Trustee boards and employers for schemes with Valuation dates
between September 2011 to September 2012 will need to consider
TPR's April 2012 Funding Statement ("2012
Statement"). Essentially, the 2012 Statement reflects
TPR's view of the impact of the current economic environment on
What are the duties of trustees in the light of the 2012
The scheme specific funding rules are contained in Pensions Act
2004. The rules include requirements relating to calculating scheme
deficits and the period of time over which deficit may be repaid.
Having taken into account the scheme specific funding legislation
and TPR's April 2012 Statement trustees are still left with a
degree of discretion. Essentially, trustee boards need to make
judgments about the degree of risk appropriate to their scheme.
If trustees stray into what TPR considers to be an unsupportable
approach TPR has various powers at its disposal. For instance, TPR
may give directions about the calculation of the Scheme's
"technical provisions" and/or may impose a schedule of
contributions (Section 231, Pensions Act 2004).
TPR has seldom used these powers. TPR faces exactly the same
problem as the schemes it regulates. The funding regime is scheme
specific and the right answer, or the range of acceptable answers,
depends on the scheme's particular circumstances e.g. the
profile of its membership liabilities and the strength or weakness
of the employer covenant. TPR is likely to resist what it judges to
be unreasonable risk.
What is unreasonable risk?
The recent sale of BMI by Lufthansa involved TPR considering
whether it could exercise its anti-avoidance powers. TPR's
statutory Report (issued May 2012) gives an interesting insight
into TPR's views on scheme risk.
The employer, Lufthansa was prepared to give a limited level of
funding on a conditional basis. This would have resulted in a
"25 year recovery plan which would have required a
considerable degree of investment out-performance above the
Trustee's proposed funding basis. Consequently, a sizable
proportion of the scheme's assets were required to be invested
in non-hedged asset classes over that period".
TPR rejected this approach as it placed too much reliance and
hence risk on "investment out-performance".
The facts of the Lufthansa/BMI case were special as Lufthansa
was not a participating scheme employer and for technical reasons
TPR could not exercise its anti-avoidance powers. Nonetheless,
TPR's report illustrates TPR paying close attention to
investment risk in the funding context and the strategies schemes
put in place to mitigate the risk of a failure of
Trustee duties generally
Perhaps a simpler way of looking at the legislation, together
with the Codes of Practice, Guidance and other material published
by TPR, is to keep in mind the basic trust law duty namely trustees
should manage all their risks prudently in the particular
circumstances of their scheme. A contrary view would be that TPR is
going beyond what trust law requires and is being overly protective
of the PPF.
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.
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The Court of Justice of the European Union has ruled that VAT on investment management fees paid by the trustees of a UK defined benefit pension scheme is irrecoverable under a VAT exemption for special investment contained in two EU Directives.
A number of summaries regarding the most recent updates as reported by the the FSA, the Financial Conduct Authority, the Prudential Regulatory Authority, the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange.
A summary of the most recent developments as reported by the FCA, the PRA, the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange.
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