Evidence to Parliamentary Ombudsman inquiry prepared on behalf of complainants – Ros Altmann

    Ros is a leading authority on both private and state pensions,annuities and
    retirement policy. Numerous major awards have recognised her work to
    demystify finance and make pensions work better for people.

  • Ros Altmann

    Ros Altmann

    Evidence to Parliamentary Ombudsman inquiry prepared on behalf of complainants

    Evidence to Parliamentary Ombudsman inquiry prepared on behalf of complainants

    Evidence to Parliamentary Ombudsman inquiry prepared on behalf of complainants

    by Dr. Ros Altmann

    (All material on this page is subject to copyright and must not be reproduced without the author’s permission.)


    On behalf of complainants, I welcome this report, but with great sadness that many of those affected did not live to read it.  It has been several years since the victims of this social injustice first discovered they had lost most or all of the company pension they had contributed to and which they had been led to believe was safe and protected by law.  The experience of losing one’s entire retirement income and the uncertainty hanging over these individuals and their families is impossible to over-estimate.  Their sense of betrayal is acute.

    At last, an independent investigation has highlighted clearly, for all to see, the gravity of the injustice that they have suffered.  Having been brushed aside and fobbed off by Government for so long, the complainants had almost lost faith in justice and the rule of law.  It is comforting, therefore, to see that our Parliamentary democracy does have a mechanism for forcing Governments to face the consequences of their actions, if Ministers and officials are unable, themselves, to appreciate the injustices they are responsible for.

    This has been an exhausting, frustrating and deeply depressing fight and many lives have been destroyed.  I have watched people die, desperate because they had tried to provide for their families, believed and trusted in the system and then found their trust was misplaced.  Having saved all their lives to look after themselves, they could not bear the thought that they had unwittingly ‘let their loved ones down’.  They did everything right, did what Government told them to do and yet their pension was not there for them.  These stories are a dreadful indictment of our pension system and I hope the fight for justice in this instance may ensure that others, in future, will not suffer in the same way.  If something is not safe, the Government should not tell us that it is.  If Government assurances of safety turn out to be false – due to unforeseen circumstances – then it must quickly compensate those who have been damaged.

    It is heartening that the Parliamentary Ombudsman has uncovered the full extent of this injustice, and I hope that all Members of Parliament will recognise immediately that they have a duty to ensure that full restoration of pensions is forthcoming straight away.  These people have suffered more than enough – it is time they received a full apology and full restoration of what has been lawfully taken away from them and what they were always told was actually ‘protected’ by the law.

    Every right-thinking person with a sense of fairness and natural justice, when reading the evidence uncovered by this investigation, cannot fail to appreciate that these individuals have been dreadfully wronged by our Government.  The real worry is that Government itself, having seen the Parliamentary Ombudsman’s report, seems to be trying to deny the evidence clearly put before it.

    These individuals have done nothing wrong.  Their lives have been devastated by the carelessness of Government and their mistake was that they genuinely believed Government would tell them the truth.  It beggars belief that Government is now saying that the members either have lied about actually reading and relying on the official information and leaflets or that, if they did read them, of course they should never have believed what they read!

    Since I first met the members of ASW Cardiff, in 2002, and subsequently having met so many other individuals who have suffered so much these past years, I have been struck by how decent and honest they are.  They believed and trusted in official assurances of safety and are the kind of people who are the bedrock of our British nation.  Hard-working people who always wanted to look after themselves, worked and saved hard, tried to check out what they should do, and did what they thought was the right thing to do because government told them so.  We as a nation shout be ashamed of how our Government is behaving on this issue. 

    Government seems to be trying to say that this situation is the fault of everyone else, but not itself.  This is a mess that the Government created and which it has consistently refused to acknowledge.  It is outrageous that Government is then also trying to accuse the complainants of lying.  Such suggestions are merely adding insult to injury.  These are people who believe it is wrong to lie and have lived their lives by the principles of personal responsibility and honesty.  Many of them still find it almost impossible to believe that their Government could really behave dishonestly.

    It is essential that the public understands what has happened here and, in the context of the current proposals for pension reform, this situation should inform the wider pensions policy debate.  MPs and officials need to consider carefully the findings of this report, and hopefully take on board the important messages that it highlights.

