Financial Adviser comment – scandalous attempts by Government to deny occupational pension policy errors
by Dr. Ros Altmann
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The Parliamentary Ombudsman – after an exhaustive 18-month independent investigation – has found that the Government is effectively guilty of ‘mis-selling’ occupational pensions to at least 85,000 people, who lost their company pensions, with no warning and with no chance to protect themselves. Unlike the financial services industry, however, having been found guilty and told to pay compensation, the Government has just refused! This is an outrage.
Government issued statements and leaflets assuring the public that final salary pensions would be properly funded and safe and encouraging members to contribute to or stay in their employers’ schemes. However, behind the scenes, it actually decided that its official Minimum Funding Requirement (MFR) need only give workers a 50/50 chance of getting their full pensions. Official materials explaining the benefits of occupational scheme membership, said this MFR would ensure that schemes had enough money to pay pensions, whatever happened to the employer, and failed to mention the risk that they may not get their pension if their scheme wound-up. Members were lulled into a false sense of security. Many have lost their entire pension and even their state earnings-related pensions too, since their scheme cannot cover their contracted-out Guaranteed Minimum Pension (GMP). Both the Government and the FSA misled the public, but are now trying to deny any responsibility!
How do Ministers and officials sleep at night? While they were voting themselves increased pensions, at taxpayers’ expense, members were contributing to their company schemes, week after week, believing they were safe. Even after being warned and consulting about disclosing the risks to members, Government decided to just keep the public in the dark. Then, when the members have lost out so badly, those Ministers and officials deny any culpability and refuse to spend taxpayers money on compensation.
If members had known the truth, they could have tried to protect themselves. For example, they could have retired at their first opportunity, could have invested in ISA’s instead of AVCs, taken out separate life insurance, moved employer, transferred money out, not transferred money in, cut down spending elsewhere to build up a safety net, demanded that their employer funded the scheme better, and so on. It is too late now.
The Government’s behaviour on this issue is an absolute disgrace. As a nation, we should be ashamed to have treated people in this way. In fact, this scandal is far worse than Maxwell. With the Maxwell debacle, the 32,000 pensioners did receive their pensions, but here are 85,000 being left to beg for justice. Government is trying to scare the public into believing this will be too expensive to put right, citing a cost of £15billion, but this is false. Replacing these lost pensions would cost no more than £100-£150million a year, index-linked, for 40 or 50 years. Last year alone, officials overpaid £130m in pension credit and this sum was easily absorbed in the DWP budget. This is not an over-burdensome cost.
Apart from the inadequate MFR, misleading leaflets and official statements, several other Government decisions contributed to this injustice. For example, removal of dividend tax relief in 1997; allowing employers to take contribution holidays; taxing pension fund ‘surpluses’; and Inland Revenue rules forcing members to rely totally on their company pension, not allowing them to have any other pension. Furthermore, the legal priority order introduced in 1997, over-rode trustee discretion on wind-up and required trustees to use all assets first to buy index-linked annuities for pensioners’ full pensions, without any provision for long-serving non-pensioners who could lose their entire pension if there were no assets left. Without this legal interference, trustees could have acted more fairly. Also, before 1997, if a scheme wound-up without sufficient assets, the Government could take all members’ Guaranteed Minimum Pensions back into the National Insurance scheme, so members would not lose their GMP as has happened since 1997. Furthermore, it is only in recent years that annuity rates have soared, so it has become increasingly expensive to actually buy out the pensions, leaving far less for all non-pensioners. Again, this is something which Government failed to take account of, and it has devastated members’ pensions.
Having been censured by its own Ombudsman, however, the Government is desperately trying to avoid responsibility. The reasons it has given are shameful. For example, it now says its leaflets were only ‘general guides’ and no-one should have relied on them. Yet, when they were issued, government said they were being produced so that the public could understand the benefits and risks of pensions from an impartial source. The DSS (fore-runner of the DWP) announced that it would be working with the FSA to issue such general pension education leaflets. Indeed, the FSA guides said final salary pensions were ‘guaranteed…this makes it easier to plan for retirement’ without any mention of the risk that the scheme could wind-up and members could lose their whole pension.
Government’s claims that official information leaflets were complete, comprehensive and not misleading are absolute nonsense! How can general guides be considered complete without mentioning the biggest risk people faced? Even sections headed ‘How do I know my money is safe?’, or ‘What happens if things go wrong?’, or ‘What else do I need to think about?’ failed to mention the risk of wind-up. All that would have been required would be a short sentence such as ‘you may not get your full pension if your scheme winds-up’. As Alistair Darling said in 2000 ‘The public rely on Government information and they are entitled to be reassured that leaflets are accurate and comprehensive’.
Government has tried to scare MPs into believing that complying with the Ombudsman’s recommendations would set a dangerous precedent, because taxpayers cannot underwrite pension schemes. This argument completely misses the point and, in truth, it is not complying with her recommendations that would set the dangerous precedent.
Government needs to learn that it must not do this again. People who read the Government information just believed it. Members with weak employers would not have felt safe, if the Government had not told them they were. It was Government which endorsed the employer pensions promise. If Government had told members their pensions were only safe if the employer remained in business and did not wind-up the scheme, then they could have considered what they wanted to do. But members had no idea their accrued rights were really dependent on their employer. They obviously knew that future pension accruals would cease if the employer was no longer there, but had no idea they could lose their past pension rights. Government deliberately led members to believe their pensions were safe, when they were not and kept weakening protection. Members would not think to themselves, ‘well surely the taxpayer can’t underwrite the pension promises of my employer’. They would think, ‘if the Government tells me that my pension is safe because the law has been changed to make sure it is, then I feel reassured and can relax’. Of course members were concerned after Maxwell, since they knew these were employer schemes and they wanted to know whether their pensions were secure. That is often why they read the official materials and tried to check out if their pensions were really safe, even if the employer failed. Everything they read assured them that their pensions were protected by laws, the scheme’s assets were separate from their employer, that the new Regulator would protect them and there was no mention of any risk.
The Government is also trying to blame trustees or employers – but the Ombudsman’s Report explains how Government assured the public that the law would protect members. Indeed, Jeff Rooker, Pensions Minister in 2000, told Parliament ‘we are aware of the importance of protecting members’ rights. If we cannot do that, they have no-one else to look to’. The DWPs own leaflets said the Regulator ‘can act quickly to protect your interests’. So, at the time, Government admitted it was responsible for protecting members. Furthermore, in 2000, when the Actuarial Profession report highlighted that members did not realize the MFR would not guarantee full pensions on wind-up and recommended these risks must be disclosed, the Profession said ‘we have particular concern that this is not understood by scheme members, trustees and employers’. So, again, at the time the Government was warned that trustees and employers, as well as scheme members, did not realize the risks to pensions on scheme wind-up. Yet it did nothing to change its official material to alert members to the risks. It cannot now look back a few years later and try to blame employers and trustees.
There cannot be one rule for the Government and another for everyone else. If Government has caused people to lose out so badly, it must compensate. If it is allowed to ignore the findings of its own Ombudsman, then the whole financial services industry should take very careful note.