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EDITIONS
Thursday, 8 March, 2001, 20:36 GMT
Pension experts criticise budget
Elderly shoppers
The spending power of 40,000 people is set to improve
By the BBC's personal finance reporter Andrew Verity

Leading pension consultants have criticised the Chancellor's decision to abolish a crucial safeguard for pension funds.

The consultants fear Gordon Brown has decided to scrap the Minimum Funding Requirement without providing an adequate alternative to protect employee's pensions.


The government is simply passing the buck to individual schemes and the individual groups of trustees

Mike Pomery
Bacon & Woodrow
The Minimum Funding Requirement was the main plank of the Pensions Act 1995, which aimed to help prevent a repeat of Robert Maxwell's theft of more than 400m from pension funds sponsored by his companies.

Ten years ago the committee investigating the Maxwell affair, led by Professor Roy Goode, discovered a crucial fact: in law there was nothing to oblige employers to have any assets in their pension funds at all.

The committee's answer was to insist that all companies put enough into the pension funds they sponsored to be sure of paying out their pensions - even if they suddenly went bust.

Under attack

The result was a law called the Minimum Funding Requirement (MFR), which the pensions industry attacked from the start.

Big privatised companies with lots of retired employees could not always afford to comply with it, and it was watered down before it reached the statute book.

The pensions industry's biggest objection to MFR was that it required pension funds to invest cautiously to ensure they could meet their pension promises.

That meant investing more in safer government gilts. The pension funds would have preferred to invest more in shares, which carry a higher risk but hold out the chance of better returns.

The National Association of Pension Funds, whose members control assets worth more than 700 billion, first called for MFR to be scrapped two years ago.

Watered down

The NAPF said the safeguard had been so watered down that it was giving members of pension schemes a false sense of security.

Companies could meet the MFR but still be unable to pay in full the pensions promised to their staff.

In one example, a small firm named Blagden was forced to close down.

Its pension fund met the MFR test, yet it could only afford to pay two thirds of the pension benefits it owed to members.

In this week's Budget, Gordon Brown said the MFR had failed and would be scrapped.

Too much responsibility

Instead, individual pension schemes and the trustees responsible for them would decide for themselves the level of assets they needed to meet their promises.

But pension consultants like Mike Pomery of Bacon & Woodrow say the government's done away with the protection offered by MFR - without proposing an alternative.

By leaving it up to pension schemes, it could be asking too much of trustees.

He added: "I think there's very little protection in this at all. The government is simply passing the buck to individual schemes and the individual groups of trustees [who supervise the schemes] to set their own levels of funding.

"The trustees are going to find it very difficult to do that without the government taking the initial, political decision about what level of protection the public should expect from their pension schemes."

With 13 million people relying on company pensions, the government says they will be just as well protected if pension funds decide themselves how much they need in their coffers.

The consultants fear this leaves all the crucial decisions to unpaid pension trustees, most of whom cannot devote more than 20 hours a year to the task.

And they point out that it was precisely the trustees who failed to notice what Robert Maxwell was up to.


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See also:

08 Feb 01 | Business
07 Mar 01 | Budget 2001
23 Nov 00 | UK Politics
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