UK - Interim changes to the Minimum Funding Requirement (MFR) now been finalised by the Government represent a reduction of 7.7% in equity-related MFR liabilities, according to consultants William M Mercer.
The effect on a typical MFR valuation, where around half the liabilities might be equity-related, is likely to be an improvement of 3-4% in the MFR funding level.
Mercer said: “The fact that the Government has at last agreed to reduce MFR liabilities by changing the market value adjustment is also positive for employers. This change removes some of the unintended reduction in MFR funding levels arising from technical deficiencies in thecalculation methods.
“The news from a member’s point of view may not be so good. Transfer values for early leavers will have a lower guarantee, and some may be reduced.”
The changes announced:
* extend the deficit correction periods within which scheme funding must be made good
* remove the requirement for annual recertifications for schemes that are fully funded on an MFR basis
* introduce stricter conditions when an employer decides to wind a scheme up voluntarily
Mercer also added on the whole package of MFR changes: “This package of changes brings a substantial easing of current funding requirements and, in the present circumstances, will be welcomed by many schemes.
Effectively, it gives employers greater flexibility to correct any deficits in their fund at a time when, typically, they have experienced two years of poor investment returns and face a plethora of other problems.
However, the longer correction periods for scheme deficits and reduction in funding levels will mean reduced immediate cashflow into schemes, and hence less security for members.
The Government correctly claims that the changes will bring extra security when solvent employers voluntarily wind up a pension scheme.
“However, few employers do this; most who make a change just stop the accrual of benefits and/or close the scheme to new entrants, and leave the scheme otherwise running as a closed entity.”
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