Chapter 4 - Security Of Private Pension Provision

Question 0

Who has the power to determine investment strategy and appoint investment managers under the TD&R?

Answer 0

Usually the trustees, but historically may have been subject to consent of employer.

Legislation now places power with the trustees subject to consultation with the employer.

Question 1

List the powers and duties set out in the trust deed

Answer 1

Investment of scheme assets;
Financing;
Scheme amendment and termination;
Benefit augmentation;
Transfers;
Administration;
Appointment and removal of trustees;
Trustee protections;
TK&U

Question 2

Who has the power to set the contribution rate under the TD&R?

Answer 2

The trustees, the employer, SA or various combinations.

Legislation places responsibility for the SFO assumptions with the trustees. So whatever the contribution rule says, the trustees must agree the level of contribution. They must consult with the employer in any case.

Question 3

If the SA has the power to set the contribution rate, what additional requirements are there?

Answer 3

The SA must certify the contributions are no lower than would have resulted if they were responsible for preparing the SOC, SFP and RP.

Question 4

What is required between triennial valuations?

Answer 4

Annual actuarial reports must be completed within 12 months of the effective date.

A SFS must then be issued within 3 months of the report deadline.

Question 5

What does the scheme specific funding requirement require of Trustees?

Answer 5

Trustees must instruct the SA to perform an actuarial valuation which includes the solvency of the scheme.

TAS also requires a neutral estimate.

This must be done every 3 years with the formal report issued within 15 months of the valuation date.

Question 6

What should the SFP include?

Answer 6

Funding objectives and additional objectives;
Circumstances someone other than the employer may contribute;
Circumstances payments may be made out of scheme to employer;
Discretionary powers to increase benefits and allowance for this ok funding decisions;
Intervals at which valuations will be obtained;
Circumstances additional valuations may be required;
Policy on reduction of CETVs;
RP period

Question 7

What if the trustees and employer cannot agree a SFP if required?

Answer 7

They must notify tPR.

Question 8

How does the PA04 aim to protect members?

Answer 8

It sets a long term scheme specific funding standard in the context of a strong regime of transparency and disclosure.

Question 9

What is the SFO?

Answer 9

The scheme must have appropriate and adequate assets to meet its technical provisions.

Question 10

What are the technical provisions?

Answer 10

The SA assessment calculated on scheme specific funding assumptions determined by the trustees of the amount required to meet the scheme liabilities as they fall due.

Question 11

When did the SFO begin to apply?

Answer 11

For valuations from 22 September 2005 (previously the MFR applied).

Question 12

What are the signatory requirements for a Schedule of Contributions?

Answer 12

Certified by SA as being adequate to meet the SFO and consistent with the SFP (and no less than they would have chosen if required);
Signed by Trustees (and Employer if required).

Question 13

What must the Recovery Plan set out?

Answer 13

Method and timescale for reaching full funding;
Date by which expect shortfall to be eliminated;
Date by which half of the RP contributions will be paid (unless RP period less than 1 year).

Question 14

What must Trustees consider when setting the RP?

Answer 14

Employer covenant;
Asset and liability structure;
Risk profile;
Liquidity requirements;
Age profile of members.

Question 15

What indicators do tPR use to identify high risk schemes?

Answer 15

Whether contributions reflect the investment risk / employer covenant;
Specific issues regarding sponsor covenant;
Shape of the RP;
Investment performance assumption;
Significant issues from previous valuation submissions.

Question 16

When must the SOC and RP be sent to tPR?

Answer 16

Within 5 days of certification.

Question 17

If the trustees and employer fail to reach an agreement on any of the valuation items, what may tPR do?

Answer 17

Reduce future benefit accrual;
Give directions in relation to the SFO and RP;
Impose a SOC.

Question 18

What was the problem with the compensation fund that existed from April 1997?

Answer 18

It only covered loss due to fraud, theft and dishonest appropriation, and only if the employer was insolvent. Personal pension schemes were not covered.

Question 19

Who does the Fraud Compensation Fund cover?

Answer 19

Schemes where on or after 6 April 2005:
the employer is unlikely to be a going concern;
there is no likelihood of the scheme being rescued;
the value of the schemes assets has been reduced due to an offence involving dishonesty.

Question 20

What will the Fraud Compensation Fund do?

Answer 20

Compensate a fund for loss incurred, taking into account the change in asset value between the date of the fraud and the date of compensation.

Question 21

How is the Fraud Compensation Fund funded?

