Part 3 of the Pensions Act 2004 introduced a new scheme funding framework for defined benefits which came into force in December 2005. This framework replaces the old minimum funding require-ment and aims to ensure that schemes have sufficient assets to meet their liabilities.There are 14.9 million members of around 10,000 defined-benefit schemes, all of which need to implement the funding framework at their next valuation on, or after, September 22, 2005. The new statutory funding objective requires that a scheme has sufficient and appropriate assets to cover its technical provisions – an estimate based on prudent actuarial assumptions of the amount needed to pay for benefits as they fall due. The trustees must prepare a statement of funding principles – which may be combined with the existing statement of investment principles – setting out how this statutory funding objective will be met. If there is a shortfall, the trustees must also prepare a recovery plan, supported by a schedule of contributions. The trustees are required to obtain periodic actuarial valuations at least every three years, with actuarial reports in the intervening years. Given the large number of DB schemes, the regulator proposes to employ a risk-based strategy to identify those schemes which present the greatest risk to members’ benefits. As our statement explains, we intend to use a filter mechanism based on triggers as an initial means of identifying schemes whose funding plans may be inadequate or unrealistic. A scheme will initially trigger our attention if the technical provisions appear to be low or the recovery period too long. The triggers are designed to be operated from information readily available to the regulator. We will look first and foremost at the technical provisions, comparing the figure established by trustees with a range between two other ways of valuing the liabilities – the section 179 valuation of PPF liabilities and the FRS17 accounting liability (irrespective of which of the two is higher). Schemes below this range will trigger, as will some within the range, depending on the strength of the employer covenant and the maturity of the membership. The second set of triggers relates to the recovery plan. A scheme will trigger if the recovery period is longer than 10 years, if there is a signifi-cantly higher level of contrib-utions towards the end of the period, or if the underlying investment assumptions appear inappropriate. If a scheme triggers in any of these ways or comes to our attention through other means such as a notifiable event or reported breach of the law, we will further assess the scheme’s circumstances before deciding whether to contact the scheme or take other action. These triggers are essentially a regulatory tool, helping us to focus our attention and resources effectively on schemes at risk, they are not funding targets. Our aim is that trustees, employers and advisers should work together to develop appropriate solutions to eliminate their deficits, wherever possible, in as short a time as is reasonably affordable for the employer. Our position is that the best means of delivering the members’ benefits is usually for the scheme to have the continued support of a viable employer. Therefore, when considering the affordability of a recovery plan, we will pay particular attention to the future viability of the sponsoring employer, recognising that there is a balance to be struck between paying down pension fund deficits now and investing in the business for the future. Schemes will need to contact the regulator in a number of circumstances. All recovery plans must be submitted to us and we must be told if, for example, trustees and employers are unable to reach agreement or if the scheme actuary cannot certify the calculations underlying the technical provisions. As far as possible, we will encourage trustees and employers to establish agreed solutions – if necessary, with the help of independent advice, mediation or arbitration. We can impose funding solutions – for example, where the trustees and employer fail to agree – but we intend to use our powers proportionately and as a last resort. The regulatory statement is one of a number of documents published by The Pensions Regulator to support those involved in scheme funding. We have also published on our website a code of practice, Funding Defined Benefits, which gives practical, straightforward information on how to comply with the legislation. In addition, we provide examples of the documents required under the new requirements, such as the statement of funding principles and recovery plan. We have also developed a free e-learning resource for trustees and others (www.trusteetoolkit. com) which, from the end of July , will include a module specifically on defined-benefit scheme funding.
Paternoster, the new life assurance company, endorsed the three key elements of the government’s white paper on the future of pensions policy, announced today, but warned that companies may increasingly opt out of defined benefit pensions and switch to purely defined contribution schemes.Chief executive Mark Wood says: “There is a risk that employers who currently […]
Swiss Re’s annual industry protection report reveals that the life insurance protection gap was static at 2.3 trillion in 2005/06 but the income protection gap grew to 170bn.
The ABI broadly welcomes today’s white paper on pensions but says more dialogue is needed on consumers’ needs and expectations.Director general Stephen Haddrill says: “The White Paper points pensions policy firmly in the right direction. Today’s decisions provide a solid platform for creating a new savings culture in Britain.“And the Government has rightly recognised that […]
New Treasury economic secretary Ed Balls told the Treasury select committee this week he is unsure about the future of basic advice and that changes are needed to ensure better balance between simplicity and regulation.
It has taken a little longer than expected, but finally the jaws of regulation are closing on those employers who have failed to meet their auto-enrolment (AE) legal duties.
- Top trends
News and expert analysis straight to your inboxSign up
Latest from Money Marketing
Providers are reviewing their marketing packages to advisers at conferences and on websites amid concerns they will fall foul of new inducement rules under Mifid II. Mifid II, which came into force on 3 January, brought in more stringent rules around “non-monetary benefits” from providers to advisers. The rules have been translated into the FCA conduct of […]
A misleading headline rate of unemployment means opportunities are being overlooked by investors
The FSCS is budgeting an extra £3.5m to cover the cost of running the scheme this year. The management expenses levy, which is used to cover the cost of administering the scheme separately from any compensation payments made, proposed for 2018/19 by the FSCS today is £77.7 million, up 5 per cent on the previous […]