Pension funding and expensing in the minimum funding requirement environment

Document description

The statutory Minimum Funding Requirement (MFR) introduces fundamental change to the funding of pension schemes in the United Kingdom. While only a minority of schemes will actually be affected materially in terms of actual contributions or benefits, taken over a period of years, the influence of MFR will be much more widely felt. This is because the MFR is an absolute standard to be met, whereas long-term funding targets for ongoing schemes are, at least up to a point, optional and adjustable. The paper discusses the difference between MFR and long-term funding and suggests a variation on traditional actuarial methods to control explicitly the risk of MFR failure, based on a combination of traditional methods and the theories underlying asset/liability modelling. The paper also discusses the implications for pension expensing and communication of funding levels.