Welcome to our latest Pensions Update. 

Since our last update, the Social Welfare and Pensions Act 2012 has been signed into law, the Pensions Board has published extensive statutory guidance for defined benefit pension schemes and has announced the new deadlines for submission of funding proposals to address deficits in such schemes.  The statutory guidance is distinct from existing Pensions Board guidance and cannot be altered without the consent of the Minister for Social Protection.  A breach of the statutory guidance will amount to an offence.  

The headline issues include the following:

  1. With effect from 1 January 2016, defined benefit pension schemes must hold a funding standard reserve (FSR) with the aim of acting as a buffer protecting against certain investment volatility.  However, with effect from 1 June 2012, schemes must check whether they satisfy the FSR in addition to the minimum funding standard.  Additionally, if a direction is sought under Section 50, the scheme must satisfy the FSR immediately unless combined with a funding proposal;
  2. The FSR is 15% of minimum funding standard liabilities less any holdings the scheme has of EU government bonds or cash PLUS the net effect on the scheme's funding position of a 0.5% fall in interest rates.  Estimates indicate that meeting the FSR may increase the cost of funding defined benefit schemes by up to 15%.  It is worth noting that the FSR may be changed by the Minister;
  3. Funding proposals must be submitted by the later of:

    • 31 December 2012, and
    • within 12 months of the last scheme year end falling on or before 31 May 2012

    (NB if a Section 50 benefit reduction is incorporated into the funding proposal, the deadline is 28 February 2013);
  4. Schemes may be allowed until 2023 to make good their existing deficit;
  5. Where a scheme holds sovereign bonds or sovereign annuities, its actuary may, subject to certain requirements, give credit for these in funding standard calculations (known as Section 53B basis calculations);
  6. Under Section 42 statutory guidance, trustees must take advice, pass a resolution and notify members or authorised trade unions to take advantage of the Section 53B basis calculation;
  7. The requirement to hold a risk reserve may be met fully or partially in non-cash format by the use of an employer undertaking which must comply with statutory guidance requirements; and
  8. Benefit reductions under Section 50 must now be carried out within one month of the direction and the application requirements are now contained in statutory guidance.

Comments

The new requirements are onerous and accompanied by extensive documentation / guidance from the Pensions Board.  There is widespread concern within the industry that the lead in time for meeting the required deadlines is extremely challenging. At the time of writing, sovereign annuities are slow coming on the market and trustees, employers and their advisers will have a lot of work to assess their scheme, consider the options available, pass any necessary resolutions and make any necessary notifications.  Another concern is that, in seeking to protect against investment volatility, the new regime will effectively reward schemes which invest in what are currently more risky peripheral Sovereign EU bonds.  Regardless of concerns, what is clear is that there is no time to waste, trustees and employers need to apply their minds to the issues now and seek all necessary advice without delay.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.