UK – The minimum funding requirement (MFR) is not necessarily to blame for the problems surrounding occupational pension schemes, suggests the annual Equity Gilt Study by Barclays Capital.

If MFR regulations are to be blamed for the volatility of pension fund liabilities, then perhaps it is the defined benefits (DB) schemes themselves that cause the problem, says Mark Capletone, director at Barclays Capital, the investment banking division of Barclays.

Currently, UK pension fund assets total around £1trn (e1.6trn) of assets, of which 80% is in defined benefit schemes, while 50-70% of plan members are inactive, or deferred. Inactive liabilities, says Capletone, are bond type liabilities, and recognised as such by the MFR framework, yet sterling bonds average less than 20% of pension plan assets - creating a large asset/liability mismatch.

Another problem Capletone points out, is the enormous size of pension funds, compared to the sponsoring company: the British Airways fund’s assets, for example, are three times larger than the company capital. The “privatisation” of public expenditure on pensions in the UK creates a “fiendishly complex subject,” says Capletone.

The operational leverage created by a DB scheme to the company, with large liabilities and uncertain returns, is one reason why Capletone prefers the defined contribution (DC) approach.

“ Running a DB scheme is rather like having a hedge fund subsidiary bolted onto the business, and it will now look more like one. Indeed, for a few companies, a better description of them would be hedge funds with small businesses attached,” says Capletone.

The upside for companies that have to pay into pension schemes, he concludes, is that if long sterling bond yields are artificially low, then the companies at least have access to debt finance at artificially low costs.