    ‘Informed choice’ has been at the heart of the Government’s pension reform agenda, but if it then takes it upon itself to inform citizens, it must do so honestly, clearly and transparently, rather than trying to hide the truth in order to fulfil its own agenda or please wider interest groups.  Furthermore, if Government makes mistakes, or if the consequences of its policy decisions unintentionally cause dreadful losses, it is urgent that the Government acknowledges its failings and offers full redress quickly.  It is likely to take some considerable time to restore public confidence in pensions and the fact that the complainants have had to beg and plead for years is an obstacle to progress on pension reform.

    The Government has also claimed that its policy agenda is based on fairness, social justice and personal responsibility.  If those who did indeed take personal responsibility for their future are left high and dry after being lulled into a false sense of security by Government, then the public will be unable to trust official assurances in future.  Last year, in his speech on ‘Risk and the compensation culture’ the Prime Minister rightly said that ‘Government has a responsibility to inform properly and not over-claim’ and ‘We must act to ensure that valid cases are compensated quickly’.  That is absolutely right, but on this issue, the Government has not complied with such sentiments.  It did not properly inform, it over-claimed about the safety of pensions and it has not acted quickly to compensate. 

    It seems clear that Government’s desire to keep state pension spending very low, encourage employers to provide occupational pensions, and to prevent employers from closing final salary schemes, overrode concerns about member security.  Ministers and officials took it upon themselves to hide the truth from ordinary scheme members.  They also decided that it was not necessary or advisable to tell members the truth about the level of protection that the legal framework offered them.  The decision to give non-pensioner members only an even chance of receiving the pensions they were promised should have been explained clearly.  The decision to allow employers to continue to under-fund their schemes should also have been explained honestly, but members were continually assured, by official statements and documents, that the Government was acting to protect members’ pensions.

    If Government makes mistakes that lead to grave injustices, it should rectify those mistakes rapidly, rather than trying to bully the victims into accepting their losses.  Surely, when officials claim that they want to make sure people can save in a safe environment, the public is entitled to look to the Government to protect their interests, rather than giving higher priority to the interests of powerful lobby groups such as employers.

    The actions of some employers have clearly been reprehensible in connection with final salary pension schemes.  There are far too many examples of companies which appear to have deliberately set out to ensure that they can rid themselves of their UK pension costs and then move on to profit from the assets of those companies which have been separated from their pension liabilities.  The fact that the law permitted such behaviour does not make it morally acceptable.  The involvement of venture capitalist firms should be investigated closely.  Apax Partners, for example, was directly involved in the situation where both BUSM and Dexion members lost their pensions.  Prudential Ventures was involved in the demise of UEF.  Directors of ASW took ‘early retirement’ shortly before the company collapsed and ensured that their high pensions were fully protected, with index-linking, for life, paid for by the contributions of loyal workers who have lost their life savings.  If Government wishes to share some of the costs of rectifying these injustices, it could consider asking the firms partly responsible for company collapses to contribute to the costs of any compensation scheme going forward.

    It cannot be left to the members to do this themselves, since they have no power and no money with which to fight, but Government may be more able to force others to face their moral responsibilities.

    Paying compensation:

    In November 2003, I recommended that the assets of these schemes should not be used to purchase annuities, but that the schemes could be run on, allowing trustees to pay out pensions as they became due and then Government could set aside funding to top up the scheme assets in a pooled vehicle, which would be able to pay the pensions over the long-term.  I proposed this again when the Financial Assistance Scheme details were announced and have consistently asked the DWP to tell trustees to put the annuity purchases on hold, rather than allowing the scheme assets to disappear and making the organisation of compensation far more difficult.  The Government has consistently refused to do this.

