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Home > Frequency and Main Features of an Actuarial Valuation

14.0 Introduction

This section includes:


purposes of a valuation




funding methods


economic and demographic assumptions


valuation of assets and liabilities


minimum funding requirement (MFR)


scheme-specific funding


risks associated with funding, and


multi-employer withdrawal arrangements.


Purpose of an actuarial valuation

In law a Defined Benefit scheme has to conduct an actuarial valuation at least once every three years, due to the way benefits are funded. The trustees and the sponsoring employer will need to know the ‘solvency’ position of the fund had it wound up on the valuation day (i.e. has the fund enough invested assets to meet its liabilities on benefits accrued to date). They will also need to know the scheme's ongoing funding position (which determines the level of future contributions payable by the employer(s)).

The results of an actuarial valuation include an estimate of the cost of future benefits (on the assumptions used) and this leads to how much the employer should contribute to meet those benefits (and possibly also the members). The results will also report the position had the fund wound up on the valuation day. All these questions and others (including those relating to which actuarial factors to use) are answered by undertaking an actuarial valuation. Actuarial valuations are completed by the scheme actuary in accordance with guidance notes drawn up by the Actuarial Council, part of the Financial Reporting Council, effective 2 July 2012 [see 13.1.1].

Role of the Trustees 

Trustees have overall responsibility for making key decisions about the funding of the scheme. In carrying out their responsibilities, trustees are required to obtain advice from the scheme actuary and obtain the agreement of the sponsoring employer regarding levels of future contributions.

There may be some situations in which disagreements on funding cannot be resolved between the trustees and sponsoring employer. In these cases, if all other options have failed, The Pensions Regulator has a range of new powers designed to achieve such a resolution.

Code of Practice and guidance

Scheme-specific funding enables schemes to adopt funding strategies and contribution levels appropriate to their circumstances. The scheme-specific funding regime is governed by regulations issued under the Pensions Act 2004 supported by a code of practice issued by The Pensions Regulator. The code (Code 3 – Funding defined benefits [see 24.10.2(iii) and 14.7.1]gives practical guidance to both trustees and actuaries on complying with the regulations.

Trustees cannot ‘opt out’ of their responsibilities under the scheme-specific funding requirements. Where trustees do not take reasonable steps to comply, the Regulator has power to impose penalties and may, if necessary, replace trustees. The code of practice on funding gives trustees guidance on the steps they need to take in order to reach agreement with the employer before reporting to the Regulator.

The code is fairly robust about the process trustees and employers should undertake to reach agreement. Trustees may need more information about the employer’s financial position in order to reach an agreement and, if such information is not forthcoming, the Regulator might call for a skilled person report (SPR) from an independent accountant so that the employer’s ability to pay can be assessed.

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