The minimum funding requirement (MFR) for UK pension funds came up for hot discussion at the NAPF’s annual investment conference in Eastbourne. The Government Actuary Chris Daykin punctured some of the assumptions about the effect of the quasi solvency ratio imposed on pension funds, following the Maxwell scandal.
“It is not at all evident why the MFR, as such, should be blamed for encouraging a move from equities to gilts and index-linked gilts,” he said. Market forces played a part as did the maturing of pension schemes. He went on to say: “An MFR would not have prevented the Maxwell debacle, as its purpose is to guard against persistent un-der funding rather than against misappropriation or misdirection of assets.”
Daykin reckoned it provided a reasonable discipline and a benchmark for trustees, but it did not provide a solution to what happens when a pension fund discontinues. “The MFR liability falls short of the value of accrued rights on an going concern basis.”
The creation of a Central Discontinuance Fund (CDF) was being examined, he pointed out. “If it were to come into existence, the terms of buying out liabilities in to the CDF would de facto define a rational solvency standard, which would need to become the minimum solvency requirement, if the objective of being able to ensure protection of 100% of accrued rights in the event of scheme discontinuance was to be achieved.”
The MFR standard was in trouble because of its inflexibility in the face of the huge changes in the period since it started, Donald Duval, of Aon Consulting told the conference. “In that time, we have seen the removal of imputation credits; massive changes in corporate dividend policy; a substantial rerating of the UK and the US equity markets, and major falls in Asian markets. None of these were anticipated when the MFR was designed and it was not possible to adapt the MFR sufficiently rapidly.”
He believed the government should abandon the idea of a single objective funding standard applied mechanically to all schemes and should allow professional judgement to be applied.
On the CDF issue, he preferred the defined contribution approach, one of the NAPF suggestions, where a target benefit would be established for each member in the fund, but adjusted with the investment performance of the fund. “This would protect employers from the risk of levies to support bankrupt schemes.”
NAPF chairman Peter Murray of the Railways Pension Fund, had no hesitation in telling the conference: “MFR is a failure!” He added: “It provides, in practice, relatively little security for scheme members but at substantial cost a risk to sponsoring employers of mature and super-mature schemes.” He saw it as a factor in the move from defined benefit to defined contribution. “MFR is bad for your schemes’ health.” He urged members to become involved in the campaign to abandon “the damaging” and ineffective MFR approach.
In his view, there was no one stop solution. “The issue of long-term funding is a quite separate one from how to deal with relatively small number of cases where a sponsors’ insolvency leads to a scheme wind-up.”
The conference also opened the investment consultants’ role box once again. John Marsh of Chiswell Associates, giving the investment managers’ perspective, said there was a huge gap in the resources given to manager research by the investment consultancy practices. “Generally, the big firms do a reasonable job, but the others do not.” He also noted that it was rare for managers to be given the opportunity to check for factual accuracy in something being submitted by a consultant to a client. He also questioned the shift from balanced to specialist managers, even though at ‘total fund level’ there was no evidence that specialist structures produced better results. He asked if the specialist was favoured because it gave the consultant more chance to earn more fees and to be more indispensible to the client.
“The idea of performance related fees for consultants seems a good one particularly in some areas of work like manager selection,” Roger Urwin, of Watson Wyatt Investment Consulting said. “The accountability of consultants would be positively reinforced by wider usage of such fee arrangements.”
With consultants moving in the direction of fund operators and acting as advisers to investment management firms, he acknowledged conflicts of interest, which might be best resolved if these activities “are run as separate businesses, with separate staffing.”