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Will MFR changes stem final flood?

Reform of the minimum funding requirement may be the first good news that final-salary pension schemes have had in a long time but many people in the industry believe it does not go far enough to be their saviour.

In the face of a tide of highprofile final-salary closures, the Government hopes the proposals will go some way to ease the burden of defined-benefit schemes while maintaining member protection.

The new measures extend the time limit which schemes have to make good any def-icits. Firms presently have one year to make up funding to 90 per cent of the MFR and five years to reach 100 per cent funding. These periods will be extended to three years and 10 years respectively.

The MFR is widely seen as an unwieldy beast brought in to protect members from a repeat of the Maxwell affair.

Towers Perrin partner Mark Duke says: “The MFR was well intentioned but is badly constructed, has unintended consequences and is little understood.”

It has been under review for some time after the Gov-ernment recognised it was an inflexible measure. A new scheme-specific funding standard to replace the MFR is expected by 2004.

The NAPF says the ref-orms are a practical solution to some of the serious issues facing defined-benefit schemes and will bring some relief from the burden of red tape.

Others in the industry say the reforms will at least ease pressures on final-salary schemes to make up MFR funding deficits.

Standard Life senior technical manager John Lawson says: “These reforms will certainly allow more breathing space. If you have been holding equities in the fund, now is the time, because the markets are down, when you need more time to make up deficits.”

Deloitte & Touche reg-ional head of employee benefits Andy Mewis says: “These are definitely steps in the right direction. Previously, if a company could not make up a deficit within 12 months, they may have thought about closing the fund. Now they have got three years so if they have been going through a bad trading year, they have more time to make it up.”

Although the Treasury bel-ieves reform of the MFR is vital to the future success of defined-benefit schemes, few in the industry would agree.

Aon Consulting says alth-ough these changes will provide some relief for employers struggling to meet the MFR in the current economic climate, the changes will have no long-term effect on the cost of a scheme.

Scottish Equitable pensions development director Stewart Ritchie says even schemes fully funded on an MFR basis can find when they wind up the scheme that it can be up to 30 per cent short on its liabilities for members not yet retired.

He says: “The MFR is a weak standard. It is really the least of trustees&#39 concerns. In the context of what else is facing them, the MFR is not on the list. It may be an inconvenience but it is not a strong measure.”

Lawson says: “This is a bit like locking the stable door after the horse has bolted. In hindsight, the MFR can be seen as overkill to Maxwell.It will not make a huge difference to final-salary schemes, with people living longer and accountancy standard FRS17.”

Few would argue with the need to move away from the rigidities of the MFR and these changes are generally regarded as sensible interim measures until a better solution can be found.

But the problems surrounding MFR are only a drop in the ocean of troubles facing final-salary schemes and reforms are thought unlikely to assuage employers from heading for the safer shores of money-purchase schemes.

Clerical Medical pensions strategy manager Nigel Stammers says: “Some schemes will find these measures helpful and may at least allow them to avoid making any hurried action but they are not the answer for turning around the flood of final-salary scheme closures. There are too many things working against final-salary schemes.”


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