By Mohamed Ali Bernat The Association of Consulting Actuaries has accused Government of fostering a ...
By Mohamed Ali Bernat
The Association of Consulting Actuaries has accused Government of fostering a pensions environment that will lead to the end of occupational pensions.
In a discussion paper entitled Apocalypse Now? the association said employers are being driven from providing occupational pensions by increasing compliance costs, resulting in a reduction of overall benefits for staff.
The paper also notes a worrying and general lack of confidence that any new pensions structure will remain in place for any length of time and describes the Minimum Funding Requirement (MFR) as being "generally recognised to have broken down".
Ian Shepherd, an actuary for Mercers, described the revised MFR, originally scheduled for spring 2000, as a further threat looming on the horizon. His warning, which came at the same time as the Pensions Scheme Registry, showed fewer occupational schemes had been set up in 1999 than in any of the previous 20 years. Some 3,170 schemes were started in 1999, compared with 4,939 in 1998, 6,578 in 1995 and 11,112 in 1991.
Tougher regulations on MFR would further deter scheme sponsors from continuing to run the risk of offering defined benefit schemes and result in most switching to defined contribution, according to Shepherd, who suggest the MFR review should have started from a pragmatic rather than theoretical angle.
He said: "At present an MFR based purely on gilt yields would be a significantly tougher test than the current MFR and the target of 100% funding would be unattainable by many schemes. The review should take into account scheme sponsors whose requirements include the ability to invest in equities and the avoidance of short-term fluctuations in cash flow due to falling MFR value."
Shepherd added that even if funds did link their ratings with corporate bonds, liabilities would still fluctuate in line with the gilt market, causing further disparity.
He said current MFR liabilities were hampered by illogical factors based on a skewed dividend outlook, which needed to accept that companies were generally issuing lower payouts. MFR liability, based on fixed amounts divided by the total average dividend yield of the FTSE All-Share Index, was bound to be affected by falling dividend expectations on the market, according to Shepherd. He said Vodafone's takeover of German telecoms firm Mannesmann in February was a classic example because the company's low yield affected the entire index. He added: "Changes in company dividend policies and the fall in real yields produce spectacular increases in pension costs."
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