Changes to Defined Benefit Pension Provision - November 2011

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The Government has approved a number of changes to defined benefit (DB) pension provision to help ensure its sustainability, enhance the security of member benefits and increase equity between members of DB schemes, as follows:

  1. The existing Funding Standard (amended to give credit for the purchase of sovereign annuities) will be restored for a three year period. Details will be announced by The Pensions Board.
  2. The Funding Standard will be reformed and strengthened by requiring DB pension schemes to hold a risk reserve as a protection against future volatility in the financial markets. Ultimately, schemes will need to be able to meet the requirements of the new Funding Standard in 11 years (by approx. 2022).
  3. The way in which pension scheme accrued benefits are revalued will be changed to ensure equity between those who have left the scheme (deferred members) and existing employees (active members).
  4. The priority order in which funds are disbursed when a scheme winds up in deficit will be changed. Specifically, a threshold will be introduced which will change the 100% priority given to pensioners. This will allow for a better return to existing and former employees who have not yet retired.
  5. The Pensions Board will be given powers to wind up schemes in certain limited circumstances.

Guidance for schemes on the operation of sovereign annuities is available on the Pension Board website. This will give insurance companies guidance on the operation of the sovereign annuities, and enable them to develop and issue such contracts. The availability of sovereign annuities will provide scheme trustees with further options when managing their schemes.

Legislation will be introduced to implement these changes over the coming months.

Last modified:11/04/2012

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