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Scheme funding

The level of scheme funding is calculated by comparing the value of the scheme’s assets with the value of its liabilities. Calculating the value of the liabilities (how much money needs to be paid out as benefits due to members and beneficiaries) is a very complex process, but the overall concept of scheme funding is simple: if there are sufficient assets (in whatever form e.g. equities or bonds) to cover the future liabilities of the scheme, then it is 100% funded on an ongoing basis.

What is an actuarial valuation?

This is an exercise conducted by the Actuary to determine the funding level of a defined benefit pension scheme. This involves comparing the value of the assets and the liabilities, from which the Actuary recommends a future contribution rate. The agreed contribution rate is paid by the Company after deducting the contribution rate paid by the active members.

There are different methods for calculating the funding level. These include:

ongoing basis which assumes the scheme is continuing and all future benefits of the beneficiaries are paid
discontinuance basis which assumes the scheme is wound up on the valuation date and all members’ benefits are secured with individual insurance policies or transferred to another pension arrangement

The Actuarial Valuation Report is available on request from the Pensions Administration Team.

How often is there an actuarial valuation?

An actuarial valuation is usually undertaken every three years, but more often if there are significant changes to the scheme or the membership e.g. if the benefit structure is changed or the membership profile changes as a result of acquisitions or disposals. An approximate funding update (Actuarial Report) is also prepared by the Actuary in each of the intervening years between formal valuations.

What is meant by the SOCPF’s liabilities?

This is how much the SOCPF has to pay out in benefits to all members and their beneficiaries.

How are the liabilities calculated?

The Actuary analyses data on all SOCPF members and uses it to make demographic assumptions, including when members retire, how long they live and whether they leave dependants.

The Actuary also makes a number number of financial assumptions such as the long-term rate of inflation, pay increases, and investment returns on the scheme’s assets.

The demographic and financial assumptions are agreed by the Trustee and the Company, having taken advice from the Actuary.

How are the assets calculated?

These are usually taken at their market value as at the valuation date, as stated in the SOCPF Annual Report of the Trustee and Financial Statements

What if the scheme assets are less than the liabilities?

If there are insufficient assets to meet the liabilities, the Trustee consults with the Company and prepares a recovery plan, to address the shortfall as quickly as possible.