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Myners spells out end of MFR

As expected Paul Myners, the chief executive of Gartmore, has recommended in his interim report on the UK pension fund industry that the minimum funding requirement be scrapped as a safeguard for pension funds. Myners has suggested it be replaced by an enhanced compensation scheme for fraud, mandatory arrangements for the custody of pension fund assets, and transparency and independent review of pension funds’ finances and plans.
MFR’s imminent demise has been welcomed by the industry. Says Alan Pickering, chairman of the National Association for Pension Funds, itself an outspoken opponent of the minimum requirement: “The MFR is fatally flawed. Its removal will not jeopardise the security for members but will make their benefits more affordable.”
MFR was introduced in 1997 as a safety net for pension scheme members in the event of an employer becoming insolvent and unable to pay into the scheme. Critics say it has distorted the bond market by inflating demand and depressing yields. Myners ruled out an insurance-based alternative similar to those used in Continental Europe and the US as being too expensive an potentially as damaging as the MFR itself.
Others remain wary about his proposed alternative. Charles Farquharson, managing director of Merrill Lynch Investment Managers says the alternatives to the MFR may not succeed in encouraging trustees and companies to be more entrepreneurial in their investment strategy.
Myners also pushed for more transparency on investment policy. Gordon Pollock, partner at consultant William M Mercer welcomes the greater clarity on investment policy and expected returns saying it will help ensure the long-term financial health of occupational pension schemes. However, Bob Collie, director of consulting at Frank Russell, says the proposals should be strengthened for some schemes where member security is a particular issue. “Member security merits special attention for mature schemes, underfunded schemes, those where the sponsoring employer is unable or unwilling to underwrite investment risk and those known to be liable to being wound up. In such cases, disclosure alone may be inadequate”.
As expected, Myners has urged pension funds to invest more in private equity, a move welcomed by Mercers. “This gives trustees more flexibility without imposing a requirement through regulation,” says Pollock.

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