Why safe means sorry with company pensions

When Robert Maxwell disappeared off his yacht in the Azores in 1991, his death unearthed a £400m hole in his group's pension fund. The ramifications rumble on, particularly so last week when the Faculty and Institute of Actuaries reported back to the Government on the minimum funding requirement (MFR).

When Robert Maxwell disappeared off his yacht in the Azores in 1991, his death unearthed a £400m hole in his group's pension fund. The ramifications rumble on, particularly so last week when the Faculty and Institute of Actuaries reported back to the Government on the minimum funding requirement (MFR).

For those whose memories don't stretch back that far, this was introduced to ensure there was no repeat of the Maxwell pensions scandal. Final salary occupational pension schemes have been subject to MFR since April 1997. The requirement aims to ensure that any company providing an occupational pension to employees will be able to honour those commitments should it go bust, by investing a certain proportion of funds in long-dated gilts.

Yet already MFR is looking outdated, particularly as pensions are more expensive than ever, given low annuity rates (see page 11) and increasing lifespans. As such, the valuation basis of MFR is subject to constant fluctuation, so a new level is decided every three years.

In deciding what that should be, the Institute of Actuaries has reported that a short-term fix is needed - a 5 per cent uplift of the current level.

The trouble is that MFR was largely a knee-jerk reaction to the furore surrounding Maxwell. With one in seven company pensions still failing to meet current rules on adequate funding, can it be argued that MFR has any long-term value?

Current and future pensioners have a right to some guarantee that their hard-earned money will eventually be returned to them - significantly grown through careful investment. But this also means there can't be too much security or that many restrictions as to how the money is invested. Once limits are placed on the pension manager, possible growth is curtailed. Large amounts of pension money must be invested in less well-performing assets in order to provide that security.

David Cule, a member of the pensions board at the Institute of Actuaries, agrees that the minimum funding requirement is not ideal.

"The only solution is a compromise, which is what MFR is," he says. "You could opt for 100 per cent securities, a scheme which wouldn't survive, or no securities at all, which is not fulfilling the promise made to the members of the fund."

The Government has a duty to give protection to current and future pensioners via some form of regulation. If anyone needed any confirmation of this, they need look no further than Robert Maxwell. But some sort of insurance scheme with meaningful protection, rather than an MFR which is not guaranteed to meet liabilities, may be a more useful and productive solution.

* m.bien@independent.co.uk