Under the Scheme Funding Objective (SFO) where there is a funding shortfall at the effective date of the actuarial valuation, the trustees must aim to achieve full funding in relation to the technical provisions.

The Scheme Funding Code of Practice states that “the Trustees should aim for any shortfall to be eliminated as quickly as the employer can reasonably afford.” This requires the trustees to assess the strength of the sponsoring employer’s covenant. It also states that trustees “should take into account [amongst other things] the employer’s business plans and the likely effect any potential recovery plan would have on the future viability of the employer”. With this, the Pensions Regulator (TPR) aims to help employers eliminate funding deficits as soon as reasonably possible whilst maintaining an environment that supports the employer’s business.

TPR’s statement, “How the Pensions Regulator will regulate the funding of defined benefits” was updated in September 2008. In it, it explains that its approach is to:

  • promote, through its code of practice and other forms of guidance and communication, good understanding by trustees, employers and their advisers of the matters they should consider when they agree their scheme’s statutory funding objective and any recovery plan needed to raise funding to that level;
  • intervene in those schemes where the funding objective is imprudent or the recovery plan is inappropriate, so as to protect members’ benefits and/or reduce risks to the Pension Protection Fund;
  • be transparent with trustees, employers and their advisers about the ways in which we intend to focus our resources on schemes that are likely to pose the greatest risk.

Recovery Plan Trigger

The circumstances where a scheme will trigger an investigation by TPR will include:

  • the recovery plan is longer than ten years;
  • the recovery plan appears to be significantly back-end loaded (higher contributions towards the end); or
  • assumptions underlying the recovery plan, especially investment assumptions appear inappropriate.

TPR may also look at pension schemes where it believes that the employer can reasonably afford to pay off the shortfall more quickly, but in such cases it will focus its resources on schemes with weak or weakening employers.

Impact of the economic downturn

TPR believes that the scheme funding regime is sufficiently flexible to allow a balance to be struck between trustees securing sufficient deficit payments for the scheme and sponsoring employers staying afloat.

Although longer recovery plans still trigger greater scrutiny, TPR recognises that they may be suitable in certain circumstances.