Our pension fund no longer meets its funding requirement. What does this mean?

The law requires a pension fund to be able to meet its liabilities – that is, it should be able to pay the pensions and future pensions of its members.

But the precise way of measuring this has changed over time, as government's have tried to get the right balance between protecting scheme members and making funding requirements so onerous that employers decide to close their schemes.

Since September 2005 we have a 'scheme specific funding' test. This will be negotiated between the employer and the scheme trustees, but must get the approval of the scheme actuary. It measures whether the scheme can meet its specific liabilities, unlike the previous 'one-size-fits-all' test that did not take account of real differences between schemes.

Full valuations must be carrried out at least every three years. If this shows a scheme does not have enough assets,the trustees must put in place a recovery plan. This must show how and how fast they will close the funding gap.

The recovery plan must be agreed within 12 weeks of a valuation, and sent to the Pensions Regulator. If the trustees cannot agree a recovery plan, they they must call in the Regulator.

There are three main ways that a deficit can be met. One or a combination can be used to cut the deficit.

• The employer can either make a cash payment to take it to 90 per cent or provide a financial guarantee that it would do so if it became insolvent. It could do this, for example, by putting a charge on an asset such as property it owns. A vague IOU would not be enough.
• Scheme members can pay higher contributions.
• The scheme's benefits can be reduced – for example the retirement age can be increased, the accrual rate reduced or 'perks' such as early retirement schemes cut back.

There is more about scheme funding on the OPAS website