The ‘reservoir trust’: safeguarding against a trapped pension surplus

These days, we’re repeatedly reminded of the difficulties that historically low gilt yields, volatile equity markets and increasing life expectancy have created for the funding position of UK pension schemes. So it’s not surprising that we’re less focused on one of the other dangers of the inherent asymmetry of pension scheme funding: a trapped surplus.

You might say: 'that’s a nice problem to have' and you’d be right. But many commentators believe that when the recovery takes hold the funding levels of the UK’s pension schemes will be firmly back in the black and it should certainly form part of contingency planning at least. The problem is that tax, legal and regulatory rules mean that if a scheme moves into surplus either the capital can’t be employed in the most gainful way and/or significant, if not penal, costs arise in rectifying the position. This means that a trapped surplus needs to be avoided: so, what can we do to achieve this?

Well, what about a trust that sits between the employer and the scheme which can send money either way: to the scheme if there is a deficit and to the employer if there is a surplus? We generally call this a ‘reservoir trust’ as the funds are stored like a hydroelectric dam, ready for use in the most effective way. In the meantime, the scheme has greater security over the assets and typically has the benefit of the investment yield.

Deborah Cane is a senior manager in our Pensions team. If you’d like to find out more about the benefits of a reservoir trust, you can contact her on +44 (0) 20 7212 5187 or by email at [email protected].

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