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 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 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 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 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.
