Lines Taken By Pension campaigners

Official Line from Pension campiagners:

At the heart of this case is that the DWP does not seem to know what proper standards of administration are expected of it. It seems to be under the impression that it knows best what acceptable administrative practices are and, when the experts appointed by Parliament to assess its performance conclude it has not behaved properly, it seems to think it can just disagree. This is a crucial point. The Government should have realised the implications of its information on readers – it is not up to the reader to second guess that the Government has omitted the biggest risk and most important question they needed to consider – i.e. what would happen if their scheme wound up.

The Government excuses failure to mention the major risk factor that members of company schemes faced by saying its material could not have been expected to mention the details of wind-up, scheme funding and MFR and that it only intended to offer introductory materials – aimed at people thinking about joining pension schemes, rather than members. There are 5 strong rebuttals of this line of argument:

- This is not what the Government said at the time it issued the information – it told Parliament and the public in its consultations that it had produced materials to help inform members of the benefits ‘and risks’ from a source they could trust, because at the time the Government knew members were concerned about Maxwell (so they could not trust their employers or employer trustees) and about pensions mis-selling (so they could not trust financial advisers). Indeed, the Government’s initial leaflets were entitled ‘impartial information’.

- the leaflets were aimed at scheme members (PM3 specifically is described as such) and were sent to members of schemes who requested information from the DWP/DSS

- Wind-up of a scheme is a ‘general’ risk, not a risk specific to an individual scheme

- The leaflets would not need to mention any details, just one or two lines to suggest members might not get their full pensions if the scheme wound up and that they should consider their position – especially if they are close to retirement

- By releasing information that was biased to only explain the benefits, not the risks, the government materials were more like propaganda than information. If they were truly impartial, they should have mentioned the risks.

The leaflets endorsed the employer pension scheme by assuring members that the Government had put in place proper protection to safeguard members’ pensions. This message was one that reassured members after the Maxwell scandal. It is surely impossible to suggest that nobody was misled, even if the Government believes not everyone was misled.

The reality is that any reasonable person reading this material, and also having consulted all the other sources of information which the Government refers to, would still have been unaware that there was any risk to their accrued pension rights. They would have no idea that there was a dangerous priority order that could be so damaging to long-serving members’ rights and would also have no idea that they needed to inquire deeply into the MFR funding adequacy because the Government failed to mention the fact that members could lose their pensions on wind up and also that even if their scheme was ‘fully funded’ (i.e. 100% MFR) they could actually lose their whole pension.

Government did not have to put out such material, but having done so, it was surely a requirement and legitimate expectation that it would be complete and reliable, which would necessitate mention of mention wind-up risks and the lack of protection for pensions. This was especially important because the Government did not allow members to diversify their pension holdings. Inland Revenue rules forced members to have only one pension at a time, therefore if it was not properly safe, Government was being irresponsible by preventing members from diversifying. Members would not have put all their pensions in one scheme if they had not believed that scheme was actually safe. No-one would put all their life savings into one share on the stock market, they would diversify their risk. The problem here is that Government indicated there was no risk for pensions already accrued.

The Government is effectively guilty of mis-selling. We should look at determinations in the pensions mis-selling and split-cap cases to see parallels.

Government is effectively arguing that the Parliamentary Ombudsman did not prove that members relied on the information, nor that they were misled by it. This is suggesting that every member who says they did rely on the information is not telling the truth.

MFR

The decisions about adequacy of the MFR and its calculations failed to consider member security on wind-up, even though this was the original stated intention, as declared to Parliament at the time and as admitted in the Government’s response to the Ombudsman’s report. It seems that the Government made its decisions based on employer needs, and forgot to check whether the original intention of providing accrued benefits for members on wind-up was still met. This would be the kind of over-riding reason not to accept the weakening of the standard, but it was not considered and members were constantly reassured about safety that was not there. Even after the actuarial profession’s warnings in 1999, nothing was done about solvent employer wind-ups. Again, the fact that the Government does not recognise that such behaviour is improper is at the heart of this case. If Government had allowed MFR to become far weaker on wind up than the original intention, it should have either strengthened it, or at least warned the public and certainly should not have continued to offer blanket reassurances of safety that was not there. This is particularly relevant, of course, for solvent wind-ups.

FAS

FAS is not helping most of those affected. Already over 8000 are past age 65 and about 560 are getting payments.

The extension to the FAS is not worth around £2 (the ‘cash cost’) as Government has claimed, but only £540m (net present value). Cash costs are not appropriate to use for long term spending – only for 5 years, not 50 years. The costs also fail to take account of tax paid and benefits not needing to be paid, which reduces the real cost even more.

The Government has tried to mislead MPs and Parliament by saying that FAS pays 80% of ‘expected pension’. It does not, it is 80% of a vastly reduced payment and not of what the scheme would have paid.

FAS excludes solvent schemes for no valid reason.

