Annual Funding Statements
The Pensions Act 2004 is doing a number of things, or trying to do them at least, and weíve seen some of the results of that already; the new Pensions Regulator; the Pension Protection Fund (PPF); the ability to defer Basic State Pension entitlements; the changes to Limited Price Indexation etc. etc.† While there is still the little matter of changing all our pension legislation to dovetail exactly with the new so-called simplified tax rules, we mustnít forget that the Act is also going to change the way pension schemes are funded in future.† The Minimum Funding Requirement, or MFR as it is more commonly known, is getting its marching orders and is being replaced in September this year by a new scheme funding standard.†
This long overdue tightening up of the way pension schemes are funded is being introduced by the 2004 Pensions Act, but is really being done to comply with a European Union Pensions Directive as is much of the pension legislation we are implementing.† To comply with this fully, all UK final-salary pension schemes†will have to provide Annual Funding Statements for all active, deferred and retired members.
These are designed to be informative, of course, but the high level of detail, combined with most peoplesí low level of understanding of practically impenetrable pension gobbledegook (not to mention their probable low level of interest), looks to me to be a recipe for misunderstanding and misplaced concern.† Iím sure it will be the catalyst for a deluge of queries from scheme members to pension scheme trustees.
These new annual statements need to include:
- Details of the funding position as at the last full actuarial valuation in relation to securing the promised benefits with an insurance company.† Or to put that another way, if the scheme doesnít have enough in the kitty to buy-out its liabilities that fact will become glaringly obvious to each and every scheme member.
- The date the trustees anticipate having in place the first schedule of contributions under the new funding regulations.
- Details of any current recovery plan under the scheme funding standard.
- Details of the schemeís investment policy.
- A summary of the protection offered to members by the Pension Protection Fund in the event that things go awry.
So, and I suppose to summarise it all, people will be told every year just how good or bad the funding position of their scheme was when the actuaries last had a detailed look at it.† If itís bad, then people would have some idea of how contributions under the new funding standard will kick-in to help claw the scheme out of the hole itís in.† If things are really bad and a recovery plan is in place then this Plan B approach will be spelt out.† People will also be able to judge what risks are being taken by the trustees when they invest the funds backing their pensions and, as a last resort, theyíll see how much of their benefit promises would be underwritten by the PPF in the event of the whole thing going pear-shaped.† Iím not convinced that these annual statements will be that reassuring for members to start with, particularly as the MFR standard could easily be met by schemes that could not meet the buy-out costs of their liabilities.† If understood, they could quite easily shake membersí faith in the schemes they are in and cause them to hold their collective breath for some years while things hopefully get sorted on the funding front.† Trusteesí inboxes in the meantime will, I guess, be overflowing.
On a small, but important, point, the fact that these annual funding statements will be going out to retired members as well as those active and deferred, could itself lead to some people becoming unnecessarily concerned about the security of their pensions.† Many final-salary schemes purchase annuities for retiring members when they retire and, in that case, the ongoing health or otherwise of the fund that purchased your annuity outright would be of little or no interest to you as a pensioner.† I suppose it might lead to some pensioners heaving a sigh of relief and thinking something like ďBlimey! Iím glad I got out of there in time!Ē, but I canít see any other reason why such pensioners would need to know whatís going on in the scheme they were safely parachuted out of.
28 June 2005
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