Minimum Funding Requirement
This briefing discusses the introduction and development of the Minimum Funding Requirement.
This briefing is not being updated. For the latest information on this topic, see the Library Briefing Defined benefit pension scheme funding.
The Minimum Funding Requirement (MFR) was introduced by the Pensions Act 1995 and took effect from April 1997. It was a funding standard applying to private sector, funded, defined benefit pension schemes. It was designed to keep pensions in payment but would only provide non-pensioner members with an “even chance” of receiving a cash equivalent transfer value that would, following investment, produce a pension equivalent to that which would have been provided by the scheme.
The MFR was criticised both for “distorting investment decisions without providing effective protection for members” and for being insufficiently flexible to respond to the circumstances of individual schemes. In Budget 2001, the Government announced that it would legislate to replace the MFR with a “long term scheme-specific funding standard.” Following further consultation, the Government legislated for this in Part 3 of the Pensions Act 2004. The current scheme funding requirements are covered in Library Standard Note SN/BT 4877 Pension scheme funding requirements.
The Parliamentary Ombudsman in a March 2006 report, ‘Trusting in the Pensions Promise’, found that official information provided regarding the security that members of final salary occupational pension schemes could expect from the MFR was “inaccurate, often incomplete, largely inconsistent and therefore potentially misleading.” She recommended that the Government should consider whether it should make arrangements for restoration of benefits to scheme members affected. The Government did not accept the findings but, following a judgment by the High Court, further extended the scope and generosity of the Financial Assistance Scheme (set up to provide some compensation to members of schemes that started to wind up between 1 January 1997 and April 2005.). This is covered in more detail in Library Standard Note 2010 – Financial Assistance Scheme – developments to 2007.