Deficits in scheme technical provisions
The trustees are required to develop recovery plan and submit to TPR
The recovery plan should take into account:
- The benefits available should the employer become insolvent.
- The period to eliminate any shortfall
- The impact to the employer of increased contributions and the plan for sustainable growth.
- If the employer can offer contingent security
There are few options available for deficit reduction:
- Increasing member / employer contributions
- Reducing / stopping future accrual
- Revise investment strategy
- Transferring existing company assets to the scheme
- Extending normal pension age / from 60 to 65
- Changing definition of pensionable salary
- For more serious reductions:
- Closing the scheme
- Stopping future accrual
- Replace with a DC pension
- Changing the basis for how future benefits are accrued.
Question - Use Your Note Taker To Jot Down Ideas / Calculations
Which of the following courses of action would have an immediate effect on the deficit of a defined benefit scheme?
a) Increasing employer contributions.
b) Changing a scheme’s investment strategy away from equities towards bonds.
c) Transferring existing company assets into the scheme.
d) Increasing employee contributions.
e) Reducing future benefit accrual.
A, C & D)
Moving away from equities to bonds may limit the extent to which the deficit can increase if market conditions are poor, but this would not have an immediate effect. Reducing future benefit accrual will not have an immediate effect, but it will reduce ongoing costs, which may make the recovery plan more affordable.