 The Younger Members Convention 2-3 December 2002 The De Vere Daresbury Park Hotel, Warrington, Cheshire

Au Revoir MFR Andrew Pugh Mercer Human Resource Consulting

Agenda n Introductions n History n The Future?

Introductions n Me n You n This Man : n This Boat : n This Report :

History n Why have an MFR? n What was intention of MFR? n What was / is reality?

Why have an MFR? n “Ongoing” funding normal. n Maxwell n Goode - discontinuance protection “The security for member’s entitlements should be strengthened by minimum solvency requirements…”

Other conclusions from Goode: n Minimum “Solvency” liabilities = sum of cash equivalents (actives) + cost of immediate annuities (pensioners) Cast-iron solvency test not deemed viable Note that GN11 at that time steered towards Gilt based TVs.

Other conclusions from Goode: n Avoid differences in approach to the assessment of scheme solvency which are not attributable to differences in schemes. Defined assumptions and methods for assessing solvency are required.

More amusingly….. “The administrative burdens imposed on employers and administrators should wherever possible be reduced…”

Objectives and Constraints on MFR Objective: Meet recommendations of the Goode Committee. Constraints: n strict control on compliance cost n methods consistent with current practice n simple model n 2% equity risk premium n Objectivity  +/- 2%

Compromises n Mortality - PA n Expense allowance n SoC

What is/has been the reality? A - External Influences n Returns on investments poor n Expected future dividends lower n Expected future returns reduced n Evidence of lower mortality

Consequences n Funding positions (whatever your measure) reduced n Expected future costs of pensions increased

What is/has been the reality? B - MFR Problems - Technical n “Traditional” measures to value equities nACT nShare buy backs, etc nLonger term view nVodafone / Mannesmann n Matching Problems n SoC

What is/has been the reality? B - MFR Problems - Implementation n Short term view - Myners n Distortion of gilt market? n Perception of security level VS n Costs of compliance VS n Values too low (GN11)

MFR is dead Long live MFR

The Usual Suspects AA Minimum Funding Test BInsurance CCentral discontinuance fund DOther

What are the objectives? AMember Security BTransparency / Comprehensibility C“Fairness”?

What are the constraints? AEmployer / compliance costs BRed tape costs CConsistency / objectivity DActuarial practice ESimplicity?

What are the implications / consequences? ACash Contributions BWind-up costs CInvestments DTransfer values

Minimum Funding Test 1.Status quo 2.Status quo modified 3.Solvency test -Full benefits -“Core” benefits 4.Market value funding test -Discontinuance -Ongoing 5.Other?

“Solvency” test n x% funding target against gilt based liability measure of accrued liabilities n Government to set x% Balance compliance cost VS Security level n Restoration over 10/15 years, allowing for projected salary increases ; or, perhaps just disclosure to members?

Advantages n Transparency n Objectivity n Security?

Drawbacks n Compliance cost? n Investment implications nReduces option of default nReduce scheme equity exposure nIs this a disadvantage?

Insurance ACommercial Insurance -Moral Hazard -Assessment of employer strength -Defining payout  “MFR” test still required? -Insurer of last resort BMutual Insurance -similar issues -reinsurance? -most exposed when needed most

Central Discontinuance Fund n Pooling of discontinued funds n Extra funding - levy? n Exploited n Guarantor required

OTHER?

Summary n Goode Committee - Member Security Key n MFR flawed n Replacement required? n Balance security and compliance cost

Discussion/Questions