# What are an employer's DB legal responsibilities?



## Marianne (16 Jul 2011)

Does anyone know what an employer's legal responsibilities are in relation to funding a DB scheme?  

Many DB schemes are currently refusing to grant early retirement due to funding issues.  

This is entirely understandable in a situation where the employer's own finances are such that it can't afford to make sufficient contributions to the scheme to fund early retirements as well as all the other liabilities.

But what happens if the employer *can* afford to keep the scheme well-funded?  Is there a legal obligation on them to do so, or can they unilaterally decide to refuse early retirements also?


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## Baracuda (18 Jul 2011)

Employer's have a full and complete right to refuse early retirement. When an early retirement happens regulations state in simple terms that the remainding members cannot be disadvantaged by the cost of the retiree early retirement. Therefore the employer has to 1) make up any shortfall that there maybe in the funding standard for the retiree up to his/her current age and 2)Pay the cost of the funding for the extra years between current age and normal retirement age. This is in most cases can be quite a substancial amount of money.

There is no duty on an employer to even make up a shortfall in the funding standard of a pension scheme regardless whether the employer can afford this or not but in most cases there would be a consultation between employer and unions/staff rep's and a joint agreement would be worked out for proposals to make up the shortfall over an agreed period of time (up to 10 years subject to PB approval). A lot of schemes are looking at a reductions in benefits at the moment due to funding standards and the pension levy and of course employers/employee reluctance to make up shortfalls due to increased cost/contributions. 

It is estimated that to fund the cost of a DB scheme with excalation of max 3%p.a. costs about 25% of salary and as far as I am aware only about 10% of DB schemes are proposing to fund to this standard at the moment so it stands to reason that further cuts will be imposed over the years.

The following should be done imo in extream cases only....If the employer is refusing early retirement and the employee is leaving service and they need to access further income or TFLS, they are entilted to transfer the value of the assets to a Buy Out Bond where if they are over 50 can surrender the BOB and receive a TFLS and buy an annuity pension with the residual fund. This in the most should not be considered though as the value of the assets will be reduced according to the present shortfall in the scheme so in other word the person would suffer huge losses in their pension just to access money before NRA


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## Marianne (19 Jul 2011)

Thanks for the reply Baracuda.  In a way it makes a bit of a mockery of the whole idea of a DB scheme.  The example I'm thinking about is a situation where the scheme is not allowing early retirements even though the company is posting big profits.  

If there's no obligation on the employer to fund the scheme to the level required, then the so-called "guarantees" of a DB scheme are worthless.  Member has annual statements which used to include a paragraph about possibility of early retirement with Trustees' consent.

So it would seem that DB scheme booklets should contain a line that says "At retirement you will receive a pension of 1/80 of your scheme salary for each year of service...provided that the employer can be bothered to fund the scheme to do so."  

Thanks again for the information, even if it wasn't what I wanted to hear.


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