The UK government must act immediately to cut the minimum funding requirement dividend yield assumption, according to employee benefits consultancy Gissings.
Gissings believes that without a cut in the dividend yield assumption, even more schemes will require an increase in contributions to satisfy MFR legislation.
Richard Crowhurst, an actuary at Gissings said: Lower dividend yields are making MFR demands too stringent and potentially forcing UK employers to take decisions about defined benefit provision based on unsound business reasons.
A reduction of at least 0.5% pa is needed to reflect the lower yields that seem to be a permanent feature of today’s UK equity market. This will potentially make pension provision too expensive for many sponsoring companies, and may force a withdrawal from defined benefit schemes.
It is generally recognised that the equity related MFR methodology is flawed. It is based on an outdated market adjustment approach relying on a long term 3.25% pa equity yield assumption. It is also accepted that as the government proposes to replace the MFR in due course, the methodology is unlikely to be changed. But it would be relatively easy to implement a short term modification to the long term equity yield assumption.
Gissings is writing to all its clients that operate schemes subject to the MFR, highlighting changed market conditions that have caused a fall in MFR funding levels of up to 18% since MFR assumptions were last revised three years ago.
If the scheme actuary estimates that a scheme's MFR funding level has fallen below 90%, legislation requires an accurate MFR valuation to be carried out within six months. The results are likely to show an immediate need to increase contributions, said Crowhurst.
Despite Paul Myners’ recommendations to abolish MFR, and the government’s subsequent announcement that it would be dropped, many in the industry believe it may not occur until 2004 due to the need to amend primary legislation and the knock-on effects to other issues such as transfer values and wind up provisions.
Gissings is a specialist designer and supplier of employee benefit packages for companies throughout the UK.
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