Maersk closure tests MFR rules
The validity of the minimum funding requirement clause of the UK Pensions Act has come under scrutiny after the announcement by the Danish shipping company Maersk that it is closing its UK final salary pension scheme. The move means pensions for the 196 deferred members, of whom 26 are current Maersk employees, will be slashed by 60%.
Maersk runs a defined contribution pension policy for its employees. When it took over Felixstowe-based company Sealands in 1999, it informed employees that it did not intend to keep the existing final salary scheme on a long-term basis.
The scheme was running a deficit of £1m (e1.5m) and was closed to new employees. Global stock market declines have pushed this to £3.5m, leading Maersk to announce it would be impossible to keep supporting the scheme.
OPAS, the Occupational Pensions Advisory Service, says that the scheme is finally being wound up, members are finding themselves left up to 60% short of full benefits due to the minimum funding requirement clause of the UK Pensions Act that allows Maersk to wind up the scheme as it still has enough assets to meet its minimum funding requirements.
Employees often believe that a minimum funding requirement will guarantee benefits, but this is not the case. The MFR is a clause in the Pensions Act that ensures employers have enough assets to meet liabilities, but as pension liabilities are paid out over a very long time, actuaries cannot be certain that today’s assets will provide enough cash in years to come to meet pension payments.
The MFR tells actuaries to assume that inflation will rise at a rate of 4%, that gilts will earn 8% and that equities will earn 9%. Returns on equities are far from 9% at the moment, explaining how companies do not have enough money, but are meeting the minimum funding requirement.
Says Malcolm McLean, chief executive at OPAS: “ what Maersk is doing is completely in line with the law, but is unfair on those who, already having seen their company taken over, and possibly lost their jobs, now will not receive their full pension entitlements.
“Employees believed they had a right to a pension, based on a certain formula. Now they will receive much less than they have been expecting – between 40% and 80% of their pension rights, and there is nothing they can do about it. The MFR issue should be addressed.”
It has been suggested that the government lower the expected returns from equities and gilts, or enforce a law whereby employers must make up any short fall on the pension scheme if it is to be wound up.