The ABI wants the Government to appoint a panel to establish a more pragmatic way of assessing pen...
The ABI wants the Government to appoint a panel to establish a more pragmatic way of assessing pension fund liabilities as a replacement to the minimum funding requirement (MFR).
In its response to the Government's review of MFR, the ABI has proposed that a revised funding standard should reflect the realities of investment markets and performance. According to the ABI the standard should accommodate the portfolio mix that pension funds generally invest in, reflecting informed decisions regarding the appropriate risk/reward trade-off.
Furthermore, the ABI said any established standard should reflect asset classes that pension funds can invest in and should not encourage matching to assets that are in short supply, or avoidance of those in plentiful supply, so leading to distorted markets.
The association said the appointed panel should include investment practitioners, pension specialists and actuaries. Under the proposal, the panel would meet periodically to consider and agree a discount rate for future pension fund liabilities.
Mary Francis, the director general of the ABI, said: "This would enable the present value of these liabilities to be calculated. Comparison with the actual value of the funds invested would then show whether a fund had sufficient assets to back its future liabilities.
"We believe the proposal offers the most balanced approach. It would allow a common standard to be devised, reflecting expert judgement about the prospects for a range of investments and their implications for pension funding."
Francis said pension funds would have a greater choice between bonds, equities and other asset classes, including venture capital, offering the prospect of higher returns, while safeguarding the security of scheme members.
In accepting that a standard measure is needed to gauge the assets available to meet pension obligations and to help with the calculation of transfer values, the ABI believes a balance needs to be struck between three key objectives. Those are the need to offer security to members, the need to avoid the imposition of unreasonable costs on sponsoring companies, and the need to allow trustees the flexibility of investment choice.
The ABI believes the MFR has distorted financial markets by encouraging pension schemes to invest in gilt-edged stock, while offering only limited security.
The association also rejects a number of other suggestions for replacing the MFR. It opposes the idea of additional prudential regulation, which its says would be costly and intrusive. Neither does it believe a central discontinuance fund or a compulsory or mutual scheme would work.
Francis said: "There would be significant moral hazard problems connected with all such proposals. It is also difficult to imagine the Government acting as the necessary guarantor for a central discontinuance fund, and the industry sees no argument for providing cover under a compulsory insurance scheme."
In addition to the ABI, the NAPF, Bacon & Woodrow, actuaries Punter Southall & Co, the Pensions Management Institute and the Association of Consulting Actuaries have all responded to the review calling for MFR to be scrapped.
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