| Funding requirements: UK's pension authority to focus on schemes most at risk |
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| 06/11/2005 | |
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The Pensions Regulator, UK's pension authority, has proposed to adopt a circumstances-specific approach to determine the funding requirements for defined benefit schemes. A consultation paper just released sets out to focus on schemes that pose the greatest risk to member's benefits by using a trigger mechanism to review decisions on scheme funding targets and timeframes. "Our proposals seek to protect scheme members and the PPF while taking into account the circumstances of the scheme and sponsoring employer", said Charlie Massey, the Pensions Regulator's strategic development director. This new consultation by The Pensions Regulator follows criticisms by the pension community about the lack of clear guidance on appropriate fund strategies replacing the Minimum Funding Requirement (MFR) rule as part on the Pensions Act 2004. According to the consultation document, which will be available for comments for a 12-week period, key variables in setting triggers will be the funding objective of the scheme and the length of the recovery plan. Trigger points are proposed in relation to the Pension Protection Fund and FRS17 figures for typical schemes, with separate triggers for schemes with recovery plans longer than 10 years. Impact Tim Keogh, worldwide partner at Mercer Human Resources Consulting says that a key issue that will determine the impact of those triggers will be the extent to which trustees feel obliged to seek funding at or above the level which attracts regulatory attention. "The proposals will introduce new challenges for trustees. The Regulator will be looking for a funding target of 70-80% of the full buyout cost which, typically, is at least equivalent to full funding under FRS17." An increase from 67% to 75% in the average funding target for UK schemes as a whole is equivalent to an extra £80bn being injected over the 10-year period. According to Mercer, most companies have, up to now, sought to correct deficits over more than 10 years and the majority target less stringent scheme-specific deficit measures. In 2004 a typical target was 67% of full buy-out, to be met over 14 years. Only 12% of funding policies examined by Mercer would not trigger further investigation under The Pension Regulator's proposed rules. The new requirements will apply to valuations based on an effective date of 22 September 2005 onwards but completed after 30 December 2005. Trustees beginning their valuation between 22 September and 30 December will have 18 months to complete their valuation and put in place an updated schedule of contributions, instead of the usual 15 months. A formal statement on the pension watchdog's regulatory approach and use of powers will be published in early 2006. J.L. |
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