UK – The pensions underfunding problem highlighted in a Bacon & Woodrow report this week are being compounded by the minimum funding requirement (MFR), according to employee benefits firm, Jardine Lloyd Thompson (JLT).

JLT points out that, though the government supported the Myners’ report recommendation that MFR should be abolished, it has yet to introduce any transitional arrangements to ease the burden of MFR.

At present, JLT considers that it is not just small and medium sized companies that are feeling the strain, but larger pension funds too. The Bacon & Woodrow report revealed that 17 FTSE 100 companies have assets that don’t cover their liabilities, as opposed to seven last year.

JLT suggests that the actuarial model underlying MFR is fundamentally flawed, but, as MFR is enshrined in primary legislation, it could be as much as two years before a replacement can be put in its place.

June McIntosh, technical director at JLT’s employee benefits division, comments: “We urge the government to use its powers to amend the detailed regulations of MFR in order to relieve the burden on businesses, for example by extending the funding shortfall recovery period.”

JLT says that the Occupational Pensions Regulatory Authority (OPRA) will have no choice but to continue to monitor MFR compliance, which could be “crippling to some companies”, if contribution rates increase.

“Ironically, therefore, the current MFR is leading to a worsening of pension provision by UK employers,” says McIntosh.