TaxPersonal TaxPension backdown

Pension backdown

Actuaries force government to reduce workplace pensions' minimum funding level. Phillip Inman reports

The government agreed this week to lower the minimum funding levelunding level. for occupational pension schemes, following intense lobbying by the Institute of Actuaries.

Ministers approved the move after actuaries spotted a series of distortions in the system used to measure how much money needs to be paid into defined-benefit occupational schemes by employers.

Actuaries said the distortions falsely inflated their calculation of the minimum funding level, which is based on the gross dividend yield on the FTSE Actuaries All-Share Index.

They blamed the chancellor’s decision to end dividend tax credits for pension funds and the popularity of share buy-backs for undermining the benchmark test.

Occupational pension schemes were badly hit by the changes to advanced corporation tax in last July’s Budget. Many employers considered switching away from the schemes, which pay pensions based on an employee’s final salary, after they were told they would no longer be paid gross dividend payments.

Mike Pomery, deputy chairman of the institute’s pensions board, said: ‘The strength of the current bull market (in equities) means the dividend yield has gone down. We take that into account in our test. But the distortion in the system occurs because of the share buy-backs and other ways of giving funds back to shareholders, which lead to an artificially low dividend yield.’

The effect of the distortions sent transfer values soaring, which could lead to employees making a profit on transferring their funds.

Pomery said the benchmark test – market value adjustment (MVA) – would be based on the net dividend yield, leading to a cut of 9% in the minimum funding level.

But he said the volatility of equity markets and impending accounting standards for calculating pension funds could spell the end of MVA. ‘We are looking at moving to a market value method along the lines proposed by the international accounting standards committee. At the moment, we use long-term assumptions to value assets with adjustments each year.

The latest accounting standards place a market value on the fund consistently.’

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