Joint Committee on Statutory Instruments Twenty-Fifth Report


APPENDIX 1

Memorandum from the Department for Work and Pensions

OCCUPATIONAL PENSION SCHEMES (MINIMUM FUNDING REQUIREMENT AND MISCELLANEOUS AMENDMENTS) REGULATIONS 2002 (S.I. 2002/380)

1. The Committee has asked the Department to submit an Explanatory Memorandum on the above mentioned Instrument dealing with the following point:

Explain the general effect of the amendments made by regulation 2 and why this is not explained in the Explanatory Note to the instrument as required by paragraphs 2.73 and 2.74 of Statutory Instrument Practice.

Introduction

2. Regulation 2 of S.I.2002/380 amends various provisions of the Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 (S.I.1996/1536) ("the principal Regulations"). The principal Regulations set out the detail of the statutory requirement imposed on certain occupational pension schemes (known as "defined benefit schemes") by the provisions of sections 56 to 60 of the Pensions Act 1995 ("the Act"). This statutory requirement is called the Minimum Funding Requirement ("MFR"). The legislation underpinning the MFR took effect in April 1997. The MFR has effect in relation to any actuarial valuation of the assets and liabilities of a scheme to which section 56 of the Act applies taking place on or after 6th April 1997. The MFR legislation is also subject to various modifications during a transitional period which was due to expire on 5th April 2002.

3. The actuary to schemes to which the MFR applies is required to test, using a prescribed method, whether the assets held by the scheme are sufficient to meet the scheme's liabilities to pay benefits that have already accrued to scheme members. Assets and liabilities must be valued by the scheme actuary in accordance with the detailed requirements of the principal Regulations and in accordance with guidance prepared by the Faculty and Institute of Actuaries and approved by the Secretary of State. The legislation also imposes requirements on schemes that are underfunded by reference to the MFR test to make good the underfunding within prescribed periods known as "deficit correction periods".

General effect of amendments made by regulation 2 of S.I.2002/380

4. The principal measures introduced by regulation 2 of S.I.2002/380 are-

  • an extension of the deficit correction periods for underfunded schemes;

  • removing the requirement on actuaries to fully funded schemes to certify on an annual basis the adequacy of the rates of contributions to the scheme which are set out in the schedule of contributions for the scheme.

5. Regulation 2 of S.I.2002/380 also makes some other changes to various provisions of the principal Regulations.

Paragraph (1) of regulation 2 introduces the changes made by regulation 2.

Paragraph (2) of regulation 2 extends the transitional period to 31st December 2004.

Paragraph (3) of regulation 2 makes it clear that a scheme's liabilities in respect of pure money purchase benefits are not to be taken into account in determining whether the scheme operates a gilts matching policy.

Paragraph (4) of regulation 2 requires the scheme actuary to carry out a funding calculation by reference to the position 7 days before signing a certificate of the adequacy of the scheme's schedule of contributions, rather than being required to determine the funding position on the same day that he signs that certificate. There are several references to this date throughout the principal Regulations which are similarly amended by paragraphs (5), (6), (7), (10), (11), (12), and (13).

Paragraph (5) of regulation 2 extends to 10 years the period within which schemes which are underfunded on the MFR basis must reach 100% MFR funding.

Paragraph (6) of regulation 2 clarifies the payments and contributions which must be shown separately on the scheme's schedule of contributions.

Paragraph (7) of regulation 2 removes the requirement for the adequacy of a scheme's schedule of contributions to be actuarially certified on an annual basis, provided that the scheme is not less than 100% funded on the MFR basis both at the effective date of the scheme's last MFR valuation and at the relevant date applying to the subsequent schedule of contributions. This provision also removes the requirement for certification of the schedule of contributions within a year of the previous certification where a scheme has obtained a full MFR valuation in the intervening period.

Paragraph (8) of regulation 2 extends to 3 years the period within which schemes less than 90% funded on the MFR basis must reach 90% MFR funding.

Paragraph (9) of regulation 2 requires MFR failure reports to be prepared within 3 months of the end of the relevant period.

Paragraphs (10) to (13) of regulation 2 contain various amendments reflecting the change to the effective date of the scheme actuary's funding calculation in certifying schedules of contributions, as referred to above (paragraph (4)).

Why an explanation of the general effect of the amendments made by regulation 2 of S.I.2002/380 was not included in the Explanatory Note to that instrument as required by paragraphs 2.73 and 2.74 of Statutory Instrument Practice.

6. The Department is aware of the requirements of paragraphs 2.73 and 2.74 of Statutory Instrument Practice and did consider the inclusion of an explanation of the general effect of the amendments made by regulation 2 of S.I.2002/380 in the Explanatory Note to that instrument. However, it was decided not to include such an explanation in an effort to keep the Explanatory Note brief and in view of the fact that regulation 2 contains detailed amendments to technical requirements in the principal Regulations which do not easily lend themselves to brief explanation.

7. However, the Department accepts the point made by the Committee and agrees that the Explanatory Note did not deal with the amendments made by regulation 2 as fully as it might. The Department will arrange for the Note, as it will appear in the Annual Volume, to be amplified accordingly.

25 March 2002


 
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