Further calls for the UK government to scrap the minimum funding requirement (MFR) have been made by the London-based Pensions Management Institute (PMI), the professional body for those working in pensions, in its response to the DSS paper ‘security for occupational pensions’.
It follows the appeal to the government made earlier this week by the UK National Association of Pension Funds (NAPF) that MFR should be replaced by a long-term funding requirement in order to protect members of defined benefit (DB) schemes.
PMI president David Bright, comments: “The MFR is widely discredited. It’s misleading scheme members and it’s distorting investment markets.”
Interim changes to the MFR proposed by the actuarial profession would make no appreciable difference to the solvency levels, according to the PMI, which advises:
“ Don’t tinker with MFR.”
The PMI welcomes proposals for greater transparency and an annual report to members, which could provide a basis for protecting members’ benefits. This would avoid “cost volatility”, which it says is proving to be a “strong influence” on many employers who are deciding to close their DB schemes.
Any new defined contribution schemes often provide less generous benefits, the institute comments.
The PMI’s response points out that the risk to DB scheme members is not just that of sponsor insolvency but also of a company wind-up, when there can be shortfalls in meeting liabilities to members.
The institute also thinks that since the MFR does not give any protection against fraud, and that the use of insurance or a central discontinuance fund are not practical propositions in reality, then the pension compensation scheme funded by an industry levy should be adapted.
The PMI concludes its submission saying that whatever replaces MFR must be credible to retain employer support for occupational schemes, as well being a way of reassuring members that their scheme is solvent, or explain any shortfalls and the effect these have on entitlements.