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Background

New statutory requirements relating to funding defined benefit schemes have recently come into law with the coming into force of the Social Welfare and Pensions Act 2012 on 1 May and the publication of various pieces of statutorily binding guidance issued by the Pensions Board on 7 June.

The Act makes various changes to the Pensions Act 1990, principally, its sections relating to the funding standard and revaluation of preserved benefits. The Pensions Board’s guidance sets out the details of most interest.  Through various changes to the Pensions Act, much of the Pensions Board’s guidance now has the force of law.

What to read

The guidance is of sufficient importance, and is clearly enough written, that we would recommend any interested party to read the guidance for themselves.  Perhaps the most useful starting point in reviewing both the Social Welfare and Pensions Act 2012 and to the Pensions Board’s guidance comes from the Board’s Funding Standard Overview Guide (which does not have statutory force) which summarises the main points of the new funding requirements. We then suggest reading the guidance on section 49 (funding proposals) before reviewing the other guidance.

Need to re-start work now on funding proposals

The most important point we would highlight is that schemes which have submitted an actuarial funding certificate certifying that the scheme fails the funding standard but which have not submitted a funding proposal now have until the later of the end of this year and 12 months after the end of the last scheme year falling before June this year. Where a funding proposal incorporates an application for a section 50 order reducing benefits, the new submission deadline is not earlier than the end of February 2013. The existence of the new deadlines means that trustees who need to submit funding proposals and scheme sponsors need to focus their minds over the next few weeks on the content of their funding proposals. 

New issues to consider

The requirements mean that several new matters need to be factored into the thinking on funding proposals, such as:

  • The new requirements and options relating to funding proposals which extend beyond the date of the next actuarial funding certificate or funding standard reserve certificate;
  • Having to fund for the new risk reserve if the funding proposal period ends after 2015;
  • Ways of mitigating the impact of the risk reserve, such as by increasing scheme investment in cash and EU sovereign bonds or putting in place an unsecured payment undertaking;
  • Reducing the value placed on some or all of the pensions in payment under the scheme for funding standard and funding proposal purposes (called valuing pensions in payment on the section 53B basis) by holding sovereign annuities or EU sovereign bonds; and
  • The minimum requirements for secured contingent assets to count as scheme resources for funding standard purposes.

This will all take time

Trustees and scheme sponsors also need to bear in mind the time it will take to put in place the measures that may go into a funding proposal.  For example:

  • Trustees need to take appropriate advice, pass the required resolution relating to using sovereign annuities on a winding-up and make various disclosures before the scheme actuary can use the section 53B basis to value funding standard pension liabilities; and
  • Before trustees can use contingent assets or unsecured undertakings for funding standard / funding reserve purposes, they will have to take appropriate professional advice and be satisfied that the assets or undertakings comply with the applicable guidance.

Conclusion

Funding discussions for many schemes had stalled or been put on the long finger pending the publication of the new funding requirements.  Now that the requirements are known, it is time for those discussions to be re-commenced as a matter of urgency.