UK – A new academic study has argued that the scrapping of the minimum funding requirement without replacing it with a more suitable standard was “mistaken”.

“The more than can be done to prevent ‘solvency abuse’ eventually destroying good company pensions, the better,” it said. “It is surely mistaken to abolish MFR and not replace it with a more suitable standard to work in support of PPF [the planned pension protection_fund]?”

The comments come in "Pensions and Economics: The Way Ahead", which is due to be discussed at the Staple Inn Actuarial Society on January 20. The authors of the 57-page study are Andrew Wise, David McCarthy, Jeff Neate, Michael Pardoe and Brandon Horwitz.

“Our point for debate is that some kind of minimum funding standard is a necessary component of a successful pension protection system,” they argue. “The problem is that the MFR has acquired a bad name for a variety of reasons.”

These, they say are to do with ‘behavioural influences’ in the investment markets. And they acknowledge that the MFR formula, with its equity component and dual calculation method “now looks cranky and hard to understand”.

But the study says that these concerns to not address the fundamental issue, that of moral hazard, or ‘solvency abuse’.

The government announced its proposals to replace the MFR with a long-term, scheme specific funding standard in March 2001.

They authors say that a new MFR would have to enforce a “reasonable common standard of funding to a minimum level, in order to protect good employers and the PPF from solvency abuse”.

“The best way forward seems to be to apply the strongest funding standards to the basic levels of pension that concern most people.” The authors put forward the name “Pension Funding Standard” to cover their new ideas.

The paper is at: http://www.sias.org.uk/papers/pande.pdf