The UK Treasury is considering setting up a central discontinuance fund (CDF) to replace the minimum funding requirement as a means of bailing out the pension funds of bankrupt companies. The Treasury hasn’t announced how the government will fund a CDF but it is likely it will raise initial capital though a bond issue and follow it with a levy on pension funds.
Critics of a CDF say levying defined benefit schemes is likely to accelerate the move towards defined contributions. Says Gordon Pollock, a partner at consultant William Mercer: “As there is no compulsion on any employer to offer a DB scheme, a levy on such schemes would not guarantee the solvency of the CDF. It would merely act as a mechanism whereby better-funded schemes would cross-subsidise those less well funded.”
The National Association for Pension Funds, the body representing the UK’s £830bn (e1.4trn) pension market, has urged the UK government to scrap the MFR and a discontinuance fund is seen by the Treasury as an alternative. Investors say MFRs have been skewed the market by forcing them to invest in scarce gilts to cover their liabilities.
The government first considered a discontinuance fund after the Maxwell affair but refused to underwrite it. “Unless the government underwrites it then it’s fundamentally flawed,” says Pollock. As yet the Treasury hasn’t specified who will finance any shortfalls were the CDF unable to meet its obligation. “After the Equitable Life debacle, the government cannot be unaware of the risk of failing to provide adequate reserves for guarantees.”
Apparently the Department of Social Security and the Treasury have fallen out over an alternativee to the MFR. The Treasury is considering more radical alternatives than the DSS. Jeff Rooker, minister for pensions, was last month due to publish the Institute of Actuaries’ proposals with comments from the DSS and this has been postponed due to the dispute. Both departments were unavailable for comment.