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.
The replacement of the MFR with tougher requirements for defined benefit schemes actually 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, according to experts. This situation is exacerbated by the current stock market volatility.
Annuity IFAs fear that to meet the new requirement to pay for the full benefits originally defined when schemes were set up, pension funds will have 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 defined benefit schemes and the switch to defined contribution schemes.
Annuity Bureau director Ronnie Lymburn says: “Market volatility still remains and by accepting Myners, the Chancellor has done nothing to create less 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.”