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Friends warns on massive gap between MFR and FRS17

Friends Provident is warning that more firms may switch from defined-benefit to definedcontribution pensions because of a yawning gap between the minimum funding requirement and FRS17.

Its calculations reveal even pension schemes which are overfunded under minimum funding requirements appear to face huge shortfalls under accounting standard FRS17.

The figures show that a scheme can be 115 per cent funded on an MFR basis yet only 65 per cent funded through a FRS17 valuation.

The dramatic difference is because of the way scheme liabilities are calculated. Friends says this means companies which thought their pension scheme was overfunded could be in for a shock when FRS17 valuations are calculated.

MFR liabilities are calculated by assuming a return on equities and gilts and a market value adjuster is applied to account for actual investment conditions at the time.

FRS17 liabilities are calculated on the basis of the corporate bond yield at the time. The difference can mean liabilities over 30 years under FRS17 can be double what they would be under MFR.

But actuaries are warning that MFR and FRS17 are very different measures.

The MFR valuation shows the scheme is able to pay transfer values while FRS17 shows its ability to pay benefits.

Friends senior technical manager Chris Bellers says: “Defenders of FRS17 say it only highlights deficits which are already there but with these numbers you cannot say that. If the figures show funding levels are half what the MFR level is, this can be very frightening and we might see more schemes go out the window.

Institute of Actuaries spokesman David Cule says: “It would be possible to get these different numbers. FRS17 and MFR are different measures of the same liabilities. The question is, are these real liabilities? FRS17 does not show a cash requirement and from a funding perspective can be irrelevant.”

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