Scheme Funding
Under the Pensions Act 2004, occupational defined benefit (final salary) pension 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 12 weeks from the signing-off of the valuation 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 8 weeks from the signing-off of the valuation 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.
- What are a scheme's technical provisions?
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.
- How soon must an actuarial valuation be produced?
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 produced within 12 months of its effective date.
- How quickly should my employer being paying contributions deducted from my pay to my pension scheme?
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.
- Does the scheme need to tell me about the scheme's funding strength?
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.
Q & As
