Response to Government consultation on FAS regulations
by Dr. Ros Altmann
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We have made a significant step forward in the past week, to help some of the victims of this dreadful social injustice. The DWP has pledged to pay 80% of ‘core’ benefits to those who were within 3 years of scheme pension age as at 14th May 2004, up to a maximum amount of £12,000 a year. This amount will be paid to these people for the rest of their lives, and there will also be some provision for spouse benefits. The money will not be paid by means of an annuity, because the DWP does not want to pay profit margins to an insurance company. Instead, the Government is committing to pay the money out of the Financial Assistance Scheme every year.
The DWP announced that there are 15,000 people within 3 years of pension age last May, and that 95% of these did not have core pensions above the £12,000 cap. A list of 380 ‘potentially eligible’ schemes has also been released. Of course it is vital that all the schemes included in the list are ultimately included in the FAS. To leave these people out again would surely be unthinkable.
At last, some of these good people now look as if they will get back at least much of the pensions they saved so hard for. Alan Johnson should be given enormous credit for moving us forward this far. So far, so good.
But, of course, this is only a small (but nevertheless potentially significant) step forward. There is a long way to go, to truly achieve justice for the victims of this pensions disaster and give all of them the peace of mind they deserve. So what are the issues still to be addressed?
The funding of the FAS
What about those over 3 years away from pension age?
What about those who are in very poor health, or terminally ill?
What about members of schemes winding-up with solvent employers?
What are core benefits? There is no indexation, what spouse cover is there?
There is no tax free lump sum.
Why is the cap so low?
Why are the assets of the schemes still being used to buy annuities?
When will the payments start, will they be backdated? What about those already retired – why not pay immediately where assets are available?
What about the ‘Guaranteed’ Minimum Pensions that Government told people they would be getting from their contracted out benefits?
1. The funding of the FAS
The Government has only committed £400million over 20 years to address this issue. The announced payments so far are likely to cost more than £400million already, so there will be nothing left for anyone else! If 15,000 members only receive an average of £2,000 a year pension from the FAS, this would already cost £30million a year! If an average of just 1 person in each scheme were to receive the maximum £12,000 a year cap, this alone would use up £4.5 million a year, before any of the other members receive anything. The FAS is clearly using up more than the £400million – particularly as it is committing to pay out for longer than just 20 years. It is vital that the Treasury agrees to fund this scheme properly and fully. It does not require a large sum to be found immediately and can be spread over a period of 40 years or more, with perhaps £75million each year.
2. What about those over 3 years away from pension age?
It is grossly inequitable to leave those who were just a few days or weeks beyond 3 years away from pension age without any certainty at all for their future incomes. Many of these people are already in their 60’s and feel dreadfully disappointed that others of similar age are getting some reassurance, while they are left in limbo. Without a commitment of more money, these people will find that there will be nothing in the FAS for them at all!
3. What about those who are in very poor health, or terminally ill?
There are some people who are terminally ill or have become severely ill, cannot work and desperately need their pensions on which to survive. If their company scheme were ongoing, they would be able to have an ill-health pension or early retirement, as they had been promised, but, just when they most need it, they find their decades’ worth of savings in a ‘safe’ pension scheme have not delivered, despite the Government reassurances they always received.
4. What about schemes winding-up with solvent employers?
The DWP has said that is will not include members of winding up schemes whose employers were and still are solvent. The Government’s rationale here is that such employers ‘have a duty to support their schemes’. This is simply unacceptable. The employers have complied fully with the law and the members are powerless to force them to put in extra money. The inadequate oversight of the MFR (the Government’s Minimum Funding Requirement, which was all that employers were required to meet when winding up a pension scheme) has meant that this funding measure is totally inadequate for delivering the pensions people were promised. Also, in many cases, trustees agreed a compromise deal, in order to save the company from insolvency, and now the pension scheme members are being penalised for this. If they had known that agreeing to save jobs could result in the loss of members’ pensions, they may have acted differently, but they were never told this.
5. What are core benefits? There is no indexation, what spouse cover is there?
There will be no indexation of FAS pensions, unlike the PPF, which will at least pay inflation-linked increases for the period after 1997. With inflation at 3%, the value of a level pension will halve in about 20 years. It is also not clear what cover there will be for spouses. The FAS will pay 80% of ‘core’ benefits, but does not define what these ‘core’ benefits are.
