SECURITY FOR OCCUPATIONAL PENSIONS
A Consultation Document
Introduction
Internal links
1. This consultation document seeks views on the Minimum Funding Requirement (MFR) that applies to most private sector defined benefit (DB) occupational pension schemes. It is issued in parallel with a report on the MFR from the Pensions Board of the Faculty and Institute of Actuaries. It also seeks views on alternatives to the MFR in the light of both the Actuaries? report and in the context of Paul Myners' review of institutional investment commissioned by the Chancellor of the Exchequer earlier this year.
2. Occupational pensions are important. About 4.5 million people already get pensions from private sector DB occupational pension schemes and about another 8.5 million people of working age have pension rights through such occupational schemes which will become payable in future. The Government is determined that all these scheme members - both pensioners and people still working - can have a high level of confidence that their pensions will be paid when they fall due.
3. To provide for their liabilities, defined benefit occupational pension schemes build up funds. These are subject to the Minimum Funding Requirement introduced under the Pensions Act 1995. Schemes whose assets fall below the minimum set by the MFR test have to make up the shortfall within prescribed time periods.
4. However, the MFR does not provide a guarantee that, in the event of an employer becoming insolvent, its pension scheme members? rights will be honoured in full. And there have been indications that the MFR also adversely influences the investment decisions of scheme managers. This could damage the longer term prospects for such schemes, which remain an important way of providing for retirement. Further to that in the last budget the Chancellor announced that he was asking Paul Myners to review the factors that influence institutional investment decisions. Responses to his review, for example from the National Association of Pension Funds (NAPF), suggest that the MFR has distorted investment decisions.
5. In March 1999 the Department of Social Security commissioned a report on the MFR from the Faculty and Institute of Actuaries, which is published alongside this consultation document. It contains proposals for reform and identifies a number of wider issues concerning the security and costs of defined benefit pensions. But it also suggests that the current MFR may not be the most appropriate approach for the future. This document therefore seeks to explore these wider issues with a view to achieving security for defined benefit pensions from well-performing schemes. A number of options are put forward and the Government welcomes comments on the alternatives specifically discussed as well as other suggestions.
6. Paul Myners has also been asked for his views on the MFR and the possible alternatives as part of the consultation process. He will report at the time of the Pre-Budget Report. In order to allow time to reflect on his recommendations all other responses to this consultation document are invited by 31 January 2001. Please send them to:
Ms Andrea Garman
Room 311
Pensions Directorate
Department of Social Security
The Adelphi
1-11 John Adam Street
LONDON
WC2N 6HT
Tel: 020 7962 8753
Fax: 020 7962 8591
Email: mfrreview@ms41.dss.gov.uk
LINKS
Copies of this consultation paper are available on the Department of Social Security web-site - link below.
External links
The report accompanying this consultation paper is available on the Actuaries website.