Funding your scheme
Rules outlined in pensions legislation and overseen by the Pensions Regulator, detail how a pension scheme should be run and funded. Duties are placed on trustees of pension schemes to help protect scheme members benefits.
How your scheme is run and funded
The rules outlined in pensions legislation and overseen by the Pensions Regulator, explain how a pension scheme should be run and funded. Duties are placed on trustees of pension schemes to help protect scheme members benefits.
If you're a member of a defined benefit pension scheme, legislation dictates that the employer is required to fund any shortfall in the scheme.
If you're a member of a defined contribution pension scheme, the funding requirement is on the employer to invest the contributions into a pension scheme on time.
Scheme governance describes the way your pension is run. A duty of your scheme's trustees or your provider is to make sure that your pension is looked after properly.
Good governance helps to protect the scheme members' benefits. It usually means that the scheme or pension operates efficiently, and any potential risks are recognised and managed properly.
Areas of governance your scheme's trustees or your provider usually pay particular attention to are:
- the effectiveness of the trustee board or those responsible for looking after your pension, including any advisers the trustees or your provider uses;
- managing risk;
- effective communication with you and the other members.
Funding your scheme
Defined Benefit scheme
Your employer has a duty to pay whatever is needed to make sure that the scheme is able to pay the benefits built up in the scheme.
The ability of your employer to meet the funding requirements will have an effect on how much it will be able to contribute to a scheme and further information can be found in the employer covenant section.
To make sure that there is enough money, your scheme has to meet a funding goal set down by law. This is called a 'statutory funding objective'. The trustees must get advice from an actuary about the level of funding needed to meet the funding goal and agree this with your employer. If the trustees and your employer can't agree, they must report this to the Pensions Regulator.
Every year, the trustees must arrange for an actuarial report to be done, to work out the ability of your scheme to meet the benefits built up in the scheme. Every three years, they must arrange for a full actuarial valuation to show the true position of the scheme.
Every year the trustees should send you a summary funding statement, updating you on the scheme's funding position.
The same requirements are placed on Hybrid schemes.
Your trustees must have in place a statement of funding principles. This sets out the trustees' policy for meeting the statutory funding objective. It should include:
- the scheme's investment policy;
- whether the Pensions Regulator has had to become involved in running the scheme;
- the basis for working out the value of the investments in the scheme and how much money the scheme needs to pay the benefits;
- how often the trustees will arrange for actuarial valuations; and
- how transfer values will be calculated.
- If your scheme is underfunded
If a valuation shows your scheme does not have enough funds to meet its statutory funding objective, the trustees must put in place a recovery plan. This shows how the objective will be met and how long it will take. The trustees must get actuarial advice when putting together the plan, and must agree the plan with the employer. If they cannot agree, then they must report this to the Pensions Regulator. The agreed and finalised recovery plan must be sent to the Pensions Regulator.
These schemes differ widely to defined benefit schemes. They aren't required to ensure there is sufficient funding in the scheme to meet future benefits, except that the required level of contributions are paid.
Your employer should deduct and pay over the contributions into a pension scheme by the 19th of the following month that they have been deducted from your salary, so that they can be invested on time in your chosen funds.
This timescale is different for the deduction of the first contribution for an automatic enrolment scheme.
Click here for more information about the Pensions Regulator
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.