In its response to the government's consultation on the future of the Minimum Funding Requirement (MFR), the Association of Corporate Treasurers notes that the cost to companies of providing defined benefit pensions has increased markedly over recent years, with the increase in longevity, lower real interest rates and the withdrawal of the dividend tax credit in 1997.
While most companies see defined benefit pension schemes as an important employee benefit and an aid to recruitment, it should not be assumed that such companies and their shareholders will always be willing to bear the increased costs arising from changes in government policy and other factors.
The trend for new pension schemes to be defined contribution rather than defined benefit schemes is well established and the Association believes that it is important that any legislative changes are designed to slow down rather than accelerate this trend. The Association considers that the MFR has not achieved the objective of providing adequate security to scheme members but has had a distorting and damaging effect on the financial markets. It therefore supports those arguing for it to be replaced and further suggests that:
1. A new more flexible measure is introduced to gauge the adequacy of the assets available to meet pension liabilities. This Association supports the ABI's proposals and the Association of Consulting Actuaries' proposed Statement of Funding Principles in this regard.
2. The security of scheme members is enhanced by a change to the insolvency laws (as proposed by the ICAEW) so that companies can give preferred credit status to their pension funds.
3. Given this improvement in member security, employers should have more say in the investment strategy of the fund.
4. An industry wide education effort is instituted to make scheme contributors aware that an investment programme based more on equities than gilts will have a higher expected final pension benefit, but with a greater probability that the minimum pension sought will not be delivered. The role and cost of the corporate guarantee to fund any scheme shortfalls in defined benefit schemes will then be understood as a function of the investment decisions of the pension fund trustees.
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