Funding Deficit

Section 222 of the Pensions Act 2004 imposes the "statutory funding objective": "every scheme is subject to a requirement ('the statutory funding objective') that it must have sufficient and appropriate assets to cover its technical provisions," where "a scheme's 'technical provisions' means the amount required, on an actuarial calculation, to make provision for the scheme's liabilities." A funding deficit exists whenever a scheme's assets, valued and calculated in a prescribed manner, fall short of its technical provisions as so calculated. Section 223 requires trustees or managers to prepare, and periodically review and revise, a "statement of funding principles" — a written record of "their policy for securing that the statutory funding objective is met" — and the trustees or managers must prepare, and from time to time review and if necessary revise, a written statement of that policy, including the period within which, and manner in which, any failure to meet the statutory funding objective is to be remedied.

Where a valuation reveals a deficit, trustees must agree a recovery plan with the sponsoring employer setting out how and over what period the shortfall will be eliminated, typically through additional employer contributions, asset outperformance assumptions, or a combination of the two. The Pensions Regulator has powers to intervene where recovery plans are inadequate or contributions are not paid, and scheme funding has been subject to further reform (including scheme funding and investment strategy requirements) since the 2004 Act was first enacted.