Don’t Fall Into The Surplus Trap! How Sponsors And Trustees Can Manage Issues Around Pension Scheme Surpluses

Significant market and interest rate movements over recent years have seen funding positions improve for many defined benefit pension plans across the UK, and in a lot of cases this has resulted in pension plans finding themselves with an unexpected surplus. If sponsors and trustees are not anticipating a surplus, this can lead to uncertainty as to how the surplus should be dealt with.

Once money has been paid into a pension plan it becomes subject to the terms and conditions of the plan. These terms may limit the sponsor’s ability to recover surplus money beyond the amount required ultimately to secure the plan liabilities in the insurance market, leading to a situation of “trapped surplus”.

So what can sponsors and trustees of pension plans do to guard against the risk of trapped surpluses, and how should they approach surpluses that do arise?

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Reputational Risks: Lessons From the Odey Crisis

Reputation. Cutout words

The investigations into Odey Asset Management and its founder, Crispin Odey, which are currently capturing the headlines in the financial press, tell a familiar story of how fast a financial institution can fall from grace when disaster strikes. Institutional investors (and by extension some retail funds that had been invested in Odey’s strategies) have already caused the suspension of five Odey managed funds. The pattern that we saw in the wake of the Woodford saga of investors fleeing the sinking ship is very familiar, with suspensions of redemptions and finger pointing at the FCA.

Unlike in the Woodford case, the allegations which have precipitated the collapse of the Odey business are concerned with the conduct of a single individual, rather than under-performance. Although the financial sector is far from immune from claims of sexual harassment, the solution for investors has been to disassociate themselves with the alleged behaviour as fast as possible. Getting one’s money back aside, the saga raises some interesting questions about investor rights in such a situation.

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Is the Clock Ticking for UK Pensions Law?

Brexit Clock

The Brexit Freedoms Bill will enable the UK government to remove years of burdensome EU regulation in favour of a more agile, home-grown regulatory approach that benefits people and businesses across the UK”.

(Government press release, 22 September 2022)

This has nothing to do with the merits of Brexit. It’s about how we make law in the UK. The bill is a recipe for legal uncertainty and, not for the first time, concentrates vast powers in the hands of ministers with less opportunity for democratic input.”

(Jonathan Jones KC -this quotation appeared in the Law Society Gazette)

The Retained EU Law (Revocation and Reform) Bill, which was introduced into the House of Commons in September 2022, was heralded by the government as the Brexit Freedoms Bill, and by others as a “bonfire of EU laws”. It is clearly not without its controversy. That controversy has continued to play out in Parliament over the last few months. 

It is clear that all Ministers—nothing against this Minister—in all Public Bill Committees are under instruction not to accept anything from the Opposition. If we moved an amendment that said, “Today’s Thursday”, the Government would keep talking until it was Friday and then vote it down.” 

(Peter Grant, SNP)

“There is an almost terrifying inevitability that, in their desire to pile on the bonfire anything and everything that is remotely related to the European Union, mistakes will be made, things will be missed, consequences not thought through and impacts not understood.”

(Brendan O’Hara, SNP).

But enough of the quotations (although I hope you found them interesting!), how could all this impact the world of pensions? First, a bit of background.

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LDI-Gate Anyone?

It can’t be long before someone starts discussing LDI-Gate (the turmoil in the gilts market following the Government’s September mini budget), looking for parties to blame. There have been rumours about potential claims against liability driven investment (“LDI”) managers and investment consultants, and pensions celebrities have been summoned to appear before parliamentary select committees to explain the way that LDI works and the role of leverage in product design. Some of the critics of LDI (in the “accident waiting to happen” brigade) have perhaps ignored the wholesale reform of the derivatives market that happened in the wake of the Global Financial Crisis (“GFC”)  of 2008-9, which were designed to address systemic risks in the banking sector by introducing central clearing of trades and strengthened margin or collateral requirements. Those reforms were necessary and have served institutional investors well, not least by creating greater contractual certainty between parties.

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TPR’s Pledge to Combat Pension Scams Gains Increasing Popularity with Trustees

Court Stenographer

According to complaints filed with Action Fraud, more than £30 million has been lost to pension scammers since 2017. All types of pension pots are targeted, with some individual savers losing hundreds of thousands of pounds. Given the current cost of living crisis, more people might feel tempted to access their pension savings, making them more vulnerable to pension scams. This increases the onus on pension trustees to protect their members and has encouraged more trustee boards to make the Pledge.  

