Partner Jane Kola comments in Pensions Expert on how schemes in deficit can share surplus in others upon merger
Premier Foods, maker of Mr Kipling cakes, has reached a groundbreaking agreement to merge its RHM, Premier Foods and Premier Grocery Products pension schemes, a move that the company estimates could save it as much as £145m in contributions.
The merger has been designed so that while the three cohorts will be in distinct sections of the new scheme, the anticipated buyout of the well-funded RHM section will release surplus to both the company and the members of the other two sections, which face a drastic shortfall.
Jane Kola commented that in the Premier Foods case, it is the existence of a surplus in one scheme that makes such a move feasible.
“There will be many who will wonder how the trustees of an overfunded scheme can be acting in their members’ best interests by giving up the surplus and the potential of benefit improvements,” she says.
“But members do not own surplus, and trustees should not try to ‘bank it’ for improvements unless they have very unusual rules that allow them to fund for surplus. Instead, the correct analysis is to remember that the best interests of the members are well served by securing their actual legal entitlements as promised by the sponsor”.
Jane further commented employers should “review the rules of all of their DB schemes to ensure that they have a say in the use of surplus, even if a full buyout looks a long way away”.
“Sponsors will find it difficult to justify a rule amendment giving them access to plan surplus once this has already risen, as the move will be seen as detracting from member benefits”.
“While the scheme has a deficit, it is perfectly proper to alter the rules on the use of surplus to put the sponsor in the driving seat, as long as it is as a part of a package of measures that are in the interests of members overall, such as a part of a deficit repair deal in a valuation”.
“For trustees, it’s important to be open-minded about new ideas and work with your sponsor, recognising its interests. The members’ best interests are rooted in that collaborative relationship between trustees and sponsor”.
Read Jane’s comments in Pensions
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