The Pensions Regulator

Consultation on implementing the new requirements for funding defined benefit pension schemes

Ref: PN05-02
22 March 2005

New proposals on the system to replace the minimum funding requirement (MFR) for defined benefit pension schemes, have been issued for consultation today, announced Pensions Minister, Malcolm Wicks.

The package of proposals will contain details on the new scheme funding requirements which will include a new statement of funding principles and the requirement for trustees to keep members informed about the funding of their schemes.

Malcolm Wicks said:

“This consultation will look at significant measures which will improve the arrangements for the funding of defined benefit pension schemes. Consultation has been a key feature as we have developed our proposals to replace the MFR, and the package we are issuing today represents the next stage in this process.

“Everyone is agreed that the old MFR regime needed improving upon and I believe these proposals will be positive for both trustees and scheme members.”

• draft regulations setting out the detail of new scheme funding requirements, including the new statement of funding principles which trustees will need to prepare, the preparation of actuarial valuations and reports, and the requirements for recovery plans to restore funding shortfalls;

• draft amendments to the Disclosure of Information Regulations, introducing new requirements for trustees to keep members informed about the funding of their scheme; and

• proposals for transitional arrangements allowing the smooth transfer of schemes from the MFR to the new scheme funding requirements.

The full proposals can be viewed on the DWP website.

Consultation continues on Pensions Act 2004 with the issue of a draft code of practice on funding defined benefits

At the same time the Pensions Regulator's draft code of practice on funding defined benefits was published today on the Pensions Regulator's website.

The draft code expands upon the legislative requirements by setting out the standards of conduct and practice expected of trustees and (in some respects) scheme actuaries who must meet the new legislative requirements on funding defined benefits which will replace the minimum funding requirement.

David Norgrove, Chair of the Pensions Regulator said:

“The draft code of practice gives clear guidance for trustees of defined-benefit schemes on their responsibilities in relation to scheme funding. Trustees will be better equipped to challenge advice from their scheme actuary, and to ensure that an appropriate recovery plan is in place to meet any funding shortfall.”

Development of the code of practice for the Pensions Regulator is being carried out by a team comprising representatives from DWP and the Regulator, working in consultation with members of the actuarial profession, employers and industry bodies.

Trustees and employers are invited to contribute to the consultation which changes the way that decisions about the funding of schemes providing defined benefits are made. The consultation will also be of interest to their advisers, including actuaries appointed by trustees and employers. The consultation period ends on 6 May 2005, and the code is due to be issued by the Pensions Regulator in the autumn.

To take part in the consultation on the draft code of practice visit http://www.thepensionsregulator.gov.uk/. You may respond via the website if you choose. Details of alternative methods of responding are given on the website, and in the draft code of practice.

Editor's notes

• New legislation under the Pensions Act 2004 requires trustees of schemes providing defined benefits to adopt the statutory funding objective. This requires the scheme to have sufficient assets to cover an actuarial estimate of the amount needed to meet the benefits when due (called “technical provisions”). Trustees are required to prepare a statement of funding principles specifying how the statutory funding objective will be met. They must arrange periodic actuarial valuations and actuarial reports. Trustees must also prepare a schedule of contributions specifying rates of contributions due to be paid by the employer and active members. Where the statutory funding objective is not met, the trustees must prepare a recovery plan to correct the shortfall within a specified period.

• Under the legislation, trustees are required to seek the employer’s agreement to how the technical provisions are calculated, to the statement of funding principles, how the statutory funding objective will be met, the schedule of contributions and any recovery plan.
  
• The scheme actuary appointed by the trustees will prepare valuations of the scheme, provide advice to the trustees and certify the calculation of the technical provisions and the adequacy of the schedule of contributions.
  
• It is expected that the new scheme funding legislation and the code will apply to schemes from 23 September 2005, in line with the timetable for implementing the European Directive on the activities and supervision of institutions for occupational retirement provision.

• Codes of practice are not statements of the law. However they do have evidential value, meaning they will be taken into account by the Determinations Panel of the new Pensions Regulator, a court or tribunal where relevant.

• There will be twelve mandatory codes of practice which will usually be effective from the date corresponding legislative requirements are introduced. The first code of practice on the subject of Reporting Breaches of the law will be issued in April 2005.

• The Pensions Regulator was established by the Pensions Act 2004, which received Royal Assent on 18 November 2004. On 6 April 2005 the Pensions Regulator will succeed Opra, which will cease to exist.

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