UK - The government has confirmed it has issued an "informal discussion paper" in which it looks at the possibilities for allowing more flexibility for pension schemes to refund surpluses to employers.

A spokesman for the Department for Work and Pensions (DWP) said the discussion paper stemmed from work conducted by Chris Lewin and Ed Sweeney in their Deregulatory Review of occupational schemes in 2007.

The findings of the Deregulatory Review were published in July 2007, however the government did not accept initially Lewin and Sweeney's recommendation for introducing a "trigger point" at which surplus funds could be returned - such as when a pension fund meets its scheme-specific funding target.

At the time, the government refused to remove the existing requirement in the Pensions Act, which states trustees must be satisfied that any refund of surplus to an employer must be in the scheme members' best interests.

However, in its response to the consultation in December 2007, the DWP acknowledged concerns about the surplus rules, in particular those suggesting they are too onerous and the ownership of the surplus is unclear, and stated the department "would work with employers and other stakeholders to consider if there might be scope for addressing these concerns in other ways".

Following on from the consultation and its response, the DWP has now confirmed an informal discussion paper was issued to a small number of stakeholders on 2 September 2008, with the aim of gauging the interest and views on the possible solutions to scheme surpluses.

A spokesman for the DWP said: "The discussion paper forms the next stage of that [deregulatory] process and invites views on some of the options that might be considered in relation to the surplus rules.

"It is important to stress that these are not concrete proposals, nor is this a formal public consultation. We are simply trying to gauge stakeholder interest and preferences at this stage," he added.

Danny Vassiliades, principal and actuary at Punter Southall, commented the discussion paper was a good sign, as "essentially anything that introduces flexibility into the system will improve things".

He pointed out one of employers' main concerns about pensions at present is if they put too much money into the scheme, particularly in the current economic environment, they will not be able to get that money back.

But Vassiliades claimed: "If employers know they can get out overpayments, then they are more likely to fund schemes to a higher level. However the devil is always in the detail, and if the rules put forward by the government are too prescriptive it might not be worth doing."

He suggested the proposed rules are likely to be "very tight" so the circumstances in which an employer can recover a surplus would be rare and quite difficult.

However, if on the other hand the government introduces a principles-based approach, for example where the trustees can repay a surplus to an employer under certain circumstances, Vassiliades suggested the idea "might have legs", which in turn would provide greater flexibility to the system and give more confidence to employers.

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