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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 climate on
scheme Valuations.
What are the duties of trustees in the light of the 2012
Statement?
Statutory framework
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 should be
repaid. However, 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 adopt 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 outperformance 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 antiavoidance powers. Nonetheless,
TPR's report illustrates TPR paying close attention to
investment risk in the context of funding and the strategies
schemes put in place to mitigate the risk of a failure of
out-performance.
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 in
its 2012 Statement 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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