    The assets of all schemes in wind-up should not have been used for buying annuities.  They should now be pooled, with scheme pension records transferred by the independent trustees to a Government-funded body which could handle all scheme liabilities as if the schemes were still ongoing.  The requirement is for pensions to be paid and these are long-term annual commitments.  The only capital sums needed would be tax free lump sums for each member reaching retirement age immediately, and life assurance or ill-health benefits may need to be paid from time to time, but the rest of the liabilities could be paid over many years.   I fear that many schemes are very close to buying annuities, or have recently done so, and this will ultimately mean that the bill for taxpayers to fund compensation will be much larger than would otherwise have been the case.  In order to pay compensation quickly I suggest the following:

    1. Stop schemes from buying annuities
    2. Permit trustees to pay pensions to all members who are eligible out of existing scheme assets where annuities have not yet been bought
    3. Pool all assets that have not already been used for annuities into a fund to run as a satellite of the Pension Protection Fund, utilising the systems and infrastructure which is already being put in place to pay out pensions for schemes in wind-up.  This section would be funded with top-ups from Government funds as required.
    4. The DWP has unallocated funds in its budget which could be dedicated to paying out compensation where scheme assets are already gone
    5. Unclaimed assets could be used to fund the compensation payments required.  Banks and insurance companies have made profits at the expense of pension funds in past years and the costs to the taxpayer could be minimised
    6. Government should pursue claims against some former owners of companies who appear to have behaved inappropriately.  Any monies which such companies can be encouraged or forced to contribute could help mitigate some of the costs of compensation.

    Significant amounts of taxpayers’ money have been wasted on setting up the Financial Assistance Scheme, when the Pension Protection Fund (PPF) is already being established to pay pensions for members of schemes which would otherwise have to wind up and buy annuities.  This PPF does not buy annuities and the Parliamentary Ombudsman’s report has highlighted Government advice even a few years ago (before the latest sharp rises in annuity prices) that annuity purchase is not the most sensible option for members, so it is urgent that no more of the scheme’s assets are depleted with bulk annuity purchase.  The Financial Assistance Scheme should be replaced with a more sensible arrangement, designed to pay full compensation.

    The FAS is compounding the injustices and reducing pensions even further:
    The injustices of the FAS need to be spelled out clearly.  Its rules and exclusions are grossly unfair.  The Parliamentary Ombudsman has said she will investigate the FAS if the Government does not replace it itself.  In fact, the FAS is directly responsible for many members getting even lower pensions.  This is because the costs of providing the FAS with data on scheme membership and details of those who may be eligible are paid out of scheme assets.  This reduces assets for all members, but only a few actually qualify for the FAS.  Thus, all other members must end up with lower pensions as a result of helping those within 3 years of pension age. 

    Government has tried to deny responsibility for delays in FAS payments by blaming trustees.  This is shameful.  The way the FAS has been set up is the reason why those who are eligible are not receiving benefits and this whole sorry saga suggests that the DWP is unwilling to embrace simplicity and fairness in any aspect of pensions.  This is a brand new scheme, with no previous rules to deal with and yet, before it even starts paying out properly, it is already riddled with injustices, cliff-edges, bureaucratic delays and inefficiencies.  There are so many things wrong with the FAS it is difficult to know where to start.  Firstly, it insists on schemes buying bulk annuities and then topping up the pensions for the few who qualify in the 3-year from pension age ‘window’.  This is the most expensive way of operating and will mean that members get the lowest possible pension.  Indeed, the existence of the FAS will result in all those who are not eligible having even smaller pensions than they would in the absence of this ‘assistance’ scheme.  Given that only a few members in each scheme actually qualify, the FAS is making the situation worse for the majority of the 85,000 people who have lost their pensions!  Secondly, the rationale for excluding solvent schemes has never been explained properly, since the Government’s argument that solvent employers have a moral obligation to pay pensions is totally unenforceable. The MFR legislation is responsible for solvent employers being able to walk away from their obligations totally legally.  Thirdly, the decision only to cover those within 3 years of scheme pension age, but then making them wait till age 65 and scheme wind-up, even if scheme pension age was 60, is inequitable.  One member who is now 58 qualifies, but will get nothing until 2013, but another member who is now 62 is excluded even though he will be 65 in 2008.  A £12,000 cap and no inflation-linking are other examples of unfairness, but the worst example is the ‘interim’ payments of only 60% rather than 80%.  Those who are terminally ill (defined as having less than 6 months to live) are being cut back to 60% and, if topping up to this 60% level implies receiving less than £10 per week, they will receive nothing at all.  By definition, these individuals will never get their 80%, yet their money is currently probably sitting in a bank and trustees could pay them the full 80% (or even 100%) of their entitlement immediately if the DWP were to agree to allow this. 

