Pension Scheme Deficits - What to Do

Posted: 2nd April 2011

In accordance with the Pensions Act 2004 all defined benefit schemes must have regular actuarial valuations to ensure that the scheme meets the ‘Statutory Funding Objective’ (SFO). The Pensions Act 2008 sets out an employer's obligations to provide information to 'jobholders'.

To ensure SFO compliance, the scheme trustees and managers must prepare a statement of funding principles having obtained actuarial advice. The statement should outline how SFO compliance is to be achieved and the steps to be taken should a shortfall occur and it must comply with the Act and also the Occupational Pensions (Scheme Funding) Regulations 2005 (the Regulations).

My scheme fails the SFO, now what?

In this situation, having obtained actuarial advice, the trustees and managers should draft a recovery plan for the scheme, a copy of which must be sent to the Pensions Regulator.

The trustees and managers should aim to eliminate the shortfall as soon as the employer can reasonably afford to do so, taking into account the employer’s financial position and prospects as well as his willingness to pay the scheme benefits.

When drafting the plan, the trustees should consider the factors outlined in the Regulations and the code applicable to occupational pensions. This will include considering the employer’s business plans and the effect the recovery plan will have on the solvency of the employer and also looking at the contingent security provided by the employer (such as the payment of funds into an escrow account which can be paid into the scheme in the event of employer insolvency).

The plan should outline how the shortfall is to be eliminated and when this is to be achieved, and should be appropriate for the scheme.

What about the employer?

The employer must agree to the statement of funding principles and the recovery plan. If agreement cannot be reached, the trustees must inform the Pensions Regulator.

The employer should obtain legal advice at each stage of the process, especially with regard to factors which can lengthen the recovery time allowed to the scheme, such as contingent security.

The employer should consider its statutory obligation to provide the trustees with the information needed to perform their duties. Legal advice can assist in ensuring statutory compliance whilst protecting the employer’s interests.
The Pensions Act 2008 imposes considerable additional obligations on employers. Contact us for advice regarding these or any other obligations you may have as an employer.