The Pensions Regulator (TPR)’s Pledge to Combat Pension Scams (the Pledge), launched in November 2020, is an invitation for schemes to self-certify to TPR that they have put in place certain practices to protect members against scammers. Schemes can sign up to the pledge using an online form, which acts as confirmation that the scheme has implemented the pledge commitments.

117 pledges were made within a month of the campaign’s launch, mainly by institutions and administrators rather than trustees. However, we are now observing a growing appetite for signing the Pledge from amongst our trustee client base.

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A Recipe for Success – Dishing Up Pensions Dashboards

Close up on hand of a Chef decorating a beautiful plate at a fancy restaurant

How do you succeed in serving up pensions dashboards to scheme members? It is a bit like creating a complicated recipe. You know how you want your dish to look and taste, but how do you get there?

First, the ingredients have to be listed. Second, the method has to be tried and tested (and it also has to be simple, if you want domestic cooks to follow it, as well as master chefs). Thirdly, the dish has to be cooked to perfection and presented in a way that looks appetising.

How far have we got with cooking up a dashboards recipe?

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ASAP x 10 – TPR Puts The Dash Into Pensions Dashboards

Businessman working

The Pensions Regulator (TPR) is not pulling any punches in its latest messaging around pensions dashboards.

The Deadline campaign, launched on 22 June 2022, follows research conducted by TPR revealing that insufficient progress has been made by schemes in preparing for pensions dashboards and moving towards the level of digitalisation of member records that will be required. The research shows that 63% of schemes have not yet discussed dashboards at trustee board level. 63% seems like a lot. Hopefully, none of the 63% are those with staging dates in 2023 – otherwise time is in short supply if compliance is going to be a smooth process.

TPR’s initial guidance, based on draft regulations issued by the DWP, summarises what it expects trustees to do. If you have a basic familiarity with dashboards, the guidance is a fairly quick read. Importantly, it sets out a checklist/timetable for compliance. If there is already a plan in place for your scheme, it would be a good idea to check this against TPR’s action plan, to see if there are any gaps or mismatches in terms of timeframes. If your scheme does not yet have a plan, now would be a good time to reassess this.

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Sharia Law Considerations for Pension Trustees and Employers

Retirement Jar

Each year, I have a profound respect and admiration for colleagues and friends who have fasted during Ramadan. It is a very public demonstration of their faith, which clearly also has tremendous personal significance. I was particularly struck this year how LinkedIn was full of supportive comments and suggestions how employers might support those fasting.

Are there steps that employers – and trustees – can take to support Muslim employees and members from a pensions perspective? Indeed, is there a positive obligation to do so?

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Down to the Wire!

Frustrated computer user

On 28 April 2022, at 4:35 pm we issued legal advice to our client regarding the GMP conversion exercise for two schemes, along with final versions of the deed of amendment to bring into effect GMP conversion; the Conversion Date was set for 1 May 2022.  At 4:43 pm, we get an e-mail from our professional support lawyer stating that the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Bill, a private member’s bill proposing further changes to the GMP conversion legislation, has just received Royal Assent and is now the Pension Schemes (Conversion of Guaranteed Minimum Pensions) Act 2022; “all those currently advising on GMP conversion should take note!” Talk about bad timing! As the reader will be aware, GMP conversion projects require months of planning and negotiations between advisers, trustees and employers. Would the changes introduced by the Act be in force on 1 May?! Would we have to update our legal advice? Could the deeds still be signed?! Would we have to send out new communications to members?

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Getting to Net Zero: Lessons from Butler-Sloss v the Charity Commissioners & the Attorney General for Pension Schemes


Once in a while trustees get frustrated with what the law appears to tell them is their fiduciary duty. If they can afford it, trustees can resolve such ambiguities or uncertainty by getting a ruling from the courts as to how to interpret their duties. This is what two sets of charitable trustees recently did in relation to an area of keen interest to pension trustees: how can one implement an investment strategy that is based on a commitment to align with the Paris Agreement on climate change (in keeping with a charitable purpose that expressly included environmental protection), which would inevitably mean excluding a significant part of the investment universe, without sacrificing financial returns to the trust?

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