By Mohamed Ali Bernat Opra is to issue guidance on the application process for extending the amount ...
By Mohamed Ali Bernat
Opra is to issue guidance on the application process for extending the amount of time employers have to redress their minimum funding requirement (MFR) shortfalls.
The regulator has the power to extend the periods for the restoration of full MFR when serious shortfalls are experienced.
If a fund falls below 90% funded, employers are required to pump money into it to redress the balance.
In its July bulletin, the regulator pointed out that it has received few applications to extend the restoration period and that its board has so far considered only one such application.
Opra is able to grant an application where the loss of scheme assets is due to dishonesty, including fraud.
It can grant an application when loss is caused by exceptional general economic or financial circumstances, which would affect the profitability or the financial position of the employer's business.
The extension can also be allowed where the employer wishes to make a contribution but needs to raise funds by the sale of an asset.
Donald Duval, a director of research at Aon Consulting, said the normal timescale for restoration to 90% funding was one year, with a five-year timescale for full restoration.
However, an employer is not required to meet these costs if it can prove the fund's performance had subsequently lifted it back up to the full funding requirement.
He added that investment policy was likely to be a sticking point, especially where funds deviated from standard investments by selecting overseas stocks and veering away from the All-Share index.
The issue of occupational schemes investing more in venture capital and overseas has been the centre of recent debate in the industry and it is something which is being studied by the Government-sponsored Myners report into pension fund investing.
Duval said: "A key question is, when will Opra use its power to extend the period? A fund would want the extension facility when it had taken a position on, for example, overseas investments or even venture capital. The problem is that if a fund has taken this position in isolation rather than as a wider trend, will Opra allow it off the hook?"
Several conditions must be met before Opra considers granting an extension.
If liabilities have increased with the employer's knowledge but this was not known to the trustees, an application cannot be made.
Similarly, the application will be rejected if the increased liabilities were within the control of the employer or where the employer has already made proposals for meeting the MFR within an extended period and is paying contributions at the prescribed level.
Applicants must also provide Opra with a statement on the general circumstances of the scheme and proposals for meeting the MFR over an extended time period.
A statement must be provided detailing the financial position of the employer, including its ability to make adequate contributions and the likelihood of its position being seriously affected if the application is refused.
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