Does MFR matter?

Article Abstract:

The United Kingdom introduced a minimum funding requirement (MFR) for pensions as part of the Pensions bill which became the Pensions Act of 1995, and became law in April 1997. MFR does not take full effect for some time, and has been affected by a number of uncertainties. These include changes in the tax system in the summer 1997 Budget, which ended dividend tax credits previously received by pension funds, altering yields. There are a number of questions need to be tackled, such as the cost of holding government securities to satisfy the MFR, and whether this is worth paying.

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The Minimum Funding Requirement challenge

Article Abstract:

The UK pension industry will be affected by the Pensions Act which has introduced a Minimum Funding Requirement (MFR). The MFR aims to ensure the solvency of salary-related pension schemes so transfer values and pensions are secure if the scheme is wound up. There is likely to be a major impact on strategy over the long term, though this is likely to be felt gradually. The final details have yet to be provided to fund managers, but a number of benchmarks are likely to be set up.

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The best of both worlds

Article Abstract:

Equities tend to perform better than wage inflation and bonds over the long term, and this has meant that United Kingdom pension funds have tended to increase their allocations to equities. This trend appears to be reversing due to maturation of liabilities of pension schemes, and the Pensions Act, which has increased awareness of risk. Changes to advance corporation tax in 1997 reduced likely returns from equities, and are likely to accentuatethis shift toward bonds.

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