| Pension funds welcome MFR changes |
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| 28/02/2002 | |
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by Nat Mankelow The government has announced changes to the current minimum funding requirement (MFR) for pension fund investment, the heavily criticised directive introduced in 1995 following the Maxwell pensions scandal three years before. Since 1995, the MFR has been attacked from all quarters of the £800bn pensions industry for discouraging investment in riskier but potentially more lucrative asset classes. The new proposals introduced by the Department of Work and Pensions (DWP), which have come as part of a year-long consultation with key pensions and union bodies, have extended the time limits for schemes to make good underfunding (they now have until April 2003) and removed the requirement for annual recertifications for schemes that are fully funded on an MFR basis. NAPF, the pension's industry standard-bearer, has welcomed the DWP proposals "as a practical solution to some of the more serious issues faced by UK pension schemes". NAPF benefits director, David Astley, said the DWP had acknowledged concerns raised by the NAPF on its initial proposals, and had taken a practical and positive approach. The DWP believes these changes to the current MFR regime mean that pension schemes can start to move towards the position of more sustainable funding, in addition to increased protection for pension scheme members where an employer decides to wind a scheme up. By extending the deficit correction periods within which scheme funding must be made good, short-term volatility problems associated with the current MFR regime is smoothed out, says the DWP. The removal of the requirement for annual recertifications means fully funded schemes should be able to concentrate their efforts and resources elsewhere. Annual security checks will remain in place for underfunded schemes, however. In line with a recommendation from the Faculty & Institute of Actuaries, the government has also approved a change to the MFR equity market value adjustment. The dividend yield in the market value adjustment (MVA) is being lowered from 3.25 per cent to 3 per cent to reflect the overall impact of lower dividend payments by companies to shareholders, and of increasing life expectancy. Economic secretary to the Treasury Ruth Kelly said: "Reform of the Minimum Funding Requirement is vital to the future success of defined benefit pension schemes. We are moving to a system that provides more effective security for scheme members, makes defined benefit schemes easier to operate for employers and avoids unintended effects on investment." The Government's longer-term proposals to replace the MFR were announced on 7 March 2001. The MFR will be replaced with a long-term, scheme-specific funding standard in the context of a regime of transparency and disclosure, with additional measures to strengthen security. |
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