UK - FRS17 and the minimum funding requirement (MFR) do not show the ‘real' risks inherent in pension scheme funding, according to employee benefit advisers Gissings.
Tim Webb, divisional director of Gissings, said: The real problem for long term pensions is an obsession with short term funding measures based on index models. The idea that FRS17 or MFR shows the real risk is nonsense. They are inherently artificial.
Those who argue that FRS17 only requires a company to properly disclose its pension liabilities are mistaken to think employers’ concerns are solely about revealing ‘true’ deficit positions, Webb says.
In reality a surplus or deficit is never realised until either a scheme runs out of money, the last beneficiary of the scheme dies or leaves, or the scheme is wound up and bought out. Otherwise, all that can be estimated is what the surplus or deficit would be against a certain set of assumptions.
Historically, trustees and actuaries have understood the fluctuations in the financial position of a final salary pension scheme resulting from equity investment and viewed the pension fund as a long-term issue.
Arriving as it does on the back of MFR, FRS17 has introduced unwanted volatility into companies' accounts and it is this volatility that is causing companies greater concern than other factors such as increased life expectancy and legislative demands that have led, over time, to increasing costs, according to Webb.
FRS17 and MFR encourage short-term thinking. Gissings believes many employers who have not yet taken action on closing final salary schemes are waiting in the wings not wanting to be the first in their sector to announce that they wish to move from the volatility of final salary schemes to the relative certainty of defined contribution provision.
By Luke Clancy
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