Critique of John Hutton’s evidence to PASC

by Dr. Ros Altmann

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Comments on John Hutton’s evidence to PASC, 28 June 2006

Summary:
The Governments ‘reasons’ for rejecting the Parliamentary Ombudsman’s report are, in many cases, untrue.  I now wonder whether perhaps the DWP actually does not understand what happened to pension schemes when they wound up (there is anecdotal evidence from actuaries and pensions lawyers that officials were unaware of how the rules of wind-up worked in practice).  I also wonder whether Ministers have actually read the official information.

Official information
Mr. Hutton said that the DWP materials were fit for their audience because they were not aimed at members of schemes, but at those yet to join
This is not true.  The DWP actually described its leaflet ‘Occupational Pensions – Your guide’ (PM3) as follows in all the official materials: ‘You will find this guide helpful if you are working for an employer who runs a pension scheme and you are a member of the scheme or are thinking of joining’.  How can Mr. Hutton say that this is not aimed at scheme members?

Mr Hutton said that the official leaflets clearly said people needed to take proper advice.
This is not true, they do not say this at all.  The DWP did not produce leaflets that make clear people need to take professional advice before putting money into their company final salary scheme.  The leaflets all contain the reassurances and talk of safety and protection. They refer readers to other sources of information, such as the documentation from their employer or their scheme and other leaflets produced by the Government, none of which mention the risks of wind-up – risks which the Government created, but hid from the public.

Mr. Hutton said the leaflets did not need to mention wind-up because that only happens on insolvency and ‘the risk of the employer falling into insolvency was unlikely’. 
This is obviously untrue, for several reasons, including:
1.  Hundreds of schemes wound up with an insolvent employer and about 1 in every 100 members (up to 125,000 out of about 12.5million members) lost their pensions. 
2.  It is not just insolvency that led to losses on wind-up, as members whose solvent employer wound up their scheme have also lost their pensions.  I believe it is possible that the DWP itself did not actually understand that this could happen. 
3.  In any case, the leaflets do mention insolvency – in two places - but only to assure members that they will be compensated if there is not enough money in the scheme.  For example, page 18 of leaflet PM3, October 2002 ‘Occupational Pensions –Your Guide’ has a section headed ‘What if things go wrong’ which says ‘Although it’s rare, if an insolvent (bankrupt) employer has removed a pension scheme’s assets dishonestly, the Pensions Compensation Board can make compensation payments to the scheme’.  The same leaflet on page 23 says ‘If an insolvent (bankrupt) employer has removed your pension scheme’s assets dishonestly, the Pensions Compensation Board can compensate you’.

Mr Hutton said the DSS’ 1996 leaflet, which wrongly said MFR was designed to ensure there would be enough money in the fund to pay all pensions ‘whatever happens to the employer’ was referring to fraud such as Maxwell, not employer insolvency.
If this statement was indeed meant to refer to fraud, surely it would have said ‘whatever the employer does’, or ‘irrespective of employer actions’, but using the phrase, ‘whatever happens to the employer’ clearly implies insolvency.  In any event, even if this statement was meant to refer to fraud, that means the leaflet was unclear about what it meant, and this is still maladministration.  As the Ombudsman explains, issuing official material that is unclear is maladministrative.

Mr Hutton said the Actuaries’ 1999/2000 advice did not prompt the DWP to think it should review its own leaflets, since they were suggesting trustees, not Government, should tell members
The actuaries’ advice actually said that they wanted to work with Government and the industry to remove the misunderstandings about member security, so the advice was clearly calling on Government to become involved, not just trustees.  In any event, if Ministers did think the actuarial profession’s comments were referring to trustees, why didn’t the Government change the disclosure regulations to require trustees to tell members about wind-up?  It was Government which determined what trustees had to disclose to members. 

Inherited SERPS parallels
Mr Hutton said that the leaflets referring to occupational pensions cannot be considered in the same light as the inherited SERPS case, because SERPS was a scheme run and administered by DWP.  Also because people had sought advice from DSS and got the wrong advice.
There are, in fact, almost exact parallels between the Ombudsman’s occupational pensions inquiry and the inherited SERPS case.  It seems the DWP does not recognise these were not just private schemes and, of course, they contained members’ SERPS rights too.  Government set the rules for funding of occupational schemes, for disclosure of information to members and for how to divide the assets on wind-up.  On wind-up, Government rules govern administration of the schemes, taking over from trustee discretion.  However, DSS information did not mention the risk that members may not get their full expected pensions if the scheme wound up.  Even though, after the inherited SERPS case, the DSS promised its leaflets would be properly checked, accurate and comprehensive in future.  Alistair Darling said, in 2000, ‘It is important that governments should be honest about what they do…Whatever else they do, they should not put people in a position in which they do not have adequate pension cover.’  Yet Government rules have left people with no pension at all when their final salary schemes were wound up.  The DSS/DWP assured Parliament that its leaflets would be accurate and complete and its internal guidelines required all information to be reliable and comprehensive, with no significant omissions.  As Alistair Darling again said in 2000 ‘There is a clear responsibility to ensure that the information that Departments provide is accurate and complete’ ‘As a matter of principle, when someone loses out because they were given the wrong information by a Department, they are entitled to expect the Government to put it right’.  Another parallel with inherited SERPS is that some of the official information was actually wrong.  The Regulator (OPRA)’s 1997 handbook for trustees was incorrect, telling trustees that the MFR funding regime would ensure schemes had enough money to pay all accrued pensions if the scheme wound up.   This OPRA handbook was corrected in 1999, but this correction, and the mistake in the 1997 edition, were not brought to trustees’ attention. 

