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Employee Benefits
Monday, March 1, 1999
Mine.’ ‘No, mine’..minefield

The issue of ownership of the surplus of a defined benefit pension fund is still unresolved. What’s more, it’s likely to remain so.
‘Surplus’ is defined as the value of the assets of the fund minus the value of the accrued liabilities for members’ benefit. Surplus arises when the total contributions paid to the fund prove, in retrospect, to have been excessive. The over contribution normally arises because the experience of the fund as regards investment performance, salary increases, resignations and other factors turns out to be more favourable than the actuary originally assumed in calculating the required contribution rates.
‘Surplus’ becomes an issue when the fund is either terminating or being converted to a defined contribution fund. In both cases, the assets of the fund are being distributed to the stakeholders, i.e. members, pensioners, and employer.
So who should get the surplus?
Many actuaries argue that the employer should get it all, since he was liable for any deficit, which may have arisen. By the same token then he should be entitled to the surplus. This argument is refuted by member representatives who claim that nothing prevents the employer from avoiding this liability by terminating the fund and distributing the available (insufficient) assets. Alternatively, the employer could plead poverty and reduce the benefits, thereby restoring the fund to a financially sound position.
The members may also argue that (as is true in many cases) part of the surplus arose from excess investment returns over a long period. As these excess returns are also earned on member contributions, why should the employer get it all? Finally, the members often argue that they are entitled to the full surplus, as, in their view, employer contributions should be viewed as deferred pay, and therefore no clawback should be allowed. This argument is strengthened where employer fund contributions are included in a gross remuneration package.
The Tek case, which involved an employee claiming a share of the surplus from his employer when the pension fund to which he belonged was converted from a defined benefit to a defined contribution fund, did not shed any further light on the matter. The judge ruled that an employer is only entitled to surplus arising from ‘over-contribution’. Unfortunately, this was not defined, and employers will of course submit that anything more than was necessary s ‘over-contribution’ and therefore they are entitled to the full surplus!
The only answer to the question ‘Who owns the surplus?’ is ‘how do the trustees want to allocate it amongst the various stakeholders?’ This involves negotiation between member and employer representatives. As this representation is now equal, any reasonable split recommended by the board is likely to be accepted by the authorities. By Derek Pead

Copyright © Insurance Times and Investments® Vol:12.2 1st March, 1999
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