Pensions throw off strait-jacket

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The Independent Online

Despite speculation to the contrary, the Budget did not tinker with annuities. The Chancellor clearly felt a wholesale review of what is an emotive subject was inappropriate fodder for a pre-election Budget.

Despite speculation to the contrary, the Budget did not tinker with annuities. The Chancellor clearly felt a wholesale review of what is an emotive subject was inappropriate fodder for a pre-election Budget.

But there was a surprise in that the Chancellor accepted the proposals of Paul Myners, chairman of Gartmore Investment Management, for pension fund reform. He took the sensible course of action in announcing the abolition of the minimum funding requirement (MFR).

As advised in Mr Myners' review of the £1,500bn institutional investment industry, the solvency test for pensions will be replaced with more practical measures.

These plans should ensure that members of company pension schemes receive protection while not losing out on investment returns. The MFR was introduced in 1997 to avoid a repeat of the Robert Maxwell pensions scandal. It aimed to ensure that any company providing an occupational pension to employees was able to honour the commitment if it went bust. However, Mr Myners argued in his report that he felt MFR did not protect pension funds.

The abolition of MFR has been long overdue owing to the distorting effect it has had on pension fund investment, requiring each company pension to invest a proportion of funds in out-of-favour gilts. Critics argue that it did not encourage investment in private equity or venture capital because it was too reliant on gilts, whose performance has been less than glittering. Such dependence on ultra-safe investments has dragged down the returns on pension funds.

Pension funds will be able to invest more in private equity, providing a welcome boost to venture capital. Other investments will be considered too as the Government is commissioning an independent review of personal investment products. This will look at whether savers get enough information about investment funds to make informed choices.

There will be a short consultation period, after which MFR will be replaced by a long-term funding standard tailored to different types of pension schemes. There will be additional protective measures, such as a statutory duty of care towards members, imposed on the scheme's actuary, as well as stricter rules on voluntary wind-up, and compensation for fraud. Recovery plans for underfunded pensions will be introduced.

The plans, which will overhaul the way pension funds are run, have been welcomed by most fund managers.

The Government has also agreed to the abolition of solvency rules for occupational pension schemes. It will conduct an independent review into how personal investment products are sold, similar to Don Cruickshank's banking review of last year. It will monitor the City's compliance with a voluntary code of best practice, and in two years' time assess whether there has been a change in behaviour. If not, the Government is likely to threaten the industry with regulation.

This, out of all the Budget measures the Chancellor announced last week, could turn out to be the most significant.

 

* m.bien@independent.co.uk

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