Pension fund trustees will be granted more powers under the Government's intended replacement for th...
Pension fund trustees will be granted more powers under the Government's intended replacement for the minimum funding requirement (MFR).
The proposals, included in the Pensions Green Paper, will see trustees have the ability to freeze or wind-up schemes in certain events, such as conflicts with employers concerning appropriate contribution levels and overcoming any funding deficits.
Admitting MFR has not worked as intended and the need to satisfy the MFR test has led some schemes to focus too much on the impact of short-term market conditions instead of on an appropriate strategy for meeting their specific pension commitments, the Department of Work and Pensions said.
Instead, final salary plans will now have to adhere to scheme specific requirements, drawn up and agreed upon by the employer, trustees and scheme actuary.
In addition to the trustees and employer agreeing on a statement of investment principles, they will also have to agree a statement of funding principles. This statement will be based on actuarial advice and is aimed at complementing a statement of investment principles (SIP) as proposed by the Myners' Review.
The Government is looking to prescribe in legislation what information is to be included in the funding principles statement but has decided it will be up to the trustees to determine whether to combine it with the SIP. Where the trustees and employers disagree on certain areas of the funding principles, for example, the level of contributions, trustees can freeze the scheme or wind it up.
Trustees will also be required to get a full actuarial valuation of their scheme at least every three years.
According to the Government's proposals, it is up to the trustees, with the agreement of the employer, and based on the advice of the scheme actuary, to decide the funding method used in the valuation, including the economic and demographic assumptions.
After each valuation, the trustees will be required to put in place a Schedule of Contributions, prepared in accordance with the Statement of Funding Principles. This statement will outline when and how much the employer and the employees will pay into the scheme.
If the valuation shows that the value of the scheme's assets is less than the value of its accrued liabilities, the scheme actuary will advise on the level of contributions needed to eliminate the deficit. The period over which the deficit will be eliminated will be scheme-specific, and will be determined by the trustees, with the agreement of the employer, in accordance with the funding principles.
Payments, which were agreed upon in the statement of contributions, that are not made by the employer into the scheme are to be reported by the trustees to the new pensions regulator, in a similar manner as is done today with Opra. In order to enforce this the Government is planning to empower the new regulator with the ability to levy fines at employers who are not following their own statement of contributions.
Trustees can also use their powers to freeze or wind up the scheme in this case to ensure schemes do not run on for long periods of time without the appropriate contributions being paid.
In order to ensure scheme members are kept up to date, all employees are to be given a copy of the scheme's SIP and funding principles upon request. Members are also to be given a document, initially proposed to be on an annual basis, which contains key information about the scheme's funding position. This will include the last full valuation of the scheme, the current level of contributions and details of what is being done to correct any funding deficits.
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