Delay for new scheme funding basis
You know the story so far. We had something called the Minimum Funding Requirement which we all called the MFR. We got it following the 1995 Pensions Act, but it’s not proved to be very effective in practice. Final-Salary pension schemes can be ‘fully funded’ as far as the MFR basis is concerned, but still not have enough money in them to go around if they end up closing all of a sudden.
It has been decided, therefore, that the MFR will get the bullet and be replaced by something called Scheme Specific Funding. This is all being brought about by the 2004 Pensions Act and was due to come into force on 22nd September 2005, or to put that another way, two weeks ago, but on the 1st of September the Government announced that the 31st of October would be the implementation date. Well the government guys have just announced that that timetable for introducing the new funding basis by October was a bit on the adventurous side and it's now been postponed until 30th December 2005.
This slippage is important in a way because, like so many other bits of the 2004 Pensions Act, changes to scheme funding are being driven by our need to comply with a European Directive (Directive 2003/41/EC as you ask). So we’re a few yards off the pace with that, but it’s not serious.
Those of you who have followed the twists and turns of all this as I’ve tried to report on it on the BeeHive will know that the basis for calculating individual transfer values of deferred final-salary benefits is intricately tied up with all this. The actuaries were aiming to get a new transfer basis based on bond yields rather than assumed equity returns in place in time for the launching of the new funding basis, but they’ve had trouble putting it all together in time too and have delayed its implementation until the new year. The thing with both these highly important, but also highly contentious, issues is that they have generated a high level of interest in their consultation stages.
Stephen Timms, the Minister for Pension Reform, said in a press release issued yesterday that:
"These are important regulations affecting private sector defined benefit occupational pension schemes and this is why we wanted to make sure stakeholders had the chance to make their views known.
"We are all agreed that it is in everyone’s interest that we get the regulations right, so that is why we have taken the extra time to take on board stakeholders’ comments."*
The Pensions Regulator also put out a press release yesterday saying that in light of the Department for Work and Pensions' (DWP) announcement of the revised timetable for scheme funding regulations there would be changes to the schedule for its own work.
The Regulator will now publish the Funding defined benefits code of practice when the regulations are published. This is to ensure that the code accurately reflects the regulations. The specimen funding documents designed to assist trustees and their advisers will also be published in December.
The Pensions Regulator intends to publish its consultation document describing how it will operate in relation to the new requirements and how it will use its powers at the end of October 2005. This is to allow earlier discussion and clarity about how the Pensions Regulator will regulate scheme funding. Early publication of the document will help to inform trustees and employers about how the regulator plans to implement the new scheme funding regime.
As a result of the revised timetable for publishing the regulations, trustees beginning their valuation between 22 September and 30 December will now have an extra three months on top of the usual fifteen months, to complete their valuation and put in place an updated schedule of contributions.
So it's a slowing down of the process more than anything else, but it goes to underline what some of us have been saying for some time now; A-Day is not that far away and we've still got a lot to sort out. Who said working in pensions was boring?
7 October 2005
*Source: Department for Work and Pensions press release dated 6 October 2005 entitled "Revised timetable for new pension scheme funding regime"
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