THIS ARCHIVE PAGE IS UPDATED ONLY TO 2004
The Minimum Funding Requirement was introduced by the 1995 Pensions Act following the Maxwell scandal. It gave security for scheme members by requiring companies to maintain a minimum value of pension assets to meet liabilities and make good deficits over specific periods of time.
But, the value of MFR assets required was reduced after it was introduced, and it always fell short of the amount required to buy an annuity from an insurance company.
The weakness of the MFR, even for a solvent company, was demonstrated in August 2000. Blagden plc was in solvent liquidation with shareholders receiving cash, even though the pension fund was unable to buy out its pension obligations. This new twist produced disbelief amongst commentators, especially the FT's Martin Dickson "Death with a difference."
This was eventually resolved without members losing, but this was down to the small print of the Blagden Trust Deed and experts were clear it would not set a precedent. The Chairman of the Blagden Trustees also wrote a January 2003 piece in the FT "UK law cannot fall short on winding-up pensions".
Paul Myners, Chairman of fund managers Gartmore, had been asked by the Chancellor to review UK institutional investment. The Chancellor seems to have decided that the UK lacked long term venture capital & private equity funding and that such investment would happen if pension fund regulation was weakened. Boots took a robust line on the assumptions of the Review in its July 2000 "Response to the Myners' Review".
The Myners' Review produced an interim letter in November 2000 and I wrote an FT letter criticising the proposal to abolish the MFR. "Pension fund rules would be unworkable". Paul Myners defended with a number of actuaries counter attacking.
Paul Myners seems to have been unaware of the ASB's work on pensions culminating in FRS 17, which was published within a few days of his interim report. Barry Riley added his sceptical comments in "Mixed response to the new pensions report".
Meanwhile, in September 2000 the DSS, as a separate initiative, produced a "Consultation Paper on Security for Occupational Pensions", which does not appear to have been co-ordinated with the Treasury sponsored Myners' Review. Boots response to this paper continued its robust line.
Boots wanted to strengthen security for members and in particular to prevent a solvent company walking away from its pension obligation. It was proposed that pension scheme members should be given preferential treatment over creditors and the pension debt should be calculated on a market basis.
The full Myners' Review in March 2001 repeated the abolition of the MFR, which was accepted by the Chancellor in his Budget Speech. However, again separately, with no acknowledgement in the Budget Speech, the DSS simultaneously published "Security for Occupational Pensions: The Government's Proposals". This accepted the idea of calculating any pension shortfall owed by the company on a market basis and making it a preferential creditor, so members lost only in extreme circumstances.
By the time the DWP in September 2001 published "The MFR: The next stage of Reform" the Government had done a U-turn, ditching the requirement to fully fund, presumably in response to lobbying. I objected both in a Times' letter "No time to scrap the MFR" and FT article "Promise becomes a Gamble", whilst the Boots response was also highly critical of the U-turn.
Poor security for pension scheme members was highlighted in a November 2001 BBC Moneybox Special "Pensions in Peril", looking at Ravenhead Glass, which had gone bust with a pension deficit.
Whilst trying to come up with a coherent replacement for the MFR the Government further weakened the existing MFR in March 2002, prompting renewed criticism from me "Pension scheme members' only legal protection is the MFR" and others in the FT "Changes may save pensions but reduce security".
For anyone who believed this was just an academic exercise there were many small companies going bust with a pension shortfall, including United British Shoe Machinery and Albert Fisher.
In August 2002 the FT published an article pointing out the ability of a company to walk away from its pension promises prompting a stiff letter "How to impose discipline on pension scheme management". We did not have to wait long to see the ugly practice of a solvent company winding-up its pension scheme. In the words of the October 2002 FT headline "Maersk staff left short in new assault on pensions" with "Minister orders action on pension closure". John Plender suggested it was "A company pension more lethal than the bear".
More of the same was the wind up of the UK subsidiary of the US giant Parsons "Parsons pensioners fall foul of parent", whilst steel maker, ASW, went bust with a shortfall "Pension likely to be halved".
My comments at a February 2003 conference were well reported "Warning on supervision of pension funds", the speech reprinted in the FT as "A challenge to the equity cult" and I appeared (briefly) on the BBC News at Ten.
Co-incidentally, Sir Roy Goode, who has been quoted only rarely since finishing his Report after the Maxwell scandal, said in an FT article that "Pension law fails to protect employees", picked up in an FT leader with a letter from the NAPF Chairman.
In June 2003, as a very reluctant convert, the Government announced what would become the Pension Protection Fund and a tougher regulatory regime. (See my FT article).