    Comments on specific Government responses to Parliamentary Ombudsman’s report:

    • individual scheme members should have done more to understand the security of their pensions and should not have relied on introductory leaflets alone, therefore it is their own fault, not that of Government

    This response is quite extraordinary.  What should they have done?  The whole system was set up to virtually ensure that they could not find out the truth about the lack of security entailed in the new regime put in after Maxwell scandal.  The 1995 Pensions Act was promoted to the public as providing protection for the pensions of members of final salary schemes.  All public statements made, all statements in Parliament and all official material sent to the public made a point of stressing that the legislation had been put in place to provide proper protection.  There was no requirement for anyone to disclose the true picture of the security (or lack of it) provided for non-pensioners by the MFR.  Neither trustees, nor actuaries were required to tell members that they could lose most or all of their pensions and, indeed, their contracted out state pension rights, if their company scheme wound up.  Indeed, if Government calls something a ‘guaranteed minimum pension’, why would the public even have an ounce of suspicion that this might not be ‘guaranteed, ‘minimum’ or even a ‘pension’!  According to the evidence uncovered by this Report, the Government seems to have deliberately chosen not to tell the public about the risks of wind-up.  Even though it knew the truth and was warned that it should tell them, it still kept this information from scheme  members.  The Government also said that it was producing the leaflets in order to inform the public and provide information from a source they could trust.  Alistair Darling said ‘the public rely on Government information and they are entitled to be reassured that leaflets are accurate and comprehensive’.  It is clear, therefore, that even back in 2000, the DSS knew their leaflets would be relied on, however, the Department failed to ensure that the material was accurate and comprehensive and omitted the one big risk that these members faced.  How can the Government now say that people should not have relied on these leaflets, when the public were told that the materials were being produced so that they could be relied upon?  I quote two members who said to me the following: 
    ‘If you can’t rely on the Government, who can you rely on?’ 
    ‘What was the point of all the legislation after Maxwell, if it was not to protect our pensions?’

    • the financial losses are not attributable to failings on the part of Government but instead must fall as the responsibility of employers

    It is true that some employers behaved very badly.  However, the point is that the Government never warned members that their pensions were at the mercy of their employer.  In fact, official information stressed that the assets of the pension fund were totally separate from those of the company, so that the pension assets did not disappear if the company failed.  Thus, official statements and information actually endorsed the employer running the pension scheme, because the members were not warned that their pension depended on the employer at all.  This is a significant part of the misinformation that has occurred.  In truth, the employer was legally entitled to walk away from its pension scheme, either by winding up the scheme, or by a trustee compromise, or by engineering the insolvency of a part of the business and thus getting rid of its pension liabilities.  However, the Government did not tell members that this could happen.  Some of the most reprehensible employer actions have been associated with the venture capital industry.  Such firms have been directly implicated in splitting companies in corporate restructuring deals, allowing a weak subsidiary to take over the pension, transferring all deferred members into that part and then letting the company fail, thus jettisoning all the liabilities, including the pension.  However, the members cannot pursue the employers and have no power to extract money from them.  For example, BUSM members have been trying to get the Government to investigate the behaviour of Apax Partners and it has consistently refused.  If Government holds the employers responsible, then it should pursue this matter itself.  Members and trustees cannot. 

    • trustees and their professional advisers were responsible for looking after the members’ funds, so this is not Government’s fault

