The law requires a salary-related pension fund to be able to meet its liabilities – that is, it should be able to pay the pensions and future pensions of its members.
But the precise way of measuring this has changed over time, as governments have tried to get the right balance between protecting scheme members and not making funding requirements so onerous that employers decide to close their schemes.
Since September 2005, there has been a 'scheme-specific funding' test. This will usually have to be agreed between the scheme trustees and the employer. It measures whether the scheme can meet its specific liabilities, unlike the previous 'one-size-fits-all' test that did not take account of real differences between schemes.
The Pensions Regulator has issued advice to employers on funding. It describes the requirement for employers to meet a ‘statutory funding objective’ and to work closely with the trustees to ensure that the scheme meets these funding requirements.
It is most likely that the employer will have to agree with the trustees a statement of funding principles; a schedule of contributions consistent with these principles; and a recovery plan setting out the steps that will be taken to address the shortfall where the statutory funding objective is not met.
Full valuations must be carried out at least every three years. If this shows a scheme does not have enough assets, the trustees must put in place a recovery plan. This must show how (and how fast) they will close the funding gap.
The recovery plan must be agreed within 12 weeks of a valuation, and sent to The Pensions Regulator. If the trustees cannot agree a recovery plan, they must call in the Regulator.