Why the Financial Assistance Scheme is so inadequate
by Dr. Ros Altmann
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INADEQUACIES OF THE FINANCIAL ASSISTANCE SCHEME
The DWPs full final response to the Ombudsman’s report (laid in Parliament on 7th June 2006) states that the FAS will pay 80% of the’ ‘expected’ pension of those within 7 years of scheme pension age, 65% of ‘expected’ pension for those 7-11 years away and 50% of ‘expected’ pension for those up to 15 years away. This is not correct. The statement misleads MPs into thinking that members will have most of their pension back. That is far from the truth. In reality, many of those on the 80% band will still lose about half their ‘expected’ pension, those in the 65% band will often only get less than 40% of their ‘expected’ pension and most of those on the 50% band will only get between a quarter and a third of their scheme entitlement, so members are still suffering dreadful losses.
This is because the FAS payments are based on what the DWP called ‘core’ pension, which is not their ‘expected’ pension at all. There are major differences between the two, with this ‘core’ pension being worth far less than the ‘expected’ scheme pension. For example:
- FAS payments are not inflation-linked at all – the ‘expected pension’ would be
- FAS only starts at age 65 –‘expected pensions’ start from scheme pension age (often below 65)
- FAS only starts full payment when wind-up has actually finished – ‘expected pensions’ are paid as soon as pension age is reached
- FAS payments are capped at £12,000 and this cap itself is not inflation-linked, so it declines in value over the years – ‘expected pensions’ are not subject to any cap
- FAS does not have any tax free element and the entire FAS payments are subject to tax – ‘expected pensions’ include a tax-free lump sum
- FAS only pays 50% the FAS benefit to a surviving spouse – if the scheme had not wound up, spouses would normally receive at least 50% of the full ‘expected pension’
- FAS payouts halve immediately if a member dies’ soon after retirement – ongoing schemes usually continue paying full pension to surviving spouses for a few years
- If members die young, FAS pays nothing and survivors are left without any insurance – ‘expected pension’ benefits include life assurance cover
- FAS pays no ill health benefits – most schemes would offer ill-health cover
Other problems with the FAS:
- Solvent employer schemes are excluded. Even though solvent employer schemes were also at the mercy of the MFR and the rules of wind-up (both Government responsibility) they have been left out
- Some insolvent employer schemes are also excluded, in cases where a foreign employer went bust, but did not register the insolvency in the UK
- Anyone over 15 years from pension age is still excluded, so people in their 50’s who saved for over 25 years in their company scheme still get nothing.
- In fact, because of the FAS anyone over 15 years from pension age will get even less than they would have had without FAS. This is because trustee expenses incurred in submitting forms and data for each scheme must come from scheme assets.. Therefore, the FAS is taking even more money away from members whose pensions have already been decimated, in order to give a bit of assistance to those who do qualify for the FAS
It certainly seems ironic that the DWP statement, which was attempting to explain why the Government believes it did not mislead members of occupational pension schemes, was itself misleading Parliament! The statement also exaggerates the cost of the scheme, since FAS payments are taxed and those receiving assistance will lose some means tested benefits they would otherwise get, making the net cost to the taxpayer far less than the stated figures.
It is important that MPs realize just how inadequate the FAS truly is. Not only have so few people received anything at all, but even when they finally do, the payments will be far, far less than the pension they were expecting.