Code of practice on funding DB
Our updated code of practice on funding DB came into force for valuations with effective dates from 29 July 2014 onwards.
The quick guide to funding DB explains how employers should work with trustees in an open and transparent way to reach feasible scheme funding solutions.
Code of practice
Our code of practice on funding DB balances trustees’ duties to pay benefits when due with employers’ objectives to grow their business whilst ensuring pension promises are kept.
DB funding code of practice video
Fiona Frobisher talks about the main points employers should be aware of in the DB funding code of practice.
To view subtitles select the subtitles icon at the bottom of the video. You can also download a full transcript of the video (PDF, 68kb, 2 pages).
Statutory funding objective
If you run a DB pension scheme, you need to be aware that most schemes providing any defined benefits need to meet a statutory funding objective, which assesses the required levels of funding for a scheme.
As an employer, you’ll need to work closely with the trustees to ensure that your scheme meets these funding requirements. In particular, you’ll most likely be required to agree with the trustees:
- a statement of funding principles
- a schedule of contributions consistent with these principles
- a recovery plan setting out the steps that will be taken to address the shortfall where the statutory funding objective is not met
You also need to agree a valuation with the trustees within 15 months of the effective date. This is the date when the actuary measures the scheme’s assets and accrued liabilities. If you fail to agree a valuation within this time the trustees must tell us as soon as possible. Failure to submit a valuation on time may result in us taking enforcement action.
Annual funding statements
Our annual funding statement provides guidance to trustees undertaking valuations. It's relevant to trustees and employers of all DB schemes but is primarily aimed at those who are currently undertaking valuations. An annual funding statement sets out our view in relation to the risks facing schemes with effective valuation dates for that particular year.
You can find current and previous annual funding statements, along with supporting analysis, in our statements section.
Corporate sales and employer departures
Some corporate transactions could affect your ability to meet your obligations to the pension scheme either on an ongoing basis or in the event of insolvency and, as a result, be detrimental to the scheme and its members. For example, the following transactions could have such an effect:
- selling or restructuring your business
- making a return of capital
- exiting a multi-employer pension scheme
You will need to consider the effects on the pension schemes involved and the legal implications of your actions, including whether the transactions could, potentially, be seen as falling within the remit of the regulator’s anti-avoidance powers.
The effect of some group restructures can be the termination of the participation of certain employers in a pension scheme. Generally, when an employer ceases to participate in a DB multi-employer pension scheme, a debt will become payable to the scheme, equal to the departing employer’s share of the scheme’s buyout deficit, unless the employer enters into an alternative arrangement that reduces its liability. This debt is enforceable by the trustees against the employer.
For more information on corporate transactions and employer departures from multi-employer schemes please see the following guidance:
- corporate transactions
- abandonment of DB pension schemes
- multi-employer schemes and employer departures
The guidance sets out a number of different arrangements under which employers can manage their debts if they leave a multi-employer scheme. A further arrangement has been introduced since the guidance was written. This is known as a 'deferred debt arrangement' and allows a leaving employer to defer payment of its debt provided the trustees consent and the employer continues to provide support to the scheme on an ongoing basis.
Our guidance will be updated to take account of this option. In the meantime you can find details of the deferred debt arrangement in the Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018.
We can issue a contribution notice or financial support direction against employers with DB pension schemes and to persons who are connected or associated with such employers in circumstances where corporate activity has had a detrimental impact on the security of the pension schemes. A contribution notice or financial support direction is intended to ensure that pension liabilities are not avoided or left unsupported.
A contribution notice, which requires the person to whom it is directed to pay the sum specified in the notice (to the scheme), may be issued not only in circumstances where there has been a deliberate attempt to avoid an employer debt or compromise that debt, but also includes situations where an employer has acted (or failed to act), in a manner which has ‘detrimentally affected in a material way’ the likelihood of accrued pension scheme benefits being received by the members.
For more information see code of practice 12: circumstances in relation to the material detriment test and material detriment test code-related guidance.
A financial support direction, which requires the person to whom it is directed to put in place financial support for a scheme, may be issued in circumstances where the employer of a DB scheme is a service company or insufficiently resourced.
It’s possible to 'seek clearance' from us in relation to transactions which are materially detrimental to the ability of a DB scheme to meet its pension liabilities.
Clearance is the term used to describe the voluntary process of obtaining a statement from us that, based on the information provided, the regulator will not use its anti-avoidance powers in relation to a particular event.
For more information see the following clearance guidance and case studies on the clearance process and what we consider in a clearance application.
If you run a DB scheme, you must tell us promptly about certain 'notifiable' events. These are specific events which are likely to have a significant impact on the security of members' benefits. If a prescribed event occurs, then there is legislative requirement that it must be notified in writing to the regulator as soon as reasonably practical.
Employers must notify us of 'employer-related' events – for example, a decision to seek to compromise a debt owed to a scheme. Trustees must notify us of 'scheme-related' events – for example, a decision to grant benefits to a member the cost of which is more than the lower of 5% of scheme assets and £1.5 million.
The reporting of a notifiable event gives us the opportunity to assist or to intervene, before a call on the Pension Protection Fund is made.
Generally speaking, a call on the Pension Protection Fund arises when, an employer becomes insolvent and its defined benefit pension scheme is underfunded.
Consulting staff about pension changes
If you're considering making changes to your pension scheme, whether it be a DB or DC scheme, these should be discussed with the trustees or managers of your pension scheme. Depending on how many employees you have, you may also be required to consult affected employees before making certain changes to your pension scheme if these are 'listed changes' as set out in regulations.
Listed changes include an employer deciding to close a scheme to new members, to close the scheme to further benefit accruals, to change the basis on which members accrue benefits, or to remove the liability to make employer contributions.
For more information see the duty to consult on scheme changes (PDF, 48kb, 5 pages).