NEWSLETTER    |     March 21, 2024

Ombudsman upholds trustee decisions on use of winding-up surplus

The Pensions Ombudsman has recently twice upheld the decision of trustees to refund some or all of a surplus on winding-up to an employer rather than to augment benefits. This demonstrates that there is a high bar to overturn the exercise of a trustee discretion. If the Government makes it easier to refund surplus from an ongoing scheme in due course, the considerations for trustees may be different.

Background and Facts 

Issues around the use of a pension scheme surplus have become commonplace in recent times. This is mainly due to the general improvement in scheme funding and the subsequent move towards securing benefits with an insurance company, leading to queries over how any ultimate surplus on winding-up. should be usedTwo cases have recently been heard by the Pensions Ombudsman on these issues.

In both Mr Y v PO (CAS-94719-B9L) and Mr S v PO (CAS-92093-N4D9) the member made a complaint over the trustees’ distribution of the scheme’s surplus on wind up. In both cases, there was a broad surplus rule, in that the trustees had the power to consider how the surplus was distributed, including having the discretion to use it to augment member benefits. Any remaining balance was to be returned to the employer.

In Mr Y, the trustees decided that 50% of the surplus should be used to augment benefits, with 50% returned to the employer. In Mr S, it was decided that all of the surplus should be returned. The member in each case complained that the amount allocated to the employer should have been used for augmenting (or in the case of Mr Y, further augmenting) benefits.

Determination

The Ombudsman in both instances held that the trustees acted reasonably and in accordance with the rules of the scheme. It stressed that the rules gave the trustees a discretion under which they may use all or part of the surplus to provide additional benefits. So, it was open to them to decide to use (or not to use) all or some of the surplus for a specific purpose.

Interestingly, the Ombudsman made it clear that it was generally acceptable for trustees to take account of the employer’s interests when exercising their powers. Indeed, acting in the best interests of the beneficiaries included the employers too. It was also acceptable to look at other factors when deciding, including the source of the surplus and any past member augmentations.

The position after winding-up therefore appears to be clear. More difficult issues for trustees may  arise if the Government goes ahead with its recently announced initiative to make it easier to refund surplus out of an ongoing scheme.

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