Time limits for correcting minimum funding requirement deficits

United Kingdom

Legal requirements

From March this year, if the MFR funding level of a scheme is between 90% and 100%, broadly speaking the shortfall must be made up within 10 years. Where a scheme is below 90% funded, employers now have 3 years to bring the funding level up to 90%.

However, Opra may extend these periods. In the case of the period to bring the scheme up to 100% funded, an application must be made in writing to Opra showing that, broadly speaking one of the following applies:

  • there has been a substantial decrease in the value of the scheme assets as a result of an offence involving dishonesty,
  • as a result of exceptional general economic or financial circumstances there has been such a substantial decrease in the value of the scheme assets such that, unless an extension is granted, the level of contributions required would be such that the profitability of the employer's business would be seriously affected,
  • the employer proposes to make a contribution in cash to be raised by the sale of assets, but the formalities connected with the sale have been delayed, or
  • the scheme's liabilities have increased substantially.

In addition, Opra must also be satisfied that certain conditions are satisfied, for example that the employer’s business is likely to continue to operate.

Broadly similar provisions apply for an application for an extension to the 3 year period to make up a serious under provision.

Recent practice

Opra Bulletin 25 contains a case summary which throws some light on Opra’s current approach in relation to applications for an extension to such time limits.

An MFR valuation as at 31 March 2000 revealed a scheme to have a funding level of 92%. In order to restore full funding on an MFR basis by April 2007 (which was the requirement under the pre-March 2002 time limits), employer contributions would have had to increase from 7.5% to 14.4%. The employer, with the trustees’ consent, applied to Opra to extend the period to restore full funding to 18 years (the average working lifetime of the active members of the scheme) which would have required an employer contribution rate of 10.8%.

The employer’s application was made on the basis that scheme assets had performed less well than MFR index assets and there had been a substantial increase in scheme liabilities. It was also claimed that the increase in contributions required by the MFR would endanger company profitability.

In relation to whether there were grounds for making an application, Opra concluded that a substantial increase in the amount of liabilities of the scheme could be properly interpreted to include the acknowledged flaw in the MFR methodology, whereby even if liabilities were supported by matching assets, the MFR funding position could deteriorate.

In relation to the conditions which need to be satisfied for the application to be granted, the requirement that the business must be likely to continue to operate was considered. Opra concluded that did not mean that it was likely to continue to operate to the end of the extended period requested, as the applicants would be unable to supply evidence of this, but that it must be unlikely to become insolvent or cease operating in the near future.

The time period to restore the MFR funding level to 100% was extended to 18 years – considerably longer than even the 10 years now provided for in the Regulations.

Conclusion

The fact that Opra felt able to extend the period and openly referred to the "acknowledged flaw in the MFR methodology" indicates that Opra may be prepared to ease the way during these difficult times for final salary schemes. Employers facing impossibly high levels of contributions may wish to give some thought to applying for an extension.

For schemes considering an extension, Opra have just reissued their guide on making extension applications. It can be found at: http://www.opra.gov.uk/publications/notes/on9-01.shtml

For further information please contact Lucy Hamer on +44 (0)20 7367 3544 or at [email protected]