The trustees of the Abrdn (SLSPS) Pension Scheme are entitled to return a scheme surplus to the sponsor once the pension scheme is bought out by an insurer and benefits have been enhanced, the Court of Session has said. 

 

The trustees of the scheme, previously called the Standard Life Staff Pension Scheme, sought confirmation from the court on whether they can enter a buy-in agreement with a view to buyout and –after having used some surplus for members to fix inflation increases on wind-up which were previously discretionary – paying the surplus to the employer. This could be substantial. At the end of 2021, the £5.3bn fund ran a surplus of £1.9bn, giving it a funding level of 154%. 

 

With the scheme rules silent on the matter, the judge decided that the trustees were entitled to act as they proposed and that Abrdn would receive any remaining surplus after benefit enhancements and costs. 

 

There were other employers in the scheme in the past which, under common law, would be entitled to a share of surplus in line with their contributions, with any funds going to the Crown if the companies were already dissolved.  

 

However, the scheme rules state that where another sponsor employs members who remain in pensionable service, the employer loses its right to a share of surplus on leaving the scheme. The judge found that the Crown – whose position was undefended in the case – would therefore not have received any surplus share, leaving Abrdn as the sole recipient. 

 

A spokesperson from Abrdn said: “Following the decision from the Court of Session we will be working with the trustee to assess the outcome.” 

 

 

The decision will give some clarity to Scotland-based employers about the use of pension fund surplus. This has come into focus because many defined benefit pension schemes have seen funding levels rise as long-dated gilt yields went up and are now moving their risk transfer plans forward.  

 

The question of what should happen with any remaining surplus is sometimes contested by scheme members, for example in the BP Pension Fund, and the Work and Pensions Committee is taking evidence on the question in its DB pensions inquiry.  

   

 

   

News about buyouts and surpluses could also be what led Shell’s pension trustees this month to explain what buy-ins and buyouts are, after receiving “questions from a small number of members”. Neither the trustees nor the company plan to agree a buy-in or buyout for the Shell Contributory Pension Fund, according to the scheme, but it noted that in the event of one, the surplus would be paid to the company in line with the scheme’s rules. 

 

 

Wendy Hunter, partner and head of the pensions practice at law firm Squire Patton Boggs, said trustees and employers are generally cautious about the distribution of surplus on winding up because it is a major step to take.  

 

“They need to be very sure that it is indeed surplus, that they have the power to distribute and that they will be exercising such power properly. They will likely also be conscious that any challenge, even if ultimately unsuccessful, will take time and money to address,” she said. 

 

When surplus distribution is being examined, the question of who helped accumulate the surplus is typically being looked at. However, contribution does not automatically result in surplus entitlement, suggested the judge in the Abrdn case, Lord Tyre. 

 

Hunter said: “I found the comments on the topic in the judgment very interesting, including the reference to the different purposes of the contributions being made.” 

 

In this case, some members had contributed to the normally non-contributory scheme to secure increased benefits. The judge decided that for members, the “purpose was to obtain augmented pension entitlements”, which was achieved. For the participating employers, on the other hand, it “was to fund the scheme and, in particular, to meet any deficit that might arise from time to time”.  

 

Although every surplus distribution would need to be considered on its facts, Hunter believes the points about the purpose of contributions could “be similarly relevant in England for trustees or others with a discretion to decide on how to distribute a surplus on winding-up”. 

 

For the majority of pension schemes, a court decision might not be necessary, however, as most rules address how surplus should be used on wind-up. 

 

Even so, they vary in how strict they are. “Interestingly, some rules may give a discretion to one or more parties to decide the use of the surplus but in other cases there is a direction as to what must be done with the surplus,” said Hunter. 

 

The pension trustees have been contacted for comment.