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IFAs warn axing MFR could rebound on pension funds

The scrapping of the minimum funding requirement, widely expected to ease pressure on gilt markets, may actually increase demand and depress annuity rates, according to leading annuity IFAs.

They claim the replacement of the MFR with tougher requirements for defined-benefit schemes places more of a burden on pension funds. It is likely to generate greater demand for gilts as employers try to reach the 100 per cent benefit levels now required.

This situation is exacerbated by current stockmarket volatility.

Pension experts fear that to meet the new requirement to pay for the full benefits originally defined when schemes were set up, pension funds will have to generate half as much again of the money held in schemes for members not yet retired.

The more stringent requirements are expected to accelerate the demise of definedbenefit schemes and the switch to defined-contribution schemes.

The Annuity Bureau director Ronnie Lymburn says: “Market volatility still remains and, although he has accepted Myners, the Chancellor has done nothing to ease demand for gilts, which keeps annuity rates depressed. This makes the situation even worse.”

Scottish Equitable pensions development manager Margaret Craig says: “The new requirement will certainly provide security for members but may well be an onerous burden for employers. Also, no decision has been made on the important issue of how this will affect transfer values which are underpinned by MFR.”

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