Under the Pensions Act 1990, defined benefit pension (DB) schemes must meet a minimum funding standard which requires that schemes maintain sufficient assets to enable them discharge accrued liabilities in the event of the scheme winding up.
The Pensions Act, and associated regulations, prescribe that defined benefit schemes are required to assess once every year whether they meet the funding standard. Not all schemes have the same reporting date, but the Pensions Board in its Annual Report for 2008 estimated that approximately 90% of defined benefit schemes did not meet the funding standard.
Where schemes do not satisfy the Funding Standard, the sponsors/trustees must submit a funding proposal to the Pensions Board to restore full funding, normally within three years.
However, as a result of the economic difficulties, the Government introduced a number of temporary measures aimed at easing the pressures being experienced by schemes.
Those measures include:
The granting of extra time for schemes to formulate funding proposals;
Granting flexibility to the Pensions Board to allow longer periods (over 10 years) for recovery plans in appropriate circumstances;
Enabling the Board to allow the term of a replacement recovery plan to extend beyond the end date of the original plan in certain circumstances; and
Enabling the Board to take into account voluntary employer guarantees in approving recovery plans.
It is likely that, as a result of recent improvements in investment markets, the solvency of most schemes has improved. However, the situation is still a cause for concern, and I encourage scheme trustees and sponsoring employers to continue to work with the Pensions Board to address funding issues as a matter of urgency.