Solvent employer wind-ups
Mr. Hutton said that solvent employers were excluded from FAS because solvent employers should meet their pension liabilities.
This statement is not consistent with what happens with solvent employer wind-ups. Members are powerless to get employers to pay more than the MFR level, because that is all the law required.  There are examples of schemes which were 100% funded to MFR on wind-up, where the employer could have paid in more, but where members have lost their whole pension.  A French parent company wound up its scheme and was only obliged to pay in enough to meet 100% MFR.  The French shareholders received money back, while members will only receive half their GMP and none of their occupational pension at all!  This is the direct result of the regulatory regime governing solvent scheme wind-ups, which Government was responsible for, but never warned members about.

Causal links
Mr. Hutton says that there is no causal link between Government actions and pension losses.
This argument is merely deflecting attention from what the Ombudsman’s report actually says.  Her role is to determine whether people have suffered injustice and whether that injustice was caused by maladministration.  Her report clearly shows this to be the case.  The report does not say that the wind-up of the schemes was caused by official information, but it does say that the information caused the injustices suffered.  Part of the injustice is that people were reassured that it did not matter what happened to their employer and they had no idea that a scheme could wind-up.  The government never mentioned that this could even happen to a scheme, nor did it warn members that only pensioners were well protected by the law, and certainly gave them no chance to do anything about these risks.  They were thus denied an informed choice to make proper decisions about their families’ future and have been left without adequate retirement income.  They were innocent victims of a system that was misrepresented to them by Government.  There is also clear evidence of the ways in which this maladministration caused people to lose their pensions on wind-up.  The Ombudsman report and the members who gave evidence to the PASC explained how they could have protected their retirement income, if they had known the truth.  If the Government had explained how the priority order protected pensioners first, many older members would have retired and protected their pensions, but because they were not warned about the risk, they did not do so.  If people had known that their scheme was not safe, they would not have put Additional Voluntary Contributions (AVCs) into it – they could have used an ISA instead for example and not lost their AVCs.  If people had known their pension was at risk, they could have decided not to transfer other pension money into it.  Those close to retirement could have transferred out into a personal pension.  Mr. Hutton suggests that even if the Government had told people the truth about the risks of wind-up they would not have done anything to protect themselves.  Surely people are intelligent enough to be able to make such informed judgements to protect themselves.  Apart from the misleading leaflets, the maladministration of the MFR also led directly to pension losses.  Most obviously, solvent employer wind-ups demonstrate the causal link between Government actions and financial losses.  Because the Government failed to ensure that the MFR complied with its original intention of providing pensions for pensioners with annuities and transfer values giving a 50% chance of full pensions for non-pensioners, members of solvent employer schemes could lose their pensions on wind-up.  Even when companies could have paid in more, they were not obliged to. 

Furthermore, the Ombudsman points out that the maladministration was the sole cause of all the other injustices suffered by members.  Mr. Hutton did not mention these other injustices at all.  There is an obvious causal link here because if people had known of the risk, they would not have suffered shock of losing what they were misled to believe was a guaranteed pension.

MFR
Mr. Hutton said the Policy intention of the MFR was to pay pensions in full and give non pensioners an even chance of getting full pensions on wind-up. 
The Parliamentary Ombudsman found no evidence that the Government actually considered the security of members’ pensions on wind-up when setting the MFR level.  It did not look at annuity rates, it did not look at the effects on members closest to retirement who would lose out under the priority order, it did not consider solvent employer wind-ups.  It did not even check if Guaranteed Minimum Pensions – the replacement for SERPS rights - were covered by the MFR level.  This is further evidence of maladministration.

Cost of compensation
Mr. Hutton insisted that the Government has  not rejected the findings because of the ‘price tag’.
This is hardly credible, when the first thing the Prime Minister said about the reasons for rejecting the report was that it would cost £15billion.  The DWP has tried to pretend the cost is far higher than it really is.  We now know the net present value is around £3billion, and even that has not accounted for the fact that the Government would get money back from tax paid on the pensions and would save money by not having to pay means tested benefits.  Why did the Government not look more creatively at organising a rescue scheme – not all of the money had to come from taxpayers.   Government needed to organise it, but Mr. Hutton indicated Government did not seriously look at organising any rescue scheme at all.  Even now, it would be theoretically possible to undo the annuity deals that have given these scheme assets away to Legal and General or the Prudential.  This would not be easy, but could be done, if the political will is there. 

FAS
Mr. Hutton said that the Government has a moral obligation to help and it has, therefore, introduced a ‘generous’ financial assistance scheme for those who need help most urgently. 
If this is true, why has the FAS been set up so that payments are delayed so long?  Why not use scheme assets to pay pensions immediately?  Those in most urgent need require help now.  Schemes have been in wind-up for years, with members well past age 65, or who have died.  The announcement of the FAS and recent extension of the scheme have misled MPs.  Mr. Hutton’s statement in the Commons wrongly claimed that the FAS would pay 80% of people’s ‘expected pension’.  MPs have been led to believe that the FAS offers much more than it does.  FAS will pay out more like 50-60% of ‘expected’ pensions and those in the 50% band will get more like a quarter to a third of the pension which Government assured them was safe and protected by law.  Why are all the FAS payments taxed?  If they were tax free, this would at least partially offset the pension reductions. In any event, the net cost to the taxpayer has been overstated.  The net present value of £540m stated by Government (cash cost £2.3billion) will be offset by tax receipts from FAS payments and reduced benefits expenditure once people receive FAS payments. 

Conclusion
The Parliamentary Ombudsman has clearly presented the case for urgent compensation to be paid to those affected.  Government is unwilling to admit the truth or has not taken the time to understand properly what it did. 


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