UK: Regulator Releases Data On Experience Of Scheme Funding

The Pensions Regulator has issued its promised summary of experience so far in relation to "scheme specific" funding valuations. The summary breaks down the initial valuation data received from schemes up to 31 July 2007.

Under the new funding regime, every defined benefit scheme must meet its statutory funding objective, namely to have sufficient and appropriate assets to cover its liabilities, or "technical provisions". If, following an actuarial valuation, the scheme does not meet its statutory funding objective, the trustees must adopt a recovery plan setting out how it will be met, and over what period. Actuarial valuations and recovery plans must be submitted to the Regulator.

The Regulator has its own "triggers" for when it may become involved in reviewing information submitted to it. One is based on the proposed funding level (i.e. the technical provisions that have been set) where the trigger is set between the employer accounting and PPF valuation funding position of the scheme.

There are then three triggers that will filter any recovery plan for further review:

• it is longer than 10 years; and / or
• it is excessively "back-end loaded" and / or
• the investment return assumption over the life of the plan appears to be inappropriate.

Some of the key points of interest for employers and trustees are that:

• more than 80% of schemes have recovery plans no longer than 10 years and so would not have triggered further scrutiny on that ground (the average length is 7.5 years);
• around two-thirds of pension schemes triggered further Regulator enquiry, although in most cases only minimal action was required;
• the average technical provisions are close to FRS17, and marginally above PPF valuation levels; and
• the mortality assumptions used for valuation purposes are predominantly based around the medium cohort.

In addition, it is worth noting the key funding messages the Regulator wishes to project. It takes the opportunity to emphasise that:

• triggers are not targets: in particular, recovery plans should be set, and are looked at by the Regulator, on a scheme specific basis;
• most longevity assumptions used do not reflect the recent debate on what might be considered prudent and in future schemes are expected "to take into account recent arguments for strengthening assumptions";
• a handful of employers and trustees have failed to agree funding documents, which the Regulator takes very seriously;
• it is concerned by a trend for some schemes to notify the Regulator, at the last moment, that they will be late in submitting documentation.

For the full report, please click here.

A more condensed summary is also available by clicking here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 03/10/2007.