| MFR reform to give pension fund trustees breathing space |
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| 20/09/2001 | |
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by Nat Mankelow Government plans for the next stage for reform of the minimum funding requirement (MFR) were announced this week and have been broadly welcomed by the pension fund industry. Furthermore, pension fund trustees - heavily scrutinised in the Myners report - will now have longer to make up any shortfalls in defined-benefit scheme payments, should the proposals gain the support of the £800bn industry. The Department for Work and Pensions (DWP) has proposed that requirements on pension funds be reduced and a consultation panel established to help push through the reform of the MFR. The panel, which includes pensions association NAPF, insurers association ABI, and the Faculty of Actuaries, has until this December to submit its comments. The MFR, brought in by the Pensions Act 1995 following the Maxwell pensions scandal three years before, has been widely criticised for discouraging pension funds from investing in riskier but potentially more lucrative asset classes. The Myners report on institutional investment, published in March of this year, said the MFR forced investors to 'play-it-safe', relying on fixed income and straightforward equity market investing to meet required funding levels for defined-benefit pension schemes. Alternative investments perceived as more risky, such as venture capital, hedge funds, and emerging equity markets, were wrongly ignored as a result, said Myners. New order The proposals for reform are as follows: · Extend the deficit correction periods to three years for seriously underfunded schemes to reach 90 per cent MFR funding level, and to 10 years for underfunded schemes to reach 100 per cent MFR funding level. · Trustees must prepare a report about the funding position where the MFR is not met within three months of the requirement being triggered. Previously trustees had just one month to notify of a deficit, once requested. · Consideration of a new valuation system for out-of-date pension funds; fully funded schemes' schedules also no longer need to be automatically re-certified. · Stricter conditions on voluntary wind-up. The method of calculating a debt on the sponsoring employer will include actual cost of winding-up; the actual costs of annuities for members; and cash equivalent transfer values on an MFR basis for non-pensioner members. The DWP said: "Our proposals offer sustainable protection that provides more effective security for scheme members without damaging consequences for investment." 'Son of MFR' The NAPF, the standard-bearer of the £800bn pension fund industry, welcomed DWP's proposals as a positive move. "It is vital that Government and the pensions community work together to develop a measure of funding adequacy which reflects the long term nature of pensions, and the latest recommendation is a useful step forward," said NAPF chairman Peter Thompson. The 'son of MFR' is expected to allow schemes to fund and invest in a more optimal way and smooth out some of the short-term volatility associated with the current MFR regime. |
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