I pulled out my trusty MC-2D, essentially the same model you have, to see what the deal is. My declination and south line up precisely, or at least as well as my aged eyes can discern. My particular model is at least fifteen years old.

Now I can set the declination scale so that it does not point directly to south, by one degree, two degrees, or more. That is the purpose of the very small brass screw on the back of the compass ring (at least that is where it is on mine) and that is why there is that very tiny screwdriver on the lanyard. The idea is that I can set the declination to whatever value is appropriate for the region in which I am traveling.

If the compass ring and the declination scale are centered on the same point, and you can change the declination offset, I would think your compass is perfectly fine....

We may need to resort to pictures......