Answer 21

By a levy paid by all eligible schemes.

Question 22

What is the aim of the PPF?

Answer 22

To provide a minimum level of benefits to members of underfunded DB schemes where the employer is insolvent or at serious risk of becoming insolvent.

Question 23

What are the criteria for entry into the PPF?

Answer 23

Eligible for the PPF;
Not commenced wind up before 6 April 2005;
An insolvency event must have happened on or after 6 April 2005;
No chance of rescue;
Insufficient assets to secure benefits on wind up at least equal to the PPF benefits.

Question 24

What are the PPF benefits?

Answer 24

Members who have reached NPA or taken IHER receive 100% benefits (even if deferred);
Other members receive 90% accrued benefits;
Subject to compensation cap;
25% can be taken as TFC;
Post 1997 pensions increase at CPI 2.5%;
Pre 1997 pensions are nil increasing;
Pre 2009 deferred pensions revalue at CPI 5%;
Post 2009 deferred pensions revalue at CPI 2.5%;
Spouses pension is 50% post commutation pension at date of death;
Safety valve - PPF change above in event of large claim!

Question 25

When might a scheme be refused entry into the PPF?

Answer 25

If the employer is regarded as organising its affairs so as to impose a liability on the PPF.

Question 26

What if the PPF consider the scheme assets sufficient to buy out the protected liabilities?

Answer 26

The trustees will be obliged to do so and the PPF may direct them how to do this.

Question 27

What if the trustees believe that they are unable to buyout the liabilities?

Answer 27

They can request within 3 months that the PPF reconsider its decision. The request must be accompanied by an auditor’s valuation of the scheme and insurer quotations.

Question 28

What is the name of the valuation undertaken to determine if a scheme has sufficient funds?

Answer 28

A Section 143 valuation.

Question 29

What are the two levies used to meet the cost of the PPF?

Answer 29

Scheme based and risk based levies.

Question 30

What was the total levy estimated to be required for 2013/14?

Answer 30

£630m

Question 31

What is the legislative restriction on the total levy estimate?

Answer 31

It can not be more than 25% higher than the previous year.

Question 32

How is the scheme based levy calculated?

Answer 32

UL x SLM
UL = unstressed liabilities;
SLM = scheme based levy multiplier (0.000056 for 2013/14).

Question 33

What are the unstressed liabilities?

Answer 33

liabilities calculated on a S179 bases, smoothed over 5 years.

Question 34

How is the risk based levy calculated?

Answer 34

U x IR x LSF
U = underfunding;
IR = measure of insolvency risk;
LSF = risk based levy scaling factor (0.73 for 2013/14).

Question 35

What cap is imposed on the risk based levy?

Answer 35

0.75% of the unstressed liabilities.

Question 36

How is underfunding measured?

Answer 36

On a S179 basis, as the higher of the smoothed and stressed deficits.

Question 37

How often must a scheme submit a S179 valuation?

Answer 37

Every 3 years, with submission within 15 months of the effective date.

Question 38

What is the stressed deficit?

Answer 38

Stress tests are applied to the smoothed assets and liabilities.

Question 39

How are the liabilities stressed?

Answer 39

Reduce discount rate by 2/3% and (for IL liabilities) increase inflation by 1/3%.

Question 40

How are the assets stressed?

Answer 40

Asset classes are adjusted according to specific factors. The factors increase the value of assets well matched to pension scheme liabilities and reduce the others. So a higher levy requirement exists for schemes with unmatched assets.

Question 41

When might a bespoke analysis be required to break down asset classes further?

Answer 41

Where liabilities are over 1.5m and the levy is significant, or where a smaller scheme has a risk reducing LDI strategy which they want to allow for.

Question 42

How is insolvency risk measured?

Answer 42

It is calculated with reference to failure scores published by D&B and ranging from 1-100 and split over ten bands. Each band has a corresponding levy rate reflecting the probability of insolvency relative to other companies.

Question 43

What are the 3 types of contingent asset?

Answer 43

A - parent or group company guarantees;
B - security over cash, UK real estate and securities;
C - letters of credit and bank guarantee.

Question 44

Where are the contingent assets taken into consideration?

Answer 44

A - in the IR;

B&C - in U.

Question 45

What else can serve to reduce U?

Answer 45

Deficit Reduction Certificates.

Question 46

How are schemes where the employer became insolvent before 2005 protected?

Answer 46

They are sometimes eligible for the Financial Assistance Scheme.