The Merchant Navy Officers Pension Fund has increased employer and member contributions to the new section of its defined benefit scheme to strengthen its ability to pay future benefits.
Some open defined benefit schemes have increased employer and sometimes employee contributions to strengthen the security of their members' pensions.
On October 1 MNOPF increased employer contributions to the post-1978 section of its scheme to 20 per cent from 15.5 per cent and upped member contributions to 12.2 per cent from 9.5 per cent.
The new contribution rate is that advised by the actuary to the trustees as being the cost of the future benefits
“The [new overall contribution] rate is that advised by the actuary to the trustees as being the cost of the future benefits,” said Andrew Waring, the fund's chief executive.
Employer and member contribution rates are reviewed every three years after each actuarial valuation of the scheme, he added.
Sponsors must consult members on plans to increase member contributions no less than 60 days before they intend to implement the change.
“If an employer doesn’t do it, it doesn’t necessarily make the change invalid but the regulator has the ability to fine the employer if they do not comply,” said Craig Thomas, associate at Squire Sanders. This fine can amount to as much as £50,000.
It is important for schemes to set new contribution rates at an affordable level for members, Thomas added.
Increasing benefit security
The total value of the fund at the end of March was £3.8bn, with a split of £1.4bn and £2.4bn between the old and new section of the fund respectively, according to the fund’s 2013 annual report. The new section of the fund was 82 per cent funded at the time of the last actuarial valuation in 2012.
The MNOPF wrote to employers in spring telling them to inform members about plans to increase contributions rates. The scheme’s trustees then consulted with employers about members’ views before setting the new member rate, according to Waring.
Some DB schemes have increased employer and member contributions to improve their funding situation. However, increasing contributions may not always be enough to keep a DB scheme open for longer.
“In a lot of these arrangements the actual contributions into schemes might be relatively modest in comparison to liabilities as a whole,” said Brian Henderson, UK DB and savings leader at Mercer.
Schemes needing to reduce deficits could also stretch out their recovery period, take more investment risk or change the level or time frame in which members receive their benefits, Henderson said.
