The Minimum Funding Requirement (MFR), the statutory basis of funding defined benefit schemes since April 1997, has been succeeded by a new funding requirement, brought in by the Pensions Act 2004. The new funding basis applies to all valuations which are based on an effective date of 23 September 2005 or later. The new requirement, known as ‘scheme-specific funding’, allows trustees to take account of the particular circumstances of their own scheme in setting their funding plan. Trustees are expected to determine the scheme’s actuarial assumptions and methods used and agree with the sponsoring employer the period over which liabilities will be fully funded. Neither of these aspects was possible under MFR. Trustees are expected to take actuarial advice before making their funding decisions and, in most cases, will agree their decisions with the sponsoring employer. Where agreement cannot be reached with the employer (after formal mediation if necessary), trustees and employer are expected to report to the Pensions Regulator and proposals on the action to be taken will be brought to resolution.

Why was change needed?
MFR had been widely criticised since its introduction. It had not worked as intended. It had increased regulation and costs for sponsoring employers, without delivering the level of security which many people expected. It also inhibited investment decisions by some schemes, causing them to focus on meeting the conditions of the MFR, rather than on developing an appropriate funding strategy for meeting their specific pension commitments.

Pension Protection Fund Levy Valuation For the purpose of calculating the scheme’s risk based Pension Protection Fund (PPF) levy, the scheme actuary will complete a special valuation called a section 179 valuation under the Pensions Act 2004. Its results could be used by the PPF to set the scheme’s risk-based levy. Schemes may choose when to provide their first PPF levy valuation but it should be completed no later than 6 April 2008. Valuations may be submitted regularly to the PPF though not more than three years apart. The most recent valuation information will be used to calculate the risk-based levy for the year commencing the following April. For schemes that have yet to submit a PPF levy valuation, their risk-based levy will be based on their latest MFR valuation results, adjusted to the PPF basis using an approximate approach.