6. There is no tax free lump sum.
These people were promised a tax free lump sum, under their occupational scheme rules, but the FAS will not permit this. Many of them were relying on this lump sum to pay off their mortgages and are now in desperate financial difficulties.
7. Why is the cap so low?
A cap of £12,000 seems unfairly low. The Pension Protection Fund will cap benefits at £25,000 a year and pay out 90%, with some inflation-linking, so this level of FAS payment is significantly less than for people in future, who are now being warned what will happen to their pensions if their employer fails. These wind-up victims were never warned that there was any risk to their promised pensions! The DWP claims that the £12,000 cap is designed to ‘prevent higher pensions being paid to executives of failed companies that might have led to the companies failing in the first place’. This justification is unwarranted. Firstly, the top executives of the failed companies usually ensured that their own pensions were safe, either by taking early retirement, or transferring their money out. Someone earning £30,000 a year with 40 years’ service would be entitled to a pension of £20,000 a year, yet would be capped at £12,000, thus still losing 40% of their pension and all their indexing too. It is usually managerial level, rather than the top executives, who earn around £30,000 a year and it is so unfair to take their pensions away from them like this. These people are not responsible for the failure of the company. They should not be further penalised by such a low cap. Often, in fact, the top executives who these managers reported to, decided to split the company, using financial engineering or corporate ‘restructuring’ to offload a subsidiary, containing the pension scheme, then letting that subsidiary fail. Meanwhile the executives carried on running the other parts of the business, having jettisoned the pension fund and ruined these members’ lives.
8. Why are the assets of the schemes still being used to buy annuities?
The Government says it does not want to buy annuities to provide the FAS pensions, because buying annuities entails paying a profit and risk margin to the insurers who provide them. It would be much better for members, and ultimately potentially cheaper for the taxpayer, if the scheme assets were not wasted on buying annuities, but could be used to fund ongoing payments, as will be the case with the PPF. If the annuities are not purchased, then all members should receive higher pension payments from the same pool of assets (since no risk margins will be taken out of the funds). The Government could pool all the assets and run the FAS alongside the PPF, with additional Government funding coming in to provide the pensions over time.
9. When will payments start, will they be backdated? What about those already retired – why not pay immediately where assets are available?
There is no word as to when payments from the FAS will actually start. It would be possible for many of those affected to actually receive payments straight away, because, for those schemes which have not finished winding up, assets are available and usually being held in cash or bonds. The trustees could start paying pensions, out of the scheme’s assets, to those already past retirement age now, instead of forcing them wait even longer. This would, at last, deliver some meaningful help to those who are desperately in need of the pensions they saved for and were told were safe, so that they can have some of their lives back.
10. What about ‘Guaranteed’ Minimum Pensions that Government told people they would receive from their contracted out benefits?
The Government must surely address the issue that many people are not being paid the ‘Guaranteed Minimum Pension’ which they were promised, as a replacement for their state pension rights. The Government told these people that this element of their pension was ‘guaranteed’. They were not told this by their employers, by financial advisers, or by their trustees, it was actually Government that called this a ‘Guaranteed Minimum Pension’ and it seems impossible to justify such a pension being neither ‘guaranteed’ nor a ‘minimum’. The DWP must take responsibility for this and it would be best if this part of the occupational pensions of the winding-up scheme members were taken back into the state system and then the FAS could provide an additional amount on top. Taking responsibility for GMP’s back into the state system would make the winding up of all these schemes much quicker and simpler and ensure that compensation could be delivered more efficiently. This would obviously be very expensive, but it is the only course of action which is fair and which may allow people to trust pensions in future. If the Government can tell people that they will get a guaranteed amount of pension and then refuse to honour that guarantee, the future for pension confidence seems shaky indeed.
THE BOTTOM LINE
The Treasury must accept that it is the Government’s responsibility to offer compensation, not just assistance, to these people and it must make more money available to ensure that this dreadful social injustice is remedied immediately. If it does not do this voluntarily, I hope that the Parliamentary Ombudsman will force them to do so.