    All the trustees could do was to safeguard the assets that were in the scheme, but they were powerless to ensure that those assets were sufficient to secure full benefits on wind-up.  The MFR level was totally inadequate for annuity costs, but that is not the trustees’ fault, that is the fault of the framework put in by Government and the administration of that framework.  The trustees did not cause the financial losses, nor did they have any control over the MFR which governed the amounts employers were required to contribute.  In addition, particularly with respect to the member nominated trustees, they were actually misled by OPRA when they first started their duties.  There was no requirement for anyone to tell the trustees what could happen to members’ pensions on wind-up, or what the MFR funding levels meant on wind-up and no requirement for anyone to actually disclose the truth about their pension security.  Even after the Myners Review and Government studies showed that trustees generally did not have broad knowledge of pension and investment issues, the Government still failed to ensure that the trustees were properly informed.  Indeed OPRA failed to help trustees too.  If a trustee phoned the Regulator saying they wanted to get the employer to put in more than 100% MFR, the Regulator would say that there was nothing the trustees could do (unless specifically provided for in the trust deed) to force the employer to put in more than the statutory minimum.  Indeed in some cases employers could take money out of the fund if it was over funded and there was nothing the trustees could do.  In practice, the trustees had no control over the funding level in terms of ensuring that wind-up costs could be met. 

    • there is no evidence that scheme members ever read the official information or acted in a certain way because of it.

    This comment is quite breathtaking.  Effectively, what the Government seems to be saying here is that the members are lying.  This is outrageous.  It was the members themselves who went into their files, their lofts, or their store rooms and produced the leaflets to show me.  I had not ever seen them myself.  But many of these are the kind of people who carefully check things out, diligently try to make the best decisions for their families and who made many inquiries after Maxwell about the security of their pensions.  They were all reassured by the official statements and publications.   Members talked amongst themselves too and asked their unions.  Some will have received the official leaflets and shown them to their colleagues, many discussed their pension security and the official materials will have been passed around companies and friends, providing all those who read them with a false sense of security.  These are decent, honest people and I have always been struck by their sense of right and their deep desire to behave responsibly and properly.  This makes the way they have been treated all the more distressing for them.  They feel they have been so let down, they feel their trust has been betrayed and they have been taken for fools.  For the Government to then come along and accuse them of lying is disgraceful.  These are decent, hard-working people who have tried their best to look after themselves and their families.  Even after losing their jobs and their pensions and having been so badly treated by the Government, they are still trying to work, they still pay their taxes and still do not want to live on the State.  They find the term ‘assistance’ an insult and just want back the pensions that all the Government’s materials and utterances told them were safe and protected by the law.

    Lessons for the future:

    The Pensions Commission report should be informed by this situation too.  Unfortunately, the Commission’s proposals for a National Pension Savings Scheme have ignored the concept of suitability and assumed there is no need for advice.  However, if the public are enticed into such a state-organised pension vehicle, it is essential that they understand the implications of putting their money into it.  Once money has been invested in a pension, it is locked away and cannot be retrieved until pension age.  However, if the state pension continues to rely on mass means testing, the ultimate pension may be penalised and a pension contribution may be wasted.  If the investments made by the scheme lose money, will the public be satisfied?

    It is vital that government understands that it cannot take on the role of directing people’s investments, if it refuses to accept the concomitant responsibility for ensuring suitability that is attached.  A National Pension Savings Scheme which contains a default fund largely invested in equities is potentially dangerous.  UK pensions policy has, for decades, relied on the notion that equity investment is the solution to providing strong long term investment growth and that younger individuals are bound to do better if they invest in equities, rather than ‘safer’ bonds or other lower risk investments.  This belief is partly responsible for the loss of members’ pensions in occupational final salary schemes and it is vital that officials recognise that it is not necessarily safe to operate on such a basis.

    Equities do not ‘generate’ high returns, they merely offer the ‘opportunity’ of earning higher returns.  That is very different.  Most ordinary people’s idea of ‘risk’ is not ‘will I outperform over the long term?’  It is ‘will I lose money?’  That is a wholly different concept, but the public will not be satisfied if they come to need to draw their pensions at a time when equity markets have performed very poorly and their pension savings are worth little.  They may well blame Government for enticing them into the NPSS and creating a default fund which relied heavily on equity investments, when knowing that they did not fully understand the risks involved.  If these people then also find that the means test of the state pension takes away a substantial portion of their pension income, they are likely to challenge a future Government for ‘mis-selling’.

    The future pensions debate cannot ignore the issues of suitability and advice.  If people have big debts, they should not be told to save.  If they are likely to have their pension income means-tested later, they may be better saving in a different form.  If they do not want to face the prospect of investment losses, they should be offered a capital protected default option.  These are important issues for everyone involved in the pension reform debate to consider.

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