Sections

The Pensions Regulator

Codes of practice

Codes of practice

Code of practice 03
Funding defined benefits

Meeting the key statutory obligations

Statement of funding principles

Preparation, review and revision

  1. The trustees must prepare a statement of funding principles within fifteen months (eighteen months for some transitional cases) of the effective date of the scheme's first actuarial valuation under Part 3. They must subsequently review and if necessary revise it within the same deadline after the effective date of each subsequent valuation.59 However, they may review and revise it at other times.60

Dealing with a shortfall

  1. Where the trustees have made decisions about the manner and period within which to eliminate a shortfall then these decisions must also be recorded in the statement of funding principles.61 The trustees should also record all of the assumptions used.

Combining with the statement of investment principles

  1. The trustees may wish to prepare a single document combining the statement of funding principles with the statement of investment principles.62 They should ensure that the matters relating to each statement satisfy the appropriate requirements for employer consultation (in the case of the investment statement) and agreement (in the case of the funding statement).

Calculation of technical provisions - method

  1. Trustees must choose an accrued benefits funding method for calculating the scheme's technical provisions.63 Before doing so they must obtain actuarial advice and must reach agreement with the employer.64

Accrued benefits funding methods

  1. As its name suggests, under an accrued benefits funding method, a value is placed on benefits accrued to date. At the same time, a consistent contribution rate should be determined to meet future accrual of benefits for active members.
  2. An important distinguishing feature of the four accrued benefits funding methods currently recognised by the actuarial profession65 is the treatment of pay increases for active members. The smaller the proportion of active members in the scheme, the less significant the differences between the various methods will be to the overall valuation result.

Factors to consider

  1. Trustees must take advice from their actuary on the differences between the available methods in relation to their scheme.66 The following factors should be covered by that advice and discussed with the employer:
    • the relationship between the technical provisions required under a particular funding method and the future contributions (if any) needed to support them, taking into account expected future pay increases for active members;
    • how that funding method might be expected to affect the future contributions over the lifetime of the scheme;
    • the significance of the relative liabilities in respect of pensioner, deferred and active members as well as the age profile of the membership;
    • the ability and willingness of the employer to make advance provision for future events (for example, the allowance made today for future pay growth) in the technical provisions; and
    • the likely number of new entrants to the scheme in the future.
Calculation of technical provisions - assumptions
  1. It is the trustees' responsibility to choose which assumptions are to be adopted for the calculation of the scheme's technical provisions. This is another matter on which they must take advice from their actuary and reach agreement with the employer.67
  2. Whilst the future is unknown, for funding purposes assumptions need to be made about the course of events. It is a legislative requirement that trustees must follow the principles set out in legislation with regard to 'prudence' when choosing the actuarial assumptions to be used in the calculation.68
  3. The decisions made will not only affect the technical provisions, but will also have an impact on the level of future contributions required.

59 See regulation 6(3)(a).
60 See paragraph 137 to 141.
61 See section 223(2).
62 The statement of investment principles is required under section 35 of the Pensions Act 1995 (as amended).
63 See regulation 5(2).
64 See sections 230(1) and 229(1) respectively.
65 See Guidance Note 26, 'Pension Fund Terminology'.
66 See section 230(1)(a).
67 See sections 230(1) and 229(1) respectively.
68 See regulations 5(3)(a) and 5(4).
Trustee/employer agreement