Occupational Pension Funds (Hansard, 26 July 1985)

§ Mr. Moore

I am happy to take this opportunity to clear up any misunderstanding that may have arisen concerning the Inland Revenue's attitude towards pension scheme refunds.

Occupational pension schemes which are approved by the Inland Revenue benefit from tax reliefs and exemptions. Not only do contributions to the fund attract relief but, once invested, those contributions can build up free of tax. Furthermore, on retirement an employee may, if the rules of the scheme so permit, commute a significant part of the pension and take it as a tax-free lump sum. In return, schemes must satisfy certain conditions which are intended, broadly speaking, to ensure that such arrangements are set up to establish retirement benefits, and for no other purpose.

One of these conditions is that the funds should be alienated from the employer. This is to protect the interests of the scheme members. Another condition is that contributions to the scheme should not be excessive. This is to protect the Exchequer: without such a control, companies could park spare profits in their scheme and so defer, perhaps for many years, a corporation tax liability. So schemes are required to provide the Inland Revenue with an actuarial valuation of their assets every three or five years.

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Even with expert actuarial advice it can be difficult to establish the correct level of contributions. Pension schemes are very long-term arrangements. And most promise pension rights linked to length of service and final salary. If the actuary's assumptions about investment returns turn out to be too pessimistic, schemes can easily become temporarily over-funded.

Where a surplus is not too large, the Revenue is usually able to accept it until the next valuation is due, as a temporary fluctuation in the long-term fortunes of the scheme. If special measures are needed, a small temporary reduction in contributions — usually employers' contributions—is generally enough to reduce the surplus to an acceptable level by the time of the next valuation. If that is insufficient, a reduction in the long-term contribution rate may be all that is needed. But where the surplus is very large, in relation to the scheme's liabilities, immediate action may be required if the exempt approved status of the scheme is not to be put at risk. This may take the form of improvements in scheme benefits (although the Revenue no longer insist on this in all cases) or a complete suspension of contributions by the employer and, if necessary, the employees.

If a complete contributions holiday for a period of, say, five years would still fail to achieve the desired result the Revenue might require part of all of the surplus to be refunded to the employer. But such cases will be very rare: no one should assume that a refund will automatically be permitted if a surplus would remain after a five year contributions holiday.

The crucial question is not whether a surplus is large enough to qualify for permission to be refunded. On the contrary, the question is whether the surplus is so large that special measures must be taken to deal with it—and, if so, what those measures should be.

The employer's financial position does not become relevant for these purposes until the question for decision is whether or not a surplus can be reduced to an acceptable level by means of a complete contribution holiday for five years. In some cases, the appropriate remedy might be a longer contributions holiday. In other, a refund might be a preferable solution.

Finally, I should like to make it clear that these considerations will apply equally to continuing schemes and to schemes which are wound up and then replaced by a new scheme. Clearly there is no reason to object to the reconstruction of a company's pension scheme. But if, as part of that reconstruction, funds are extracted by the company, the Revenue reserve the right to withhold approval of the new scheme—or, if it has already been approved, to withdraw such approval.