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Mercer says MFR replacement could be worse

UK – Consultant William M Mercer has expressed serious concerns over the UK government’s proposed plan for the replacement of the minimum funding requirement (MFR).

The consultant believes that the proposed regulation could cause a major move towards investment in fixed income rather than equity, as well as higher funding levels.
It suggests that employers’ liabilities in scheme wind-up situations should be reduced and pension fund members should be told that full benefits might not be paid.

“ Given the potential impact of the changes, we are surprised the government has not invited comments through a formal consultation at this stage, “ says Stuart Benson, European partner at William M Mercer.

The UK government announced the plans to abolish the MFR on March 7 and a long-term scheme specific standard was proposed to replace it.
Says Benson: “ Under the MFR system, there is a legal obligation to maintain a minimum level of funding in company pension schemes – even though 100% funding doesn’t guarantee full pensions for members when schemes are unexpectedly wound up.
“ Although flawed, the MFR was seen as a pragmatic compromise between providing member security and keeping costs to a reasonable level.”

Benson sees the new long-term funding approach as worse than the previous requirement standard.
“ Under the government’s proposals, schemes are encouraged to take a long-term approach to funding and investment. At the same time, however, there is a new requirement for schemes to meet their potential wind-up liabilities in full – with all the implications that brings,” says Benson.

“ The crux of the problem will be that trustees will want to increase member security through safer investment and higher funding levels – and employers may find themselves having to support this new approach in order to control their own risks,” Benson says.

The consultant recommends the government adjust the regulation by reducing employer liability in wind-up situations and introducing a “significant” extension of the proposed three-year correction period.
Also, it should be ensured that that there is a clear understanding of the extent to which trustees and scheme actuaries need to take account of the wind-up position on funding and investment issues, says Mercer.
Members should be told of the risks inherent in their pension scheme and the possibility that full benefits might not be paid, the consultant concludes.

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