Appeal to European Parliament Petitions Committee to force Government compensation
by Dr. Ros Altmann
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Mr. Maurice Jones and over 100,000 UK citizens, have lost some or all of their occupational pension, when their company pension scheme folded. Mr. Jones’s company scheme started winding up in 1997, when the company failed. He is now 66 years old, contributed to a final salary pension scheme for 38 years, but finds himself with no company pension. He is also losing part of his state pension too. In the case of Mr. Jones – and thousands of others – what Government called a Guaranteed Minimum Pension (GMP) has turned out to be neither ‘guaranteed’ nor ‘minimum’(1). Before 1997, the contracted out state pension rights were ‘guaranteed’ by the UK Government, but since 1997, UK law was changed, and Government no longer agrees to reinstate all members into the state pension system. Thus, the only protection for these GMPs was via the official funding standard introduced in 1997 – known as the ‘Minimum Funding Requirement’ (MFR).
What has caused these pension losses?
The UK Parliamentary Ombudsman has just published her assessment of this situation and, after an exhaustive 16-month independent inquiry, she concluded that the pension losses suffered by Mr. Jones and others have been caused by the UK Government’s careless oversight of our pension system. Government maladministration, plus policy decisions and lax supervision of the pensions framework, have caused the UK pension system to devastate tens of thousands of European lives, without warning. While all the while claiming that these pensions were safe and protected by law, the UK Government failed to alert members to the true risks that they could actually lose their entire pension if their scheme wound up. Even though the Government was strongly advised that it should disclose these risks to members, it deliberately decided not to do so.
In fact, having taken a policy decision in 1997 to encourage more people to join and stay in their company scheme, Government was aware that, for this to succeed, members must believe their pensions were secure. So it decided to tell members that their accrued rights would be safe, whatever happened to the employer, even though, if their scheme folded, this was not true. Innocent people, such as Mr. Jones, contributed loyally to their pensions, on Government advice, only to discover that all their money has been wasted. They were denied an informed choice and their property (pension) has been taken away from them by laws which dictate that their contributions have to be used to buy pensions for other scheme members, not for themselves.
UK law never ensured that there would be sufficient assets in a scheme to meet its accrued liabilities on wind-up. In fact, UK company pensions have been run without concern for their solvency, so when a scheme winds-up (either because the employer has failed or simply because the employer chooses to wind-up the scheme) there were no proper safeguards in place to ensure that members’ accrued pension rights were properly protected. In particular, the measures of the 1995 Pensions Act (which started in 1997) were supposed to protect company pensions after the Maxwell scandal of 1991, and members were assured that they would improve member security. In practice, however, they actually vastly reduced security for Mr. Jones and other workers. For example, a legal ‘priority order’ does not allow trustees to divide the assets of winding-up schemes fairly. The law stipulates that trustees must first buy index-linked annuities for all those already receiving a pension. If there is no money left, then even those close to retirement, with decades of service, (like Mr Jones) can end up with no pension. Vastly increased costs of buying annuities on wind-up have also undermined the value of company pensions and the official funding standards have proved far too weak.
But hasn’t the UK Government complied with the 1980 EU Insolvency Directive?
In practice, it has not. Before 2005, there was no protection scheme to ensure that scheme members’ pension rights were properly protected on wind-up. The whole system was run on the basis that schemes would not fold, yet members were assured this was safe because assets were separate from the employer. In practice, about 1 in every 100 members has now lost out badly, but the UK Government is refusing to acknowledge any responsibility for this disaster. In truth, the Parliamentary Ombudsman discovered that the MFR (which the UK Government claimed was part of its compliance with the 1980 EU Insolvency Directive) was only ever designed to give workers a 50/50 chance of getting their full pension, but Government never publicly announced this. Although EU member states are supposed to protect pensions on insolvency, UK Governments have consistently believed that such protection was not necessary, because they expected equity investments to perform well enough to generate sufficient assets to provide generous pensions for scheme members over the long term. Thus, the whole system was geared to long-term funding and ignored short-term solvency. Indeed, for many years UK pension policy was far more concerned with trying to make it as cheap as possible for employers to fund their pension promises in the short-term, and paid little attention to security for members’ pensions.
UK Governments have consistently tried to minimise state pension costs, and relied on generous private pensions to offset the very low state pensions. Because UK state pensions are so low, company pensions are a vital part of people’s retirement income. The loss of a company pension is, therefore, devastating, especially for those who have contributed for decades. They would be totally reliant on the company pension for a comfortable retirement and have no chance of replacing these losses. They have been betrayed by their Government, which endorsed the employers’ pension promises, by assuring members their pensions would be safe and did not depend on their employer. In addition, UK tax authorities did not allow diversification of pensions. Once in a company scheme, members were not allowed to have any other pension. Therefore, UK citizens who believed and trusted Government assurances of safety and were led to believe they were protected by laws that ensured their pensions would be paid, have now found their lives in ruins. This could not happen anywhere else in Europe. Other European countries have properly protected pensions. For example, IFI Richardsons was a company with plants operating in both Northern Ireland and the Irish Republic. When the company failed, all those employed in Eire have received their pensions, and all those in Northern Ireland, under UK jurisdiction, have lost their pensions. The UK Government simply cannot claim that it has protected pensions or complied with its EU obligations.
We are appealing to the European Commission to intervene on behalf of these tens of thousands of people and demand that the UK Government accept its responsibility for this disaster and comply with the recommendations of its own Ombudsman, and restore Mr. Jones’ and all the other pensions. This help is needed urgently, before more of those affected die in desperate fear that they have let their families down, despite making careful provision for their future.
(1) UK Governments have encouraged companies to assume responsibility for the state earnings related pensions of their workforce. This privatisation of state pension rights – known as ‘contracting out’ – was only permitted if the UK tax authorities ‘approved’ the company scheme. In practice, such approval has proved meaningless. The part of the pension which replaced the state pension rights is the ‘Guaranteed Minimum Pension’ (GMP). Pension scheme members were told by government that their national insurance pension contributions would be rebated into the employers’ scheme, in exchange for a pension that would be at least as large as this GMP – and should be far larger than this. This was not true.