14 September 2000
DARLING LAUNCHES CONSULTATION PAPER ON PENSION PROTECTION
Alistair Darling today published a consultation document on the Minimum Funding Requirement (MFR). Click on the link below for the full document.
The Social Security Secretary said he wanted the widest possible debate on the best way to provide security for defined-benefit occupational pension schemes.
A report on the MFR by the Faculty and Institute of Actuaries (F&IoA) was also published today, alongside the joint DSS and Treasury consultation paper.
Mr Darling said,
"This government is determined to protect the long-term security of pensioners and other pension scheme members. In the light of this review it is right to look at whether the current MFR is the best approach. We need to look at all the options for the future.
"We asked the F&IoA to review the MFR test and their report raises a number of questions about the MFR itself and its ability to protect pensioners and other scheme members.
"It is therefore sensible to explore whether there is a more effective or reliable way of protecting scheme members? rights."
The Social Security Secretary announced that he wants both the Actuaries? proposals and the views of the review of institutional investment currently being carried out by Paul Myners on behalf of Chancellor Gordon Brown to inform the wider debate.
Economic Secretary to the Treasury Melanie Johnson said:
"Defined benefit occupational pension schemes are essential to the future security of some 13 million people.
"The proper management and security of their funds, including the MFR, is of considerable wider economic significance.
"We are grateful to the F&IoA for their work in delivering a helpful report which will contribute to sustaining and improving that. We now need to build on this informative report to see how best we can look after the interests of members of occupational schemes, including existing pensioners".
The closing date for responses is 31 January 2001.
NOTES FOR EDITORS
1. The consultation paper is available on the DSS website - link below.
2. Responses should be sent to the following address by 31 January 2001.
Andrea Garman
Room 311, DSS Occupational and Personal Pensions
3rd Floor, The Adelphi,
1-11 John Adam Street,
London,WC2N 6HT.
Telephone : 020 7962 8753. Fax: 020 7962 8591
Or by email using the link below.
4. Non-media enquiries should be addressed to the DSS on 020 7962 8969 or the Treasury Public Enquiry Unit on 020 7270 4558.
5. Media enquiries should be addressed to Elaine Graham at the DSS press office on 020 7238 0755 (out of hours 01459 108883) or Charles Keseru at the Treasury press office on 020 7270 5188 (out of hours 020 7270 5000).
ANNEX ONE
1. Defined-benefit (DB) occupational pension schemes (also known as final salary schemes) promise employees a pension based on a proportion of their earnings, determined by their length of employment. They are funded by contributions from employers and usually employees. These contributions are invested in a variety of assets to ensure that sufficient funds are available to pay the pensions promised to scheme members.
2. The Minimum Funding Requirement (MFR) was introduced by the Pensions Act 1995. It came into force in April 1997, with a 10 year phasing-in period. It requires DB schemes to hold a minimum level of assets to meet their liabilities.
3. The MFR is intended to provide a reasonable level of security for members in the event of the employer becoming insolvent and no further funds being available to pay into the scheme. The underlying objectives of the MFR were decided by Government; the valuation method to meet the objectives was devised by the Pensions Board of the Faculty and Institute of Actuaries (F&IoA).
4. The objective of the MFR is that a scheme fully funded according to its requirements would, if the employer became insolvent, protect fully pensions already in payment, and provide younger members with a transfer value that would give them a reasonable expectation of replicating scheme benefits if they transferred to another pensions vehicle, eg an occupational or a personal pension scheme.
5. The MFR is calculated by comparing the market value of the assets of a pension scheme with the value placed on the liabilities of the scheme. There are time limits in which underfunding must be reduced. Transitional provisions allow underfunded schemes until April 2003 to reach 90% and until April 2007 to reach 100%. After April 2002 the scheme funding level must be brought to 90% MFR within 1 year of the signing of the MFR valuation and to 100% within 5 years.
6 The MFR does not direct how schemes invest. It specifies how the liabilities are calculated. However, some schemes which are less than, or only just, 100% funded on the MFR basis, may decide to more closely match their investments to the reference assets used by the MFR for valuing liabilities. This would make the value of their investments move more closely in line with the value of their liabilities and their funding level remain more constant.
7. Pensioner liabilities are valued by reference to prevailing yields on investment in UK gilts. Liabilities for scheme members who have not yet reached retirement age are valued on assumptions about the long-term rate of return in UK equities. A blend of the returns from equities and gilts is used to value these non-pensioner liabilities during the 10-year period up to normal pension age.
8. Following concerns that the valuation method is not sufficiently robust to cope with changing economic conditions, in March 1999 DSS Ministers asked the Pensions Board of the Faculty and Institute of Actuaries (F&IoA) to carry out a wide-ranging review of the Minimum Funding Requirement (DSS press release 043 1999).
9. The F&IoA report was received by the DSS at the end of May 2000 and is published today. It is available by clicking on the link below to the F&IoA website.
10. The consultation paper published today widens the debate to cover various options which the F&IoA was not specifically asked to look at in its review. The DSS and HM Treasury are publishing this jointly, and working closely together with all interested parties to ensure that all the implications for institutional investment behaviour are covered.
11. In his Budget speech on 21 March 2000, Chancellor of the Exchequer Gordon Brown announced a review of institutional investment to remove unnecessary barriers to investment and growth in the UK economy.
12. This review, conducted by Paul Myners, Chairman of Gartmore Investment Management plc, will also consider aspects of the MFR as part of his look at whether there are factors encouraging institutional investors to follow industry-standard investment patterns. He will announce his views on the issues raised in this consultation document at the time of the Pre-Budget Report this autumn.
13. The consultation paper looks at a range of options to provide protection for members. It invites interested parties to provide views on these possible interim changes, and suggestions for additional options. The consultation paper suggests that ideas for reform of current arrangements could include one, or a combination, of a number of options:
- retaining the MFR in a modified form;
- whether to view funding on an ongoing basis;
- a form of prudential supervision by a prudential regulator;
- introducing a form of compulsory mutual insurance;
- requiring funds to insure against the sponsoring employer's insolvency; and
- A central discontinuance fund.
14. It is important to ensure that the protection offered by the MFR is consistent with its original aims. To ensure this, limited interim changes to the current MFR arrangements recommended in the F&IoA Report, are being considered. These include adjusting the way in which MFR liabilities are assessed to reflect:
- an extra two years longevity;
- for pension increases - that price levels may fall;
- changing patterns of corporate activity; and
- generally lower market dividend yields since the current scheme was introduced.