The Pensions Regulator

Timetable for new pension scheme funding regime announced

Ref: PN05-22
1 September 2005

The Department for Work and Pensions has today announced that the new funding requirements for defined benefit occupational pension schemes will come into force on 31 October 2005.

The regulations setting out the detailed requirements stemming from Part 3 of the Pensions Act 2004 had widely been expected to be in place by 23 September 2005 in line with the overall timetable for implementing the European Directive on Occupational Pensions. The slight delay in publishing the regulations arises from the need to take account of the many issues raised by the pensions industry as a result of the extensive consultation the department undertook on draft regulations earlier this year.

The regulations will apply to any valuation completed after 31 October 2005 which is based on a date (known as the effective date of the valuation) on or after 22 September 2005.

The Department recognises that the pensions industry is keen to know the details of the final legislation. However, it believes that it is more important that the original draft legislation should take full account of all the concerns which have been raised.

Transitional arrangements mean that schemes can move from the current minimum funding requirement (MFR) to the new funding arrangements in line with their normal three yearly valuation cycle. The delay will have minimal practical effect, since it comes at the beginning of what is usually a lengthy process of conducting an actuarial valuation of a scheme’s assets and liabilities, taking up to fifteen months in total.

The new scheme funding arrangements will require trustees to take actuarial advice before making funding decisions and to have in place a recovery plan where an actuarial valuation identifies a shortfall.

Minister for Pensions Reform, Stephen Timms said:

"The new scheme funding requirements will replace the MFR and will allow the trustees of each scheme to develop an appropriate funding strategy which takes account of the specific factors and circumstances of their scheme. 

"Scheme members will also be better informed about the funding position of their scheme, and any associated risks and the regulator will have new powers to help resolve disputes about funding issues between the trustees and the sponsoring employer." 

These regulations will be laid before Parliament in October. At the same time, the Pensions Regulator will publish a suite of guidance materials to help trustees, employers and their respective advisers comply with the new funding regime.

These materials, taken together with the legislation, will provide a complete picture of how scheme funding will operate including the legal requirements, the regulator’s expectations of trustees and employers, and how the regulator will operate in relation to the new requirements.

David Norgrove, Chair of the Pensions Regulator, said:

"We will provide clear guidance for trustees of defined benefit schemes on their responsibilities in relation to scheme funding. When making scheme funding decisions, trustees should be better equipped to negotiate with the sponsoring employer after taking actuarial advice, and to ensure that an appropriate recovery plan is in place to meet any funding shortfall."

The information to be published will include:

• the code of practice on ‘Funding Defined Benefits’ from the Pensions Regulator in the form laid before Parliament;
• specimen funding documents to assist trustees and their advisers; and
• a consultation document containing a draft statement from the Pensions Regulator, describing how it will operate in relation to the new requirements and how it will use its powers.

The code of practice provides practical guidelines on the requirements of the scheme funding legislation and sets out the standards of conduct and practice expected of those who must meet these requirements. It has been amended after public consultation earlier in the year. A brief summary of feedback received during the consultation and the revised regulatory impact assessment will also be available.

The specimen documents, if used, can be expected in normal circumstances to be consistent with the principles set out in the code of practice. However, these documents are intended as examples only, and they do not have the same legal force as the code.

The statement from the Pensions Regulator will explain how it intends to operate in relation to the new requirements. It will inform trustees and employers how the regulator will monitor compliance with the new legislation and when it may intervene. It will also outline the regulator’s powers and what action it may take in certain situations. The statement will be issued as a draft for public consultation.

All of the above information will available on a dedicated page on the Pensions Regulator’s website in October at www.thepensionsregulator.gov.uk

Publication will be announced by press release and using the regulator’s ‘news by email’ service. To sign up to news by email visit www.thepensionsregulator.gov.uk/onlineServices/ .

Editor's notes

1. The new scheme funding requirements are part of the wider pension reform agenda set out in the Pensions Act 2004. Elements of the new scheme funding requirements take account of the funding requirements in Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision.
2. The version of the code published in October will have been approved by the Secretary of State for Work and Pensions, in the form to be laid before Parliament. Therefore, although it may not be the final version, the basis of the regulator's expectations will be agreed and trustees and employers can be confident they can start to act in accordance with the guidelines contained in the code.
3. Codes of practice are not statements of the law. However they do have evidential value, meaning they will be taken into account by a court or tribunal where relevant.
4. The Pensions Regulator has specific powers to intervene and help put matters right where the trustees or actuary are unable to meet their obligations under the scheme funding requirements, including the power to:
   • modify future accrual of benefits;
   • direct how technical provisions are to be calculated;
   • direct the period within which, and how, any failure to meet the statutory funding objective is to be remedied; and
   • impose a schedule of contributions.
5. The Pensions Regulator has been established as the new regulator of work-based pensions in the UK, with wider and more flexible powers under the Pensions Act 2004. It has replaced Opra.