Dump MFR for insurance system urges PwC

UK – The British government should scrap the minimum funding requirement (MFR) and replace it with an insurance system similar to those already in place in Germany, Sweden and the US, says consultant PricewaterhouseCoopers (PwC).

In a response to the governments call for consultation on the best way to provide security for occupational pension schemes, John Shuttleworth, actuarial partner at PwC comments: “ Experience in Germany, Sweden and the US suggests that such a scheme would have an annual cost of about 0.1% of pension scheme assets.
“ This cost, which represents about a fifth of what the UK spends on house contents insurance, would be met by the employer and would insure pension scheme members against employer insolvency.”

The current MFR is designed by the Department of Social Security (DSS) to enable pensions in payment to continue in full and give non-pensioners an even chance of receiving their pensions.
However, PwC notes that the argument against MFR is that only 100% funded pension schemes are protected by it.

Companies are allowed three years to reach the level of full funding, but those unable to do so may only have enough money to pay future pensioners as little as 70p in the pound, says PwC.

“ The law needs to be changed to give employers, the people who write the cheques, greater control over the investment of pension scheme assets, which are now in excess of £500bn (e790bn).
“ This would improve the sophistication of UK buyers of investment services which lags that in the US and continental Europe,” argues Shuttleworth.

The Department of Social Security (DSS) has sought suggestions on the MFR issue since it opened public debate on the subject in September 2000. Deadline for responses is January 31.

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