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Beware the MFR sting

Those who have thrown their hats in the air after the Chancellor&#39s minimum funding requirement announcement should perhaps read the small print before they break open the champagne.

The Government&#39s decision to abolish MFR has a major sting in the tail.

In order to ensure that defined-benefit scheme members do not have their security reduced, the Government will legislate so that “employers will stand behind the defined-benefit promise and members will receive the benefits accrued to date”.

Even under MFR, employers did not have to do this. As long as the scheme was 100 per cent funded on MFR, they could walk away with no further financial liability.

In cases currently winding up, this has frequently resulted in people not yet retired receiving only about 60 per cent or 70 per cent of the defined benefit they thought they were guaranteed.

If such a scheme were to wind up with the new legislation in place, this would mean the employer having to pay in to the scheme roughly half as much again of the money held in the scheme for people not yet retired.

The practical implication of this is likely to be acceleration of the move from defined benefit to money purchase, especially among small and medium-sized employers, as they seek to limit their liability before the new legislation takes effect.

The issue about transfer values out of defined-benefit schemes remains open. All the Government is saying is that “consideration will need to be given to cash equivalent transfer values as these are currently linked to MFR”.

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