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Minimum Funding Requirement - Proposed Interim Changes
In March the Government announced its intention to abolish MFR. No specific timescale for this was announced and in the interim we have been concerned that pension scheme sponsors and trustees were being caused serious problems by this broken yardstick. We are pleased that the Department for Work and Pensions have produced an interim proposal by way of draft regulations. The main proposals are:
- For MFR valuations signed between the date the new regulations come into effect and 31 December 2004, employers will have three years to bring "seriously underfunded" schemes up to 90% MFR (previously one year), and ten years to reach 100% MFR for any scheme below 100% (previously five years).
- In the future, it is proposed that where a scheme is over 100% funded on MFR, there is no need for the actuary to certify the Schedule of Contributions every year (unless there is a significant change that may affect the funding position).
- The "Debt on the Employer" calculation carried out when a scheme is in wind-up will be strengthened. Actives and deferred pensioners will be valued as before, on MFR, but pensioners will be valued at the full cost of purchasing annuities from insurance companies.
We welcome these interim proposals and in particular the fact that they address the immediate problem; namely the unfortunate consequence of the present MFR which requires funding corrections to be made within what is too short a time-scale for long-term pension schemes. The new time limits are still arbitrary and do not take into account the nature of a particular scheme, as the MFR replacement should do eventually. That said, the interim measures should bring some relief for many scheme sponsors.
We also welcome the proposal that schemes currently above the 100% MFR level will be spared the requirement for annual certification of their schedule of contributions.
The proposals in March also included a tightening up of the position on voluntary winding up of a final salary scheme, by increasing the debt on the employer beyond the MFR level and possibly right up to the full buy out cost of insured annuities. Many felt this suggestion went too far, and the new interim proposals stop short of the budget announcement, proposing that the debt on the employer is still measured against MFR for active and deferred pensioner members, and only against the full insurance buy out cost for those already drawing a pension. We regard this as more sensible.
We still believe that, in reforming MFR, a reasonable balance must be struck between protection of the discontinuance position and the long-term objectives of final salary pension schemes. The interim proposals, contained in draft regulations, are now open to comment until 10 December. We expect the regulations to be implemented as soon as possible thereafter.
Please do not hesitate to contact your usual Barnett Waddingham consultant if you would like further information, or if you would like to see a copy of Barnett Waddingham's response when it is available.
Barnett Waddingham, September 2001.