In this month’s edition of the Pensions E-Bulletin, we update you on a number of issues including the approaching deadline for the Pensions Regulator’s new record-keeping targets, its analysis of the defined benefit funding regime, the PPF’s funding determination guidance and the High Court’s recent judgment on the interpretation of a pension promise.
Record-keeping deadline approaching
The Pensions Regulator has issued a reminder that the deadline for the record-keeping targets which it expects pension schemes to achieve is approaching. In 2010, the Regulator published record-keeping targets for ‘common data’ – such as name, address and date of birth – to ensure certain standards were met. By December 2012, 100% of common data created since June 2010 and 95% of common data created before June 2010 must be complete. Targets for the standards of other data should be set by trustees in conjunction which the scheme administrator, but the Regulator expects the targets to be ‘high’.
The Pensions Regulator stated that by now it expects schemes to have taken significant steps to meet these targets, including measuring their scheme data, and where data is poor, having plans in place to correct it. Failure to take steps to ensure the completeness and accuracy of data held by a scheme may lead to an investigation by the Regulator.
Regulator publishes analysis of defined benefit funding regime
The Pensions Regulator has published a report, “The defined benefit regime: evidence and analysis”, which looks at how “flexibilities” in the funding regime have been used by schemes and employers. The report confirms that there are a wide variety of scheme circumstances which must be recognised by the regulatory framework. It notes that existing flexibilities in the funding regime have been used to deal with funding challenges as follows:
- Discount rates: discount rates vary substantially from scheme to scheme with assumptions ranging from below zero to over 200 basis points.
- Recovery plan length: the recovery plans for schemes have increased by approximately 4.2 years from their original end date.
- Contingent assets: over the last six years the use of contingent assets has increased about seven fold with over 20% of schemes in the 2009/10 valuation year reporting the use of at least one contingent asset.
The Regulator also sets out further information to support its funding statement on defined benefit schemes published earlier this year. To assess how best to achieve the right balance when regulating appropriate funding, and in particular taking into account affordability for employers, the Regulator carried out an affordability assessment to test whether it would be reasonable for schemes to continue with their current funding plans. It concluded that:
- about 25% of schemes would not need to amend their recovery plans;
- about 30% would remain on track with small adjustments to their recovery plans, such as a 10% increase in contributions and a three-year extension to the recovery plan;
- about 20% could remain on track with a similar 10% increase in contributions and a three-year extension to the recovery plan but also making use of other flexibilities such as allowing for greater outperformance on the investment return; and
- about 25% of schemes would need to make large increases to contributions or substantial use of a wider range of flexibilities.
Based on this analysis, the Regulator concluded that the existing flexibilities in the funding regime should be targeted on schemes facing affordability issues and that there was no need to change the overall funding regime to reflect current economic conditions.
PPF publishes funding determination guidance
The Pension Protection Fund (PPF) has published guidance on how it will make funding determinations when deciding if it should assume responsibility for a pension scheme during an assessment period.
Before accepting a pension scheme, the PPF must be satisfied that the value of the scheme’s assets at the ‘relevant time’ was less than the amount of the protected liabilities. This is usually done by carrying out a section 143 valuation, however, for many schemes it is clear that they are either significantly underfunded or significantly overfunded and carrying out a full section 143 valuation adds delay and expense. The power to make a funding determination allows the PPF to simplify the process.
Where the PPF looks to make a funding determination rather than require a section 143 valuation, it will seek an estimate of the protected liabilities and assets from the trustees of the scheme. The estimate should be based on the scheme’s existing section 179 valuation or a ‘suitable alternative actuarial valuation’ if this will give a better estimate. It must not be more than three years old and must be signed off by the actuary. The procedure can be used by schemes that have only recently experienced a qualifying insolvency as well as schemes that are already in an assessment period but for which a section 143 valuation had not been commissioned.
High Court interprets pension promise restrictively
In another case relating to the Sea Containers 1983 Pension Scheme (a financial support direction was previously issued in relation to the scheme), the High Court has held that a promise made by the employer when implementing equalisation must be interpreted restrictively.
In 1994 the scheme took steps to equalise its normal retirement date for men and women to age 65. An actuarial analysis determined that certain long-serving female members would be especially adversely affected by this change and so were given a special letter from the principal employer which stated that these ‘special members’ could still elect to retire at their previous retirement age of 60 and that the company would provide the pension that would have been available prior to the changes. The former employees argued for a wide interpretation of the promise, however, the court interpreted the promise narrowly and held that:
- the ‘special member’ had to retire at age 60, and not at any time before or after;
- the benefit of the promise only applied to those who took the pension immediately upon leaving service; and
- the promise was given by the principal employer only and could not be enforced against any other company.
This case serves as a reminder of the importance of clear drafting of agreements relating to pension benefits.