
• it may be tempting to take account of the likelihood of member complaints in reaching a decision, but this is not a relevant factor on which trustees should be basing a decision. 
• trustees should always take advice when making these decisions, on, for example the scope of the power, the factors to take into account and the process to follow.  Taking advice, and carefully minuting the trustees' decision will go a long way to preventing successful challenges.