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Defined benefit pension scheme funding

Published Friday, October 25, 2019

This note covers the main measures of pension scheme funding, the reviews leading up to the introduction of the scheme specific funding requirements; the key elements of the requirements; TPR’s approach to regulating scheme funding and current proposals for reform.

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The current funding regime for defined benefit (DB) pension schemes was introduced under the Pensions Act 2004 (part 3)It requires trustees to:

  • Draw up a statement of funding principles (i.e.a written statement of the policy for meeting the statutory funding objective, which is that the scheme has ‘sufficient and appropriate assets’ to meet its liabilities);
  • Obtain a full actuarial valuation of their scheme at least every three years; and
  • Where the scheme is in deficit, prepare a recovery plan setting out the steps that will be taken to meet the funding objective over what timeframe.

The aim is not to “eliminate all risk to members’ benefits” but rather to “strike a reasonable balance” between the demands on the employer and the security of member benefits, recognising that “a strong, sustainable employer is the best protection for a DB scheme” (Cm 9412, Executive Summary).

In its December 2016 report on DB pensions, the Work and Pensions Committee made a series of recommendations aimed at “reducing the risk of another scheme collapsing in the manner of BHS”. A major concern for the Committee had been the length of the recovery plan to repair the funding deficit (23 years) and the time it had taken the Pensions Regulator (TPR) to intervene.  

In its February 2017 Green Paper, Security and sustainability in Defined Benefit Pension Schemes, the Government said that while most schemes had a funding deficit, these were not generally ‘unaffordable’ for employers. However, there were some employers on whom the deficit was having a significant impact and for whom the level of contributions might become unsustainable. The Green Paper asked for views on options including:

Providing greater clarify over the requirements for scheme funding – perhaps with a comply or explain regime;

  • The potential for tailored approach - with different measures targeted at underfunded schemes with stressed sponsors compared to those with better affordability;
  • Whether and how to enable scheme consolidation, which could have the advantage of economies of scale;

The White Paper published in March 2018 proposed a revised Code of Practice, which would clarify key terms. Legislation would require the trustees of DB schemes to appoint a Chair, and for that Chair to report to the Regulator in the form of a Chair’s Statement, submitted with the scheme’s triennial valuation. (DWP, Protecting Defined Benefit Pension Schemes, Cm 9591, March 2018). Provision for this is in clause 123 of the Pension Schemes Bill [HL] 2019/20 .

Other relevant briefing papers are: CBP 4368 The Pensions Regulator: powers to protect pension benefits (October 2019) and CBP 8219 Defined benefit pension schemes white paper (February 2018).

Commons Briefing papers SN04877

Author: Djuna Thurley

Topic: Pensions

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