Closing a Final Salary Pension Scheme - Buyout Funding?

by Brian Spence   •  
Blog
In these difficult times many employers operating final salary pension schemes are closing their scheme to future accrual of benefits. Some lawyers and actuaries have expounded a theory that suggests that since this brings the eventual wind-up closer (albeit it may still be decades away) the trustees should adopt a buy-out funding target.The result is that the employer trying to responsibly limit the open ended liability that it has to fund could face more a much more onerous funding target.  While the Pensions Regulator seems more lenient these days in terms of recovery periods there is almost certainly going to be an increased need for cash as a result of adopting this radically more onerous funding target. A survey by the ACA shows that  48% of schemes among smaller companies are closed to accrual.  There is no way many of these schemes would have closed if the employers had to switch to buy-out funding. There seems to be no basis in legislation or case law for this approach and the suggestion that a responsible employer that is seeking to keep its liabilities under control should be penalised by asking them to fund a buy-out deficit quickly seems muddle headed and unconstructive in recessionary times.

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