The Legal 500

Increasingly, employers need to get involved in the contribution setting process to protect their interests. That process is now largely governed by statute and many employers are going through it for the first time. What follows is a summary of those requirements from an employer's perspective.

Statutory funding objective and technical objectives

The statutory funding objective is that a scheme must have sufficient and appropriate assets to meet its technical provisions. A scheme's technical provisions means an actuarial assessment of what is needed to meet the scheme's liabilities.

Statement of funding principles

The trustees are required to prepare a statement of funding principles, which sets out how they intend to meet the statutory funding objective. The statement must include the actuarial method and assumptions being applied to meet the statutory funding objective.

Valuation and Report

The scheme actuary is required to prepare a valuation and a report. The valuation, prepared at least every three years, values the scheme's assets and calculates its technical provisions. The report is prepared annually (unless the scheme has less than 100 members) and sets out those matters that have occurred since the last valuation that affect the scheme's technical provisions.

Recovery plan

If the valuation discloses that the statutory funding objective is not being met the trustees must prepare a recovery plan. The plan sets out the steps being taken to meet the statutory funding objective and the period within which it is to be achieved.

Employer Covenant

The trustees must form an objective assessment of the employer's financial position and prospects, as well as its willingness to continue to fund the scheme's benefits (the employer's covenant). This will inform decisions on both the technical provisions and on any recovery plan needed. The trustees' review will be coloured by any contingent asset arrangement.

Schedule of contributions

The trustees are also obliged to draw up a schedule of contributions. Where the valuation discloses that the statutory funding objective is not being met, the actuary must certify that the rate specified in the schedule is such that the statutory funding objective will be met by the end of the period specified in the recovery plan. In such circumstances, a copy of the schedule must be sent to the regulator. In addition, if the actuary cannot certify that the contributions will be sufficient to meet the statutory funding objective within the recovery period they must report it to the regulator. Any failure to make a contribution in accordance with the schedule must also be reported to the regulator by the trustees.

Employer agreement or consultation

You will see from the above summary that the trustees and the scheme actuary have a statutory obligation to meet certain requirements concerning the funding of the scheme. However, in meeting those requirements it is clear that there will be an impact on the employer, which is responsible for paying the contributions. The legislation also provides that the agreement of the employer is required on certain matters, including:

• the method and assumptions to be used in calculating the scheme's technical provisions;
• the statement of funding principles;
• the recovery plan; and
• the schedule of contributions.

If such agreement is not forthcoming, the trustees may amend the scheme to modify the future accrual of benefits and they must report the failure to agree to the regulator.

However, the agreement of the employer is only required where the agreement of the employer would be required to fixing the contribution rate under the scheme rules. If the scheme rules actually provide that the trustees have the power to set the contribution rate, the trustees will only need to consult with the employer, ie the employer's agreement is not required.

Powers of the Regulator

Where agreement, when required, is not reached between the trustees and the employer on the matters referred to above, the regulator has the following powers:

• to modify the scheme to reduce future accrual of benefits;
• to specify the actuarial assumptions used for the calculation of the technical provisions and the period of the recovery plan; and
• to impose a schedule of contributions.

The code of practice

In addition to the statutory requirements, the regulator has issued a code of practice relating to scheme funding. The code is directed at the trustees to assist them in complying with the statutory funding requirements. Broadly, trustees should aim for any shortfall to be eliminated as quickly as the employer can reasonably afford.

Funding Assumptions

It is important that employers do not just accept the assumptions being proposed by the scheme's actuary. These can have a significant impact on an employer's contribution rate. It is often worthwhile for an employer to get an independent actuary to comment on the assumptions being proposed and, where necessary, to negotiate on these.

Mark Catchpole, Head of pensions, Stephenson Harwood.

E-mail: mark.catchpole@shlegal.com.