How to manage scheme funding deficits
Produced in partnership with Alison Fleming of PwC and Stuart Foreman of Capita
How to manage scheme funding deficits

The following Pensions guidance note Produced in partnership with Alison Fleming of PwC and Stuart Foreman of Capita provides comprehensive and up to date legal information covering:

  • How to manage scheme funding deficits
  • Increasing the scheme’s assets
  • Reducing the scheme’s liabilities
  • Risk transfer

A pension scheme deficit exists when the scheme’s assets are less than its liabilities. There are a number of ways of measuring the deficit, eg:

  1. on the scheme funding basis—this is required by the Occupational Pension Schemes (Scheme Funding) Regulations 2005 and is the basis upon which future contributions are calculated

  2. on a solvency basis—liabilities are valued as the amount an insurer would require to fully insure the scheme benefits (also called the 'buy-out basis')

  3. on the Pension Protection Fund (PPF) basis—the value of assets and liabilities are based on standard assumptions and benefit structure set out by the PPF

  4. on an accounting basis—assets and liabilities are valued as required by an accounting standard

Where a deficit exists on the scheme funding measure, the trustees and sponsoring employer are required to put in place a recovery plan to remove the deficit.

For further information, see Practice Notes: The scheme-specific funding regime and Engaging in funding negotiations.

There are a number of options available to the trustees and sponsoring employer to manage a pension scheme deficit. These can be split into three broad categories:

  1. increasing the scheme’s assets

  2. reducing the scheme’s liabilities

  3. transferring the scheme’s liabilities or risks to a third party, eg an insurer

Increasing the scheme’s assets

The most common ways of increasing the scheme’s assets include:

  1. cash