Under the Pensions Act 2004, final salary and career
average schemes are required to meet a statutory funding
objective.
The Act requires schemes to 'have sufficient and appropriate
assets to cover its technical provisions'. Although it is for
trustees, with the employer's agreement, to decide how to calculate
their scheme's technical provisions, they must still comply with
regulations and guidance. In deciding the basis for calculating
technical provisions, the trustees must obtain actuarial advice. If
agreement between trustees and employer cannot be reached, it must
be reported to the Pensions Regulator.
The Act also requires trustees to obtain a written valuation of
assets and technical provisions each year, although valuations can
be done every three years if actuarial reports are obtained for the
intervening years.
If a valuation shows a scheme is not meeting its statutory
funding objective, the trustees must put in place a recovery plan
showing how the objective will be met and over what time period.
Actuarial advice must be obtained when putting together the
recovery plan. Once the recovery plan is finalised, a copy must be
sent to the Pensions Regulator. The trustees and employer have to
agree a recovery plan. If agreement cannot be reached, it must be
reported to the Regulator.
Trustees are also required to have in place a Statement of
Funding Principles. This statement sets out their policy for
meeting the statutory funding objective and should include:
- funding objectives and the trustees' policy to meeting it;
- the scheme's investment policy;
- whether the Regulator has given any direction in relation to
the scheme;
- the calculation basis for measuring assets and technical
provisions;
- how often actuarial valuations will be obtained;
- how cash equivalent transfer values will be calculated.
It is also necessary for the scheme to have in place a Schedule
of Contributions. This shows the due dates for contributions from
the employee and the employer and also the rate of contribution.
Trustees and employers have to agree a schedule and it must be
certified by the scheme actuary to confirm it meets the statutory
funding objective. If contributions are not paid on time they
become a debt on the employer. The non-payment must also be
reported to the Pensions Regulator if it is believed the
non-payment will be of material significance to the Regulator in
the exercise of its functions.
The valuation process, which includes producing the documents
mentioned above, should be completed within 15 months of the
effective date of the valuation.
Q & A's
This is an actuarial value of a scheme's built up liabilities.
Actuarial reports from 23 September 2006 are required to test a
scheme's ability to meet its technical provisions.
A valuation should be completed every 12 months or every 3 years
if actuarial reports are obtained for the intervening years. An
actuarial valuation should be produced within 15 months of its
effective date. An actuarial report should be produced within 12
months of its effective date.
It is a requirement under the Occupational Pension Schemes
(Scheme Administration) Regulations 1996 that employee
contributions are received by the 19th of the month following the
month in which they were deducted.
The trustees should issue a Summary Funding Statement to all
scheme members, of the actuarial valuation or report. This
statement should include:
- the extent the scheme's assets are adequate to cover its
technical provisions;
- an explanation of any change in the scheme's funding position
since the last valuation;
- if it is the scheme's first summary funding statement, the
actuary's estimate of solvency at the last actuarial
valuation;
- a summary of any recovery plan;
- whether the scheme has been subject to modification, direction
or imposition of a schedule of contributions by the Pensions
Regulator; and
- confirmation as to whether any refund of surplus (and amount)
has been made to the employer during the 12 months since the last
statement.
The first summary funding statement is required to be issued by
21 September 2006.
