To the victor the spoils: What the courts say about surplus distribution

Thrells v Peter Lomas

In this case¹, it fell to the High Court to distribute surplus. This unusual situation arose because the sponsoring employer – also the sole trustee – was in liquidation, creating a conflict of interest for the liquidator. The High Court held that in deciding on the distribution it had to act how a reasonable trustee could be expected to act, helpfully going on to explain what this looks like. 

• Trustees must have regard to all the material circumstances.
• They must do what is just and equitable.
• They should make sure they consider the following factors.
  • The scope and purpose of the power.
  • The size and source of the surplus.
  • The financial position of the employer and any particular needs of the members.

Not all of these factors will be relevant for each and every scheme, but this serves as a useful checklist for trustees wondering if and how to exercise their power.

Before turning to our next case, however, it is worth lingering on source of surplus as a factor. Thrells made clear just how important this is. The judge used actuarial evidence to estimate how much of the surplus was the result of unnecessary employer contributions (noting that this case predates the current funding regime), investment outperformance, the release of reserves, and so forth. The various sources could generate reasonable expectations on the part of employers and members, sometimes in quite subtle ways, when considered in light of scheme structure and how the rules are worded.

The key takeaway from this is that, while tempting, a simple split down the middle is unlikely to do justice to the twists and turns of a scheme’s history – perhaps now more than ever, given the sheer scale of deficit repair contributions made during the 2010s.

Edge v Pensions Ombudsman

Some trustees may worry that there are so many material circumstances and relevant factors pointing in different directions that any decision may be susceptible to challenge. Edge² should reassure them. In this case, the trustees reduced surplus by lowering employer and employee contributions and raising benefits for active members. Pensioners, however, received no additional benefits and complained to the Pensions Ombudsman. The dispute ended up before the Court of Appeal. 

The Court of Appeal emphasised trustee processes. Where trustees propose to exercise a discretionary power, they should take into account all relevant considerations, covering the same ground discussed above in Thrells, and ignore all irrelevant considerations. 

If trustees do this, their decision can only be challenged if it is “perverse”. This is a high bar: it means that no reasonable body of trustees could have reached the decision. On the facts in Edge, the trustees had taken account of the “relevant and proper factors” and so it was “not open to Pensions Ombudsman or any judge to interfere” with their decision even though this might look a little hard on the pensioners. 

Entrust Pension v Prospect Hospice

We mention this case³ as another source of reassurance for trustees. Not all areas of pension law are settled, but the Court of Appeal’s summary in Entrust of trustee duties when they are considering whether and how to distribute surplus shows that this one very much is. The Court boiled it down to the following requirements on trustees.  

• To act in good faith.
• To exercise their power for the purpose for which it has been given.
• To give “genuine and responsible consideration” to the exercise of their distribution powers.
• To give “proper consideration to the matters which were relevant” and exclude from consideration those matters that are not relevant.

Though the language may sometimes differ between judgments, it is clear throughout that if trustees follow a diligent process and consider with their advisers what they should and should not be taking into account, they will make a decision that the law will uphold.

So trustees should not be overly concerned about the new powers that they will be afforded under the Pension Schemes Bill. That said, Thrells is a salient reminder of the importance of contribution patterns and is likely to be a talking point for scheme employers.

Many thanks to Lesley Browning and Matthew Greenhill for their help in preparing this post.