Following the turmoil in the Gilt market and the rise in government bond yields over the past few years, many UK-defined benefit schemes now find themselves in an actuarial surplus position.
But can the employer really gain any benefit from this surplus?
Whether the employer can receive any return of a surplus depends on the scheme rules. In many cases, and under current legislation, the scheme can only return a surplus to the employer on wind-up. However, there may be other mechanisms, again depending on the scheme rules, that an employer could utilise to gain value from any current or future surplus.
These may include:
- Using the surplus to pay for scheme expenses
- Using the surplus to pay for the cost of future accrual (if the scheme is open to accrual)
- Incorporating a “switch off” mechanism into the Schedule of Contributions (where contributions may be reduced or ceased if certain funding targets are met)
- Diverting contributions into escrow
If none of these mechanisms are available, then the surplus is considered to be “trapped”.
In accordance with FRS 102 s28.2, an employer can only recognise a surplus in the financial statements to the extent that it is able to recover the surplus either through reduced contributions in the future or through refunds from the pension scheme so we can see that if future contributions cannot be reduced (by the mechanisms outlined above). The employer cannot access a refund on wind up, then any surplus is irrelevant for the accounts. In these cases, there is an effective asset ceiling, which reduces the surplus to zero.
The Department for Work and Pensions is currently consulting on pension scheme surpluses and the current proposals could mean significant benefits for employers and schemes, but no changes are expected imminently, so it’s important for pension scheme trustees and their employers to discuss what can work in their individual circumstances based on the current landscape.