INADEQUACIES OF THE FINANCIAL ASSISTANCE SCHEME

The FAS is simply not working. Of 10,000 or so members already past pension age, only about 400-500 have had any money at all, and these are only the ‘interim’ payments. The system is too slow and cumbersome and, even though trustees of schemes have money they could pay immediately to members over pension age, the DWP will not allow them to and is forcing members to wait until wind-up is completed. The ‘extension’ to the scheme is only for people who are still many years away from retirement, whereas those in most urgent need are the ones who need their pensions now, but are not getting them.

I don’t think MPs really have understood just how low the FAS payments really are. The DWPs final response to the Ombudsman’s report (laid in Parliament on 7th June 2006) states that the FAS will pay 80% of the ‘expected’ pension of those within 7 years of scheme pension age, 65% of ‘expected’ pension for those 7-11 years away and 50% of ‘expected’ pension for those up to 15 years away. This is not correct. The statement misleads MPs into thinking that members will have most of their pension back. That is far from the truth. In reality, many of those on the “80%” band will still lose about half their ‘expected’ pension, those in the “65%” band will often only well under half of their ‘expected’ pension and most of those on the “50%” band will only get between a quarter and a third of their scheme entitlement, so members are still suffering dreadful losses.

The cost of the FAS has been overstated in two ways. The DWP says that the extension to the FAS will mean taxpayers spending another £1.9bn on the scheme, but this is not correct. Firstly, as James Purnell confirmed in the Commons on 20th June, the net present value of the extension to the FAS is only £540m and this is spread over 50 years. Treasury and all experts agree that ‘cash costs’ are not appropriate for measuring costs over long periods of time, unless you want to exaggerate the true cost. Government figures only use cash costs for shorter term spending, perhaps over 5 years or so, but not for 50 years.

Secondly, the DWP costs for FAS did not allow for the fact that all FAS payments are taxed. Furthermore, many of those receiving assistance will lose some means tested benefits they would otherwise get, making the net cost to the taxpayer lower still.

MPs seem unaware of just how inadequate the FAS truly is. Not only have so few people received anything, but even when they do, the payments will be far less than the pension they were expecting. This is because the FAS calculations are based on what the DWP called ‘core’ pension, which is worth far less than members’ ‘expected’ pension. For example:

· FAS payments are not inflation-linked at all – the ‘expected pension’ would be

· FAS only starts full payment when wind-up has actually finished

· FAS starts at age 65 – ‘expected pensions’ start at scheme pension age (often below 65)

· FAS payments are capped at £12,000 and this cap itself is not inflation-linked, so it declines in value over the years

· Entire FAS payments are taxed whereas expected pensions include a tax-free lump sum

· FAS only pays 50% of the FAS benefit to a surviving spouse – whereas the scheme would normally pay spouses at least 50% of members’ full ‘expected pension’

· FAS payouts to widows halve immediately, if a member dies soon after retirement, but schemes usually continue paying full pension to surviving spouses for a few years

· If members die young, FAS pays nothing and survivors are left without any insurance – ‘expected pension’ benefits include life assurance cover and ill-health benefits

Other problems with the FAS:

· Solvent employer schemes are excluded.

· Anyone over 15 years from pension age is excluded, so people in their 50’s who saved for over 25 years in their company scheme still get nothing.

· In fact, all those not included in the FAS will get even less than they would have had without FAS, because trustee expenses incurred in submitting FAS data are taken out of scheme assets. So FAS further reduces pensions for those who get no FAS.

Government says members should have taken advice and not relied on the Government

That is not it said at the time and it is unacceptable to try to reinvent history. At the time, Government said its information was being produced for members to rely on and the material does not say members must take independent advice. It refers members to their scheme and trustees, but members had that information and were looking for confirmation from Government. It was Government that put in the rules, so why would members doubt their words of reassurance?

This is not just about some Government leaflets

It is about far more than this. Firstly, it is about the inadequate oversight of the MFR regime. Secondly, it is about the effect of the legal priority order which members were never told about. Thirdly, it is about a sustained campaign of misinformation which Government was in charge of, designed to lull members into a false sense of security about their pensions and showing more concern for employers than for members’ interests.

Government said ‘Guaranteed’ Minimum Pensions would replace contracted out benefits

Members’ occupational pension entitlements generally consist of two main parts.

a. Their Guaranteed Minimum Pension (GMP) which is just a replacement for their pre-1997 National Insurance additional pension

b. Their occupational pension This other element of members’ occupational pensions comes from their own and their employers’ contributions. This is their actual occupational pension.

Most final salary schemes were contracted out of the state earnings related pension system (SERPS/S2P), and national insurance rebates were paid to the schemes, to provide a replacement for the pension rights that members would have received if they had stayed in SERPS. Government said these rebates would give what it called a ‘Guaranteed Minimum Pension’. But, it has turned out that after 1997 neither the Guaranteed Minimum Pension, nor the company pension element were truly protected, despite repeated Government assurances that these pensions were safe! Yet, the proposed FAS regulations make no special arrangements for the part of the occupational pensions which came from contracted out rebates (as a replacement for state scheme rights). It was actually Government that called this a ‘Guaranteed Minimum Pension’ – not the employer, or the trustees or financial advisers – but it was neither ‘guaranteed’ nor ‘minimum’. How can the DWP deny responsibility for this? This part of the occupational pensions of the winding-up scheme members could be taken back into the state system for free – as happened in the case of the Maxwell scandal. Taking GMPs back into the National Insurance system would also make winding up all these schemes much quicker and simpler.

Deemed buyback is not working in practice

The Government has recently suggested that deemed buyback might help replace lost pensions. Unfortunately, deemed buyback does not really work, but because of its complexity, most MPs do not actually understand what is involved. Firstly, deemed buyback is only a replacement for the pre-1997 state pension rights that members would have had anyway, if they had never paid into a company scheme in the first place. They will still be losing their entire occupational pension that came from their own and employers’ contributions. Secondly, deemed buyback does not even replace the lost national insurance pension rights in full. Thirdly, the Inland Revenue says members must surrender their Additional Voluntary Contributions (AVCs) if they take deemed buyback – even though these were supposed to be protected above all other scheme benefits. The Inland Revenue says that it is taking the AVCs because the law does not specifically exclude it from doing so and if members want to challenge this then they should sue the Government! This is bordering on an abuse of power. Fourthly, in practice, to accept deemed buyback members are told they need financial advice, but they cannot find anyone to advise them. This is because the trustees will not do so, the Citizens Advice Bureau say they can’t help, and even financial advisers are unable to advise because the Inland Revenue will not say how much pension will be received on deemed buyback anyway. So members are being asked to make a choice, but do not know what they are choosing and cannot get any advice to help them. They receive about 20 pages of information which they do not understand and once they have made their decision, it is irrevocable, so even if they do the wrong thing there is no comeback on anyone.

Government justification for £12,000 cap

Mr. Purnell has tried to justify a £12,000 cap as follows: the average retired household receives occupational pensions of less than £5,000 a year, 90% of pensioner households have private pension income of less than £12,000 a year, and most taxpayers have no defined benefit pension, so taxpayers cannot be expected to assume responsibility for pension scheme liabilities of those who do. Just because the majority of the population do not save, or have not set aside enough money to have a decent pension, does not mean that those who have done so should be penalised. If members had been warned that their pensions were only safe up to £12,000 a year, they would have known the risks and could have saved elsewhere or taken other steps to protect themselves. In any case, the sums required for compensation are tiny compared to the £10billion a year spent on higher rate tax relief – which taxpayers spend on providing top earners with generous pensions, even though those taxpayers do not have such pensions and mostly cannot afford such high contributions. In addition, we spend £10billion a year on contracting out rebates and also hundreds of millions on giving more tax-free cash to top earners’ pensions after 2006 pension tax simplification changes. Why is taxpayer’s money justifiably used for this, but denied to the victims of Government negligence who put their entire life savings into a scheme the Government assured them was safe?

Government says it did not cause schemes to fail, so it is not responsible for compensation.

This line of reasoning misses the point. The problem is not that the schemes failed, the problem is that when they failed members’ pensions were not protected as the Government had assured everyone they would be. We all know that schemes run by employers can fail, that is why members knew they needed to be protected. The Government specifically told the public that it had put in place measures to protect final salary schemes properly after the Maxwell scandal and members believed this. The measures of the 1995 Pensions Act were supposed to provide that protection, via the MFR, the priority order on wind-up, member nominated trustees and a new Regulator. The fact that these protections did not work is the fault of Government, not of trustees, employers or members. Even once the Government was told that the protections were not working, it continued to provide unqualified reassurance to members, continued to insist that these pensions were safe and failed to alert older members to the risks that by not taking their pension when they could, they might lose it all. If the protections had worked, the fact that the schemes failed would not have mattered. In other countries, the protections did work properly. For example, IFI Richardsons was a company with factories in Northern Ireland and Eire. All workers in the Southern Irish factories, whose scheme failed when the company went bust, got their full pensions because Irish law protected them properly. All workers in the Northern Irish factory, however, covered by UK law, lost their whole pension when the scheme failed. Clearly, then, the problem is not that the scheme failed, nor that the employer failed, the problem is that the protections put in place by the UK Government did not work as they should have done. The failure of these protections was not an accident, however, since Government was clearly warned of this and simply decided to ignore it. That is why Government must compensate the innocent victims who believed what they were told and had no chance to protect themselves.

Members’ assets should not be wasted on buying annuities

The PPF will not be buying annuities, because buying annuities entails paying a profit and risk margin to the insurers who provide them. Why then is the DWP insisting that trustees of these winding up schemes must proceed with buying annuities? Bulk annuities have become extremely expensive. Instead, the scheme assets should be used to fund ongoing pension payments year by year, as will be the case with the PPF, topped up by extra contributions raised by Government. If annuity purchase is stopped or unwound, the Government would also have many years over which to set aside money to pay FAS compensation, rather than having to find large sums now. The Government could pool all the assets and run the FAS alongside the PPF, with additional funding coming in to provide ongoing pensions over time.