Timeline of events in wind-up disaster
by Dr. Ros Altmann
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CATALOGUE OF INCOMPETENCE OR DIARY OF DECEIT?
After inquiry into 1991 Maxwell scandal, Government passed 1995 Pensions Act, to ensure proper protection for occupational pensions. Announced a ‘Minimum Funding Requirement (MFR)’ and new Regulator (OPRA) to protect members’ interests. Parliament was told that this MFR would ensure final salary schemes were funded properly. The Actuarial Profession would be asked to design the calculations for this MFR. In the Lords, Lord Mackay said: the MFR ‘will mean that members can be confident that the value of their accrued rights is secure, especially in the event of the scheme or the employer company winding up. It is only right that the members’ investment and their accrued occupational pension rights, should be properly protected. Our proposals are designed to provide that protection’.
In the Commons, William Hague said: ‘what on earth would we say to people who may approach us after the Bill has been enacted and ask whether their pension funds will be able to keep their pensions in payment or give them the value of accrued rights if (the scheme) winds up? Without the MFR, the answer to such a question would be no. What on earth would we have achieved then? The MFR would mean that the answer would be yes.’
However, in November, officials instructed the Actuarial Profession to design the MFR standard so that non-pensioner members would have only a 50/50 chance (‘at least an even chance’) of getting the full scheme pension on retirement. Parliament and the public were not told this.
DSS published a leaflet summarising the 1995 Act measures. It said ‘Changes were needed as the Government wanted to remove any worries people had about the safety of their occupational (company) pension following the Maxwell affair’. ‘The MFR is intended to make sure that pensions are protected whatever happens to the employer.’
Government also proposed that trustees of company schemes which wound up must use all the fund’s assets to buy annuities for pensioner members’ full pensions, including inflation-linking, first, over-riding Scheme rules and trustee discretion. This new ‘priority order’ meant that, if no assets were left after the pensioners’ annuities had been bought, all other members would receive no pension, not even the National Insurance replacement ‘Guaranteed Minimum Pension’ (GMP).
Measures of 1995 Act officially began in April and Labour won the General Election in May. In July Gordon Brown’s first budget took away the dividend tax credits from pension funds. This immediately reduced pension fund income and undermined the MFR calculation basis.
Labour’s first Consultation on Pensions said Government aimed ‘to build a sustainable consensus for the long-term future of pensions’ and that ‘People need to have confidence in pensions and be sure their pensions are secure.’
In June, Government weakened the MFR for the first time. The Actuarial Profession said the removal of dividend tax relief had distorted the MFR calculation and changes in economic and market conditions left the MFR stronger than originally intended. Therefore, non-pensioner members’ benefits were almost 100% secure (but were only supposed to be 50% secure) and schemes were in danger of being taxed by the Inland Revenue as they were showing big surpluses.
Also in June, the Pensions Minister announced Government’s policy intention to stress the benefits of joining employer pension schemes and said the DSS would issue user-friendly leaflets to reinforce the message.
The December Green Paper on reform of non-state pensions stated that there was a need for ‘wider recognition of the benefits of occupational pension schemes and measures to encourage more people to join’. It said that, after Maxwell and personal pensions mis-selling, the public was not sure who it could trust. The DSS would issue leaflets and work with the FSA to improve pension information, including ‘promoting awareness of benefits and risks’. It said ‘The Government and financial regulators have the central role to play in developing the long-term framework and for driving forward the specific initiatives needed to improve pensions information’. ‘People should be encouraged to join their employer’s scheme, but will only do so if they believe their pension rights are properly protected. Security is of paramount importance’. It also said: ‘The concept behind the MFR is a straightforward one – that is, people who have built up pension rights should be able to draw their pensions in full, even if the employer is no longer there’.
In June, the FSA launched public information leaflets to help people understand their pension options. These assured the public that final salary schemes ‘give you a guaranteed pension. The amount of pension you get from a personal pension is unpredictable’ and ‘you are guaranteed a certain level of pension when you retire’ ‘This makes it easier to plan for retirement’. The leaflets failed to mention the risks of wind-up (which would be the most important potential question to consider when deciding whether to join or stay in a final salary scheme).
In November, the Actuarial Profession told the DSS that the MFR needed strengthening to reflect changed mortality rates and inflation expectations. It concluded ‘if no change is made there will be implications for the degree of security of members’ benefits’.
A DSS submission to the Pensions Minister discussing the Actuarial Profession’s recommendations to strengthen the MFR said ‘there are strong arguments for incorporating these changes to the MFR…These changes are technical amendments and are simply restoring the strength of the MFR level to the level intended when the requirement was first introduced.’ It also added ‘if we introduce these changes to the MFR we are likely to come under pressure to similarly change the assumptions used in the calculations of rebates which would make them more expensive to Government. We do not have Treasury agreement to this’.
In April, Pensions Minister Malcolm Wicks 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’.
In May, the Actuarial Profession submitted its formal report to Alistair Darling recommending strengthening the MFR as it was ‘weaker than its original intention’ and also advising that members should be told about the possible lack of security for their pensions. A DSS official wrote to the Minister that informing the public about security of benefits would require careful handling, since this would highlight the fact that the objectives of the MFR mean that non-pensioners only have a ‘reasonable expectation’ of receiving their benefits.
In September, the DSS consultation document on ‘Security for Occupational Pensions’ stated: ‘One of the key recommendations of the Actuaries’ report is for disclosure to members about security of their benefits’ as they did not understand the lack of protection provided by the MFR.
Meanwhile, Alistair Darling announced Government compensation for people who had not been properly informed of changes to the State Earnings Related Pension for widows (inherited SERPS). He said: ‘The giving of wrong information by a Department is inexcusable.’ ‘The public rely on Government information and they are entitled to be reassured that leaflets are accurate and comprehensive.’
‘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.’
‘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.’
‘Political responsibility must lie with the Government in office at the time. I accept responsibility for anything that happens during the term of this Labour Government.’
OPRA response to consultation on security for occupational pensions said: ‘Scheme members should have access to a realistic assessment of the extent to which the pension rights which they have built up are secure. On balance, it is better that members are provided with such a realistic assessment, even if it does give rise to member concerns’.
Government response to its consultation did not implement the recommendations to strengthen the MFR and ignored the advice to warn members about the lack of security provided by the MFR. It proposed replacing the MFR with a Scheme Specific Funding Requirement (SSFR) and rejected proposals for an insurance scheme to protect members’ pensions.
When Gordon Brown formally announced abolition of the MFR in March, he said: ‘Government is determined to protect the long-term security of pensioners and other pension scheme members in occupational schemes’.
In July, the DSS issued revised pensions information leaflet ‘a guide to your pension options’. This had sections such as ‘what else do I need to think about?’ and ‘other things that could affect your pension’ but did not mention the risks of scheme windup.
The Actuarial Profession again wrote to the DSS to say that the public should be told about pension security, so that vital information for members is not hidden. The Government set up a Consultation panel to advise on this, which said ‘whenever you enter a contract you should know the exit terms. What happens in wind-up should be disclosed to members’.
In March, following new advice from the Actuarial Profession, (partly in response to market turmoil after 9/11) the MFR was weakened for a second time. Employers were also given more time to bring their schemes to full funding, giving them 10 years to get to 100% MFR (rather than 5 years) and 3 years to get to 90% MFR (instead of 1 year). Solvent employers winding-up their schemes would need to buy annuities for pensioners, but could still use MFR transfer values for non-pensioners.
An Actuarial Profession press release welcomed the MFR changes but warned ‘Government does need to be honest and open about the impact of such measures on member security, particularly if, as a consequence, there is an increased chance for some members that the pension they expect will not be delivered… the government’s task is not an easy one – it is not possible to bolster member protection in occupational pensions schemes and at the same time reduce the cash burdens on employers. These are conflicting objectives.’
In May, the DWP published a new leaflet ‘occupational pensions: your guide’. It said ‘this guide tells you how occupational pensions work. It looks at some of the questions you may need to think about and it tells you where you can find more information…’ The section ‘how do I know my money is safe?’ said ‘although your employer pays into the scheme and may be a trustee, the assets of the pension scheme belong to the scheme and not to your employer. As a scheme member, you are protected by a number of laws’…‘OPRA can act quickly to protect your interests’. No mention of wind-up risks.
DWP evidence to Parliamentary Select committee in October said ‘The Department is actively promoting a pension education publicity campaign that is supported by a range of simple, impartial guides. The purpose of the campaign is to promote awareness of the importance of saving for retirement with the objective of encouraging people to save.’
Another Green Paper on pensions, in December, entitled ‘Simplicity, Security and Choice’ said ‘if they are to join schemes, prospective pension scheme members will want to have confidence that the pension they are promised will actually be delivered’.
The new Chairman of the Actuarial