The Pensions Regulator has issued a statement cautioning against the practice of allowing a payment made under a schedule of contributions to discharge part of a ‘section 75’ employer debt (and vice versa). The Regulator takes pains to stress that the scheme funding and employer debt requirements are entirely distinct, and that payments made in accordance with one do not discharge obligations created under the other. This is not a policy change: a similar warning is stated, more briefly, in older guidance. The Regulator is concerned that double- counting may (amongst other things): l leave amounts due to the scheme unpaid l be treated as an agreement to compromise an employer debt, thereby disqualify the scheme from the PPF l obstruct proper consideration of the effects of employer departure on the scheme’s sponsor covenant. In particular, where scheme funding
payments are accepted as discharging employer debt obligations, it may circumvent the conditions that must be met before a section 75 debt can be modified. Agreements made in advance about the way in which payments will be treated could also fetter trustees’ discretion. The Regulator’s basic underlying points seem valid: an employer debt is calculated on the basis of the circumstances that apply at a particular instant, and the trustees must decide the most appropriate way of dealing with it; and
Money purchase illustrations standard under review
The Financial Reporting Council (FRC) proposes to update its actuarial standard Technical Memorandum TM1: Statutory Money Purchase Illustrations (AS TM1) to align it with the new disclosure regulations that will come into force on 6 April 2014. An exposure draft of the proposed standard is available on the FRC’s web site, and responses had to be submitted by 13 December 2013. The new legislation will, amongst other things, relax the rules governing statutory money purchase illustrations (SMPIs) so that they can be more closely attuned to the real-life choices that scheme members make. Accordingly, AS TM1 is likely to be changed so that (briefly summarised) it enables (but will not require) trustees and other pension providers to produce SMPIs on the basis that members will take pension commencement lump sums, will buy annuities that are not inflation-linked, and will choose not to purchase a dependants’ annuity.
As for the technicalities, the FRC proposes that the interest rate assumed when estimating non-increasing annuities should be derived from fixed-interest gilt yields. Annuities that increase at rates that are not inflation linked should be calculated in a manner consistent with the methods used to estimate flat-rate and inflation-linked annuities. The FRC intends to conduct a more comprehensive review of the actuarial assumptions used in AS TM1 in 2014. The exposure draft document says more than once that SMPI providers should ensure that their illustration systems can be readily updated to incorporate any changes to the prescribed assumptions.
DC governance code in force
The Pensions Regulator’s code of practice, on Governance and Administration of Occupational Defined Contribution Trust-based Pension Schemes, came into effect on 21 November 2013. The code provides advice on compliance with statutory obligations about trustee knowledge and understanding, internal controls and investment. Supplementary regulatory guidance, covering non-statutory aspects of defined contribution (DC) governance, has also been published.
arrangements for ongoing funding should be reconsidered as a result of an employer departure. However, some lawyers have questioned the basis for the assertion that the pensions legislation does not allow ‘double-counting’. It is potentially misleading, in at least one sense. The employer debt rules say that amounts that have fallen due to be paid under a schedule of contributions should not be treated as assets of the scheme if they are “unlikely to be recovered without disproportionate cost or within a reasonable time”; a reciprocal provision about ‘bad’ employer debts appears in the funding legislation. By implication, where payment of the debt (or overdue contribution treated as a debt) is expected in due course, it should be taken into account as an asset, reducing the scheme deficit. In those circumstances, not taking the payment due under the other piece of legislation would result in double-counting, to the disadvantage of sponsors.
2013 ‘Purple Book’
The Pensions Regulator and the Pension Protection Fund (PPF) have published the eighth edition of their ‘Purple Book’, which looks at the risks faced by defined benefit (DB) schemes (predominantly in the private sector) in the year ending March 2013. It is based on the information provided by the returns submitted by 6,105 schemes, covering 11.4 million members, using the Regulator’s online Exchange system. Some points of note are that:
l the percentage of schemes open to new members has remained stable at 14% since 2012, though there has been a slight increase in the percentage of schemes closed to future accrual (30%), compared to 26% last year) l the aggregate financial position at 31 March 2013 was a deficit of £210.8 billion l the number of schemes that had their risk-based levies capped in 2013 is 427 (down from 626 in 2012) l the number of recognised contingent assets has reduced slightly from around 900 in 2012 to approximately 830 l for the first time since 2008, the average allocation of assets to UK equities is smaller than the allocation to overseas equities.
| Page 2
| Page 3
| Page 4