Under the Funding Standard provisions of the Pensions Act, the scheme actuary of a defined benefit scheme is required to prepare a valuation report of the assets and liabilities of the scheme at least every three years.  Actuarial funding certificates must be submitted to the Pensions Board on foot of these valuations.  Where a scheme cannot meet its liabilities at the date of the valuation, a funding proposal must be submitted to the Pensions Board within nine months after the effective date of the actuarial valuation.

In order to allow schemes adequate time to deal with their funding deficits in the context of rapid pension developments and volatile markets, the Pensions Board suspended the Funding Standard deadline in 2010.  However the Minister for Social Protection, Joan Burton, has recently announced that a revised funding regime will be introduced for defined benefit schemes by the end of this year. 

In the short term, the existing Funding Standard is to be restored for a three year period during which underfunded schemes will have to restore their funding levels to the current standard.  New funding proposals under the existing regime will continue to be accepted by the Pensions Board up to 12 noon on Friday 16 December 2011.  For later submissions, the Board expects to publish updated guidance by the end of the year in relation to applications under both Section 49(3) and Section 50/50A of the Pensions Act.  These updated guidelines will take account of the changes announced by the Minister and will inform trustees of schemes which are not in compliance with the Funding Standard of the dates by which recovery plans must be submitted to the Board. 

The Minister has also announced initial details of a revised Funding Standard which will require schemes to hold additional assets in excess of those required by the current Funding Standard as a risk reserve to provide an additional level of protection for the benefits of scheme members against future volatility in financial markets.  Schemes will have approximately 11 years (until 2022) to meet the new Funding Standard although it is not yet clear whether this timeframe will be generally available or only in limited circumstances approved by the Pensions Board. 

It is estimated that the provision of risk reserves will add a further 10% to scheme funding requirements.  However, schemes can consider a number of measures to adjust their asset base to satisfy the new risk reserve requirements, as follows:

• Schemes that move away from investing in equities towards bonds will be credited under the revised Funding Standard as the higher the holding in equities and similar assets, the more risk reserve is required
• The purchase of sovereign annuities will ease the funding liabilities on schemes and therefore reduce the level of risk reserves required and
• Where an employer is willing to provide a guarantee (which can be enforced), the possibility of accepting this alternative is being considered.

The Pensions Board is currently preparing revised guidelines to take account of the changes to the Funding Standard, and will also provide all the technical information needed by trustees and their advisers to prepare a recovery plan and to calculate their risk reserve.  Until much of the finer detail is available it will be difficult for sponsoring employers and trustees to fully assess the impact of the proposed changes.

Contributed by Michael Wolfe .