Abstract
Abstract The last 12 years have seen the evolution of a new funding regime under the supervision of the Pensions Regulator. Over this period, there has been significant turbulence in financial markets, including record low interest rates. This paper takes a critical look at the development of funding approaches and methodologies over this period. It analyses the Pensions Regulator guidance and how scheme specific actuarial methods have emerged since the move away from the Minimum Funding Requirement in 2001 and the introduction of the Scheme Specific Funding Requirements in 2005. It asks whether these new methodologies have been successful from the perspective of members, trustees, employers and shareholders. At a time when actuarial valuation methodologies have faced considerable criticism, this paper aims to propose a pension funding methodology which is fit for purpose and also reflects the latest guidance from the Pensions Regulator on integrated risk management.
Highlights
The details implementing the Minimum Funding Requirement (MFR) were summarised in Occupational Pension Schemes (MFR and Actuarial Valuation) Regulations (1996), notably: (i) Section required trustees to obtain a valuation from an actuary on the MFR, generally on a triennial basis; (ii) Section required trustees to prepare, and an actuary to certify, a schedule of contributions payable over a 5-year period which ensured that schemes remained 100% funded throughout or, for those schemes that were at least 90% funded, reached 100% funding by the end of the 5-year period; (iii) Section 60 required the majority of schemes below 90% funded to reach the 90% level within 12 months, unless serious under-provision was identified
This paper considers the current environment for UK Defined Benefit (DB) Pensions, including consideration of the trends observed since the introduction of scheme specific funding in 2005
The statutory funding standard is similar to the old MFR basis in the United Kingdom and requires a pension scheme to have sufficient assets at the date of certification to provide for expenses of wind-up, purchase annuities for retirees and pay a standard transfer value for those not yet retired
Summary
Thornton & Wilson (1992) published a paper “A Realistic Approach to Pension Funding” advocating the need for realistic bases and an objective approach to determining “best estimate” assumptions They suggested that “typical funding bases often contain hidden and undesirable margins”. This paper aims to present an approach to funding pension schemes which meets TPR’s principles and at the same time gives a transparent response to those who have criticised pension funding methodology, either for being too prudent or not prudent enough. This paper tries to live up to Jeremy’s challenge by promoting an approach to the funding of pension schemes which is open, transparent, accountable and focussed on meeting customer needs
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