The Cold, naked truth – Budget announcements more spin
by Dr. Ros Altmann
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The Chancellor had a golden opportunity in his final budget to properly sort out the scandal of failed final salary pension schemes. Disappointingly, instead, of showing leadership, compassion and integrity, he chose to use fiddled figures and more spin. Over 100,000 people have lost some or all of their occupational pension – and even some of their state pension. Four independent verdicts have said this is the Government’s responsibility and both the High Court and the European Court of Justice have said the Government behaved unlawfully. Yet the victims are still struggling without their pensions. This issue has been cited in numerous surveys as a cause of the dramatic decline in pensions confidence in the UK. Everyone in the financial sector has an interest in seeing a fair resolution of this scandal.
The Budget announcement of a major extension to the Financial Assistance Scheme (FAS) is a step in the right direction, but is mostly just more spin. The Government says it has increased the funding of the FAS from £2bn to £8bn and that everyone affected will now get 80% of their pension. Sounds pretty good news doesn’t it? Well of course any improvements are welcome, but I’m afraid the truth is that the £2bn was never £2bn, the £8bn is not £8bn and the 80% is really about 60% or less.
The £2bn and £8bn figures are statistically nonsensical ‘cash costs’ which are only used to inflate figures over long-term periods. They are not valid for 60 years. If you estimated the costs of public sector pensions using cash costs, the figures would be horrific.
The DWP has in fact admitted that the newly extended FAS is really worth not £8bn but just £1.9bn in real terms (net present value) paid over 60 years. This is a gross figure and the net cost to the taxpayer will be lower still – probably closer to £1.2bn – as tax is payable on the FAS and people getting FAS will not get means tested benefits.
But the scandal drags on. How long will the Chancellor insist on playing games with this issue while leaving people who saved all their lives still begging and fighting for justice? The fact is that the Treasury has not put any money into the FAS so far. Any amounts paid out have had to come from the already pre-existing DWP budget, so it has not represented any extra cost to the taxpayer yet at all. In any case, extending the FAS is not the answer. The scheme has proved a huge waste of taxpayers’ money. So far the FAS has paid out just £3.6m since 2004 to about 900 people – that’s it. Yet there are 10,000 struggling without their pensions today and more coming up to retirement each week. Most of them are being left destitute because of the cumbersome and bureaucratic system set up to help them.
So what’s wrong with the FAS, even after last week’s announcement? Firstly, members of solvent employer schemes are still excluded, even though they have suffered the same injustice. Secondly, the FAS still only pays from age 65, but those who should have retired at age 60 are losing five whole years of the retirement they paid for. The FAS pays no inflation-linking, no tax free lump sum and far less generous widow’s benefits than members would have had from their schemes. Raising the cap to £26,000 a year, removing the £10 de minimis and including all those who have lost out, regardless of their age, is welcome, but the changes do not benefit any of the claimants in the Judicial Review, nor any of the representative complainants from the Parliamentary Ombudsman’s report.
How can people ever trust any Government’s word on pensions if this scandal is left unremedied?
Financial advisers know that, after the 1995 Pensions Act, the Government and the regulators pretended final salary pension schemes were safe, ‘guaranteed’ and properly protected by law. Many advisers were bankrupted by having to pay compensation for transferring people out of company schemes into personal pensions. Yet now the Government is denying any responsibility for what has happened, despite four verdicts in favour of the victims. Ministers seem to be in complete denial and keep insisting that the official ‘guides’ were nothing more than general information which nobody should have been guided by.
This issue is not just about a couple of leaflets. There was a sustained campaign of misinformation, which lulled the public into a false sense of security. The official material, described as providing ‘impartial’ information, was designed to encourage people to contribute to these schemes. That was Government policy. Failing to alert the public to the true risks amounts to official mis-selling. In any other sphere, those who encourage people to put money into a product and provide information which talks only of the benefits and not the risks, would have to fully compensate for all losses. If the financial services Ombudsman finds someone guilty and recommends compensation, they cannot simply say they ‘disagree’ and refuse to pay.
How can it be right for Governments to make rules for others, but feel those same rules need not apply to itself? Yet Ministers are trying to over-ride our constitutional safeguards and be its own judge and jury. This is the slippery slope to dictatorship.
The Government says it did not cause the schemes to wind up, therefore it is not responsible for what happened. But, the problem is not that the schemes wound up. Everyone knows that can happen. The problem is that the Government said these pensions were safe even if the schemes did wind up. Despite being warned that members and trustees were unaware of the risks that even ‘fully funded’ schemes (on the Government’s official funding measure) may not have enough money to pay members’ full pensions, official material continued to provide unqualified reassurances of safety and protection. Other countries had proper protections for defined benefit pensions, the UK did not.
The DWP knew that members’ pensions were not really safe and members were denied any chance to protect their retirement income. The Government should have realised – at the time – that people would be relying on their company pensions and that there was a danger that those who did not receive their pensions on scheme wind-up would have no option but to look to the Government to provide the pensions that were promised by their scheme and endorsed by the official information. It is not up to the public to second-guess what the official literature means – especially when it is awarded a crystal mark for plain English!
One has to ask whether those in charge of the DWP actually understand what they are doing! When it comes to pensions, this government has made such a mess of so many areas.
Disgracefully, Government seems to have been deliberately exaggerated the costs of compensation. There is political consensus around paying all those who have lost their pensions at least the Pension Protection Fund (PPF) level of benefits (i.e. 90% of their pension at retirement, with at least some inflation linking) and there are amendments to the Pensions Bill calling for this to be paid. The extra cost of increasing the inadequate FAS to PPF levels is not large. The DWP have calculated that to pay Pension Protection Fund level benefits to all the victims would cost £2.5bn over 60 years (compared with the £1.9bn already earmarked for the FAS). Again these are gross numbers and after accounting for tax received and benefits not paid the net cost would be closer to £1.8bn compared with the £1.2bn already promised. In other words, to sort this out in a fair manner would cost just an extra £0.6bn over 60 years and this amount would also be further reduced because it is a gross figure too. After tax and benefits are accounted for, the net additional cost will be around £0.4bn.
Why hold back this last bit of funding when we are so close to a solution? Why is the Government being so mean-spirited? £600m over 60 years is almost a rounding error. In fact, DWP officials overpaid benefits to people not entitled to them last year to the value of £725m. (and official errors can not be recovered) i.e. in just one year, official errors in our benefit system cost taxpayers more than the 60 year extra cost of sorting out the biggest scandal in UK pensions history.
Even without taxpayers’ money, there are other sources of funding for the FAS which Government could organize. Furthermore, there are assets available in the failed pension funds themselves, which could be used to pay pensions immediately, rather than making people wait for years until scheme wind-up is complete and wasting the money on buying annuities. These assets could be pooled to establish a Pension Restoration Fund to be administered by the PPF but funded by top ups from Government. Only the Government can organise this. It should take on this responsibility immediately, no more delays, no more fighting, let’s just sort this out and allow these people to get on with their lives.
The Chancellor could have shown true leadership in the budget yesterday by taking responsibility for sorting this issue out properly. Sadly, he did not rise to the occasion.