By Mohamed Ali Bernat The Minimum Funding Requirement (MFR) has done little to protect pension sche...
By Mohamed Ali Bernat
The Minimum Funding Requirement (MFR) has done little to protect pension scheme members from fraud, according to Paul Myners.
In recommending the abolition of the MFR, Myners said existing fraud compensation arrangements should be extended to more adequately cover the cost of securing members' rights, to separate custody of assets from employers and to foster a regime of transparency and openness.
Fraud was one of the original concerns behind pension legislation post-Robert Maxwell but this has not been addressed by the MFR, Myners said.
He added that the MFR did not address properly the question of protecting defined benefit (DB) scheme members but was instead concerned with preventing situations where a pension fund was underfunded and unable to meet its obligation in the event of the employer becoming insolvent.
Because of this he concluded that the MFR was seriously inadequate as a form of protection.
"Prudential regulation is the answer. It is not for Government to set benchmarks but to establish a framework in which the industry can operate," he said.
He said: "MFR, as it is constituted, does not provide good and clear protection nor any guarantee to be able to fund pensions. Far from protecting members of DB schemes it has contributed to the increased cost of DB."
Myners described MFR as having provided a security blanket for the ultra-cautious which did not provide the security for members of DB pension schemes that many assumed.
He said: "I have been struck by the number of people who, when they talk about reducing MFR risk go on to say this will come about by increasing their allocation to gilts.
"The MFR has provided a blanket behind which the weak and the lazy can hide."
The solution, which would require primary legislation if adopted by the Government, is to take measures that guard against clearly inappropriate investment strategies as well as defining between the different concerns of large and small schemes, according to the number of members rather than the value of assets.
The pensions industry is still awaiting Myners' final recommendations on investment in private equity, which is expected to propose measures to increase the levels of funding to venture capital beneficiaries from pension assets estimated to be in the region of £800bn.
Myners said he did not believe the abolition of MFR was a necessary prerequisite to introducing measures that would encourage investment into private equity.
He said: "There is no doubt that the MFR was a hindrance to investment in this class of capital but the MFR has a much broader impact in constricting the type of investment trustees are willing to advocate."
The consultation period on MFR ends in January and Myners is set to make his final report to the chancellor in the run-up to the April budget.
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