What is a pension fund 'surplus'? What is a 'contributions holiday'

Salary related pension schemes need to have enough funds to meet their obligations to existing members. The rules for this have changed over time.

When schemes have assets well in excess of the legal minimum, they are said to have a surplus. This was common during the 1980s and 1990s. Any surplus can be treated in a variety of different ways. They can be:

• built up to cover future 'rainy days' (as many pension funds are having now),
• used to improve members' benefits (though there are Inland Revenue limits on this), or
• used to cut employee contributions

But many employers took the fourth option of cutting their own contributions to zero – a so-called contributions holiday. 

The problem is that too many employers got used to not paying for their pension funds and, now that surpluses have disappeared in many funds, employers are shutting schemes, at least to new entrants.

There is a thorough review of scheme funding requirements on the the OPAS website.