UK - Final salary schemes are ignoring the minimum funding requirement when calculating transfer values, it has been revealed.
More than half of defined benefit schemes are already shunning the MFR because its calculations are too low. And nearly a quarter are considering changing their methods to give members who transfer out of a scheme a higher amount.
The figures are revealed in a Hymans Robertson survey, Transfer Values: Do they Provide Fair Value?, which is due for release next week.
Hymans Robertson’s head of actuarial practice Ross Russell said: “The most inescapable conclusion of the survey is that transferring out to a private pension scheme at the MFR level is a step to be taken by the irrationally exuberant or the foolish.”
Russell calculated that some members could be as left with as little as 30% of their pension pot on transferring out.
He added that actuaries have become concerned over the past few years over how weak the MFR is, culminating in March this year when values were reduced by 8% for members more than 10 years from retirement.
“When the MFR first came in it was very common for actuaries to use it for transfer values. But with the way markets have been, the MFR has become weak as a calculation method for transfers out.”
The data used in the survey was compiled from 69 pension funds, all with assets in excess of £100m.
The low level of transfer values has also been raised separately by the Faculty & Institute of Actuaries. In a letter to its members, it slammed the MFR as untenable and urged them to lobby the government on the issue.
Pensions Board chairman Ronald Bowie said: “It is increasingly difficult for an actuary of any scheme to continue to certify that cash equivalents equal to the MFR minimum satisfy the mandatory requirements of GN11 [a section of the Pensions Act 1995].”
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