House of Commons Library

Defined benefit pension scheme funding

Published Tuesday, October 17, 2017

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.  The Committee recommended that recovery plans of longer than ten years should be exceptional and that TPR’s powers should be increased – allowing it, for example, to issue “punitive fines” in addition to its existing powers to require contributions and financial support  see Library Briefing Paper CBP-04368 The Pensions Regulator: Powers to protect pension benefits (October 2017).

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;

It also asked for views relevant to TPR’s powers to protect scheme benefits – relating to its powers to issue contributions notices and financial support directions, to give clearance to corporate transactions and to allow stressed employers to separate from a scheme. These are discussed in Library Briefing Paper CBP-04368 (October 2017).

Another issue discussed the in Green Paper – whether there should be flexibility on schemes regarding indexation of pensions in payment is discussed in Library Briefing Paper CBP-05656 Occupational pension increases (September 2017).

The Government expects to produce a White Paper later in the winter (PQ 10024, September 2017).

 

Commons Briefing papers SN04877

Author: Djuna Thurley

Topic: Pensions

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