TKU: Statement of funding principles

July/August 2010

The aim of the Statement of Funding Principles (SFP) is to provide a written statement of the trustees’ or managers’ policy for ensuring that the scheme’s statutory funding objective is met. It is also a record of the decisions taken by the trustees regarding the valuation methods and assumptions to be used in calculating the scheme’s technical provisions.

The SFP further records the decisions taken by the trustees as to the period within which, and manner in which, any failure to meet the statutory funding objective is to be remedied.

As such, the SFP documents the decisions which are at the heart of the scheme’s actuarial valuation process and provides a record of these for both the trustees and the members of the scheme, who are entitled to see the document if they request a copy.

12A ROLES AND RESPONSIBILITIES FOR PREPARING THE SFP

The SFP must be reviewed and if necessary, revised within 15 months of the effective date of the actuarial valuation. The responsibility for preparing and reviewing it sits with the trustees. However the scheme actuary must provide advice on the contents of the SFP. Normally, the agreement of the employer to its contents will also be required and the document is jointly signed by both the employer and the trustees.

12B THE SCHEME’S STATUTORY FUNDING OBJECTIVE

Scheme funding legislation sets out a statutory funding objective which is that the scheme must have sufficient and appropriate assets to cover its technical provisions. Technical provisions are an estimate of the value placed on the benefits already built up in the scheme, calculated using the method and assumptions adopted by the trustees. If this statutory funding objective is not met then the SFP sets out how the position is to be rectified.

The trustees can also choose to adopt a secondary funding objective different from the statutory funding objective. For example, some trustees may wish to decide on a target such as ensuring a certain percentage of the liabilities are met, assuming that the scheme is to buy out in a number of years. The legislation does not preclude such objectives provided they are in addition to, and not incompatible with, the main statutory funding objective.

12C CONTENT OF THE SFP

The content of the SFP is prescribed under regulations. In addition to stating the decisions about the method and assumptions and the trustees’ policies on various other matters such as how they would eliminate any shortfall between the assets of the scheme and the technical provisions and the period over which the shortfall will be eliminated, it must also include the following:

(a) any funding objectives provided for in the rules of the scheme or which the trustees or managers have adopted, in addition to the statutory funding objective;

(b) if there are arrangements for a person other than the employer or a member of the scheme to contribute to the funds held by the scheme, and the circumstances in which any such arrangements apply;

(c) whether there is a power to make payments to the employer out of funds held for the purposes of the scheme and, if there is such a power, the circumstances in which it may be exercised;

(d) whether there are discretionary powers to provide or increase benefits for, or in respect of, all or any of the members. If there are such powers, the extent to which they are taken into account in the funding of the scheme;

(e) the policy of the trustees or managers regarding the reduction of the cash equivalent of benefits which have accrued to or in respect of members on account of the state of the funding of the scheme, and

(f) the intervals at which the trustees or managers will obtain actuarial valuations in accordance with section 224(1)(a) of the 2004 Act, and any circumstances in which they might obtain additional actuarial valuations.

The SFP may also include other matters not required by the regulations that the trustees consider appropriate and relevant.

Statements may differ in the degree to which the choice of assumption, both financial (such as the discount rate(s)) and demographic (such as the choice of mortality table), is documented. There is a potential spectrum from simply listing the assumptions that have been used to providing full reasons for the choices made.

The Pensions Regulator has said it believes that, in order to comply with the spirit of the legislation and best practice, the statement should include an explanation of the trustees’ reasoning behind the assumptions chosen. In addition, paragraph 38 of Code of Practice 3 recommends that trustees “should also keep clear records of the material matters they took into account during their deliberations upon the key scheme funding issues and their reasons for making these decisions.”

However, there is no specific requirement for the SFP to include the reasons for choosing each and every assumption.

It is considered good practice for the trustees and scheme actuary to discuss the way that the assumptions are documented, taking into account the Regulator’s guidance and recommendations and the other documents produced as part of their scheme funding process.

12D MONITORING THE SFP

The trustees are required to take actuarial advice before agreeing to any changes to the method and assumptions set out in the current SFP. Such changes would need to be agreed by the trustees and the employer and justified by a change in legal, demographic or economic circumstances.

The SFP must be reviewed at each actuarial valuation. The trustees may also review the SFP at any other time and should consider doing so where there is a serious change in the employer covenant or where a change in the scheme rules makes such a change necessary. However if the trustees are advised that the impact of events on the funding level of the scheme is likely to be material, it will usually be appropriate to commission an early actuarial valuation. The Regulator has the power to require the trustees to amend a SFP.

Much of the contents for the SFP are specified in legislation. However, the act of documenting the assumptions gives more ownership of these assumptions to the trustees rather than them simply being seen as the remit of the actuary. The SFP serves as a document which can ensure consistency of approach from valuation to valuation. Establishing clear principles by which assumptions will be set and decisions taken on the recovery of deficits is clearly extremely useful though most trustees and employers will wish to ensure that these principles allow sufficient flexibility in the event that conditions or circumstances change.

Joanne Livingstone is principal and technical director at Punter Southall