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Pensions News


Re-introduction of the Funding Standard

When?

The Funding Standard has been re-introduced with effect from 1 June 2012

When do you need to submit a Funding Proposal?

If your scheme is underfunded you will be required to submit a Funding Proposal to the Pensions Board with submission deadlines falling between 31 December 2012 and 31 May 2013 depending on your scheme renewal date.

Comment – this does not give Trustees and Plan Sponsors much time to meet their obligation to submit a Funding Proposal. Given the significant changes to the Funding Standard (outlined below), it is important for Trustees and Plan Sponsors to engage with their respective advisers as soon as possible. Plan Sponsors will need to consider the appointment of independent advisers as the objectives of Trustees and Plan Sponsors may not be aligned leaving much scope for conflict.

What has changed?

The two main changes to the Funding Standard relate to risk reserves and sovereign annuities/bonds.

Risk Reserves

With effect from 1 January 2016, schemes must hold additional assets in the form of a risk reserve. The amount of the risk reserve required will be scheme specific and will depend on the mix of assets held and the characteristics of the scheme liabilities.

The risk reserves must be funded or covered by a legally enforceable employer undertaking (with can either be secured on unsecured).

If schemes are reducing benefits under Section 50 of the Pensions Act, the requirement to hold risk reserves comes into effect immediately.

Comment – the requirement to hold risk reserves will put more financial pressure on pension schemes and will undoubtedly force some schemes to wind up. While the possible use of an employer undertaking is welcome, the Pensions Board will only allow unsecured undertakings from employers with investment grade credit ratings. This will significantly reduce the number of schemes who can avail of this option.

Sovereign Annuities and Sovereign Bonds

Schemes which hold EU sovereign bonds or sovereign annuities can reduce the value placed on pensioner liabilities, while also passing some risk from active and deferred members to pensioners. In order to avail of this option, Trustees must pass a formal resolution that they will use sovereign annuities in the event of a scheme wind up and also notify all members of the implications of purchasing sovereign annuities.

Comment – while the introduction of sovereign annuities and sovereign bonds is a welcome move, the Sovereign Annuity market is in its infancy and it is difficult at this stage to evaluate the impact of this on scheme liabilities. The impact of holding sovereign bonds has also been reduced somewhat by the requirement to diminish the reduction in the value placed on pensioner liabilities to 5% by the end of the term of a Funding Proposal.

Other Changes

The period of a funding proposal can be extended to the later of 31 December 2023 or 6 years from the effective date of the funding proposal, by application to the Pensions Board. The maximum investment return assumption to be used is 6% p.a. before expenses and the investment strategy must be altered so that schemes hold a sufficient weighting of bonds and cash to match the pensioner liabilities at the end of the funding proposal.

Where a funding proposal goes off track, a new funding proposal will not be required if the scheme is projected to meet the Funding Standard within 2 years of the end of the original funding proposal.

Finally, there are new requirements placed on Trustees to notify the Pensions Board of non-compliance with certain terms of a funding proposal.

Comment – these additional requirements will reduce the assumed investment return that can be used in a funding proposal which will drive contributions up further or require bigger reductions in benefits. The introduction of the new 2 year extension for off track funding proposals is to be welcomed and will allow schemes some breathing space if funding proposals are marginally off track.

Conclusions

The new funding standard rules are far more onerous than the rules that were previously in force. This will place additional financial strain on schemes which are already struggling in the current volatile economic environment.

Given the complexity of the new rules and the very tight deadlines for submission of funding proposals it is vital that Trustees and Plan Sponsors commence work as soon as possible. Both parties should ensure that they are obtaining independent advice as much conflict is expected due to the potential need for significant benefit reductions and increased funding demands on Plan Sponsors from Trustees.



If you would like to discuss how we can help, please contact Joe Byrne, or request a call back.

Other services that may interest you:

Pensions Restructructing and Plan Reviews

Accounting Disclosures

Risk Management

Employers Covenant Review

Dispute Resolution

Closed DB Schemes - Managing Your Escape Route
Joe Byrne's presentation to the IAPF Trustee Network.
Budget 2013 Comment
Review of changes affecting pensions, and the extension of funding proposals deadline.
Funding Standard Re-introduced
New deadlines, risk reserve and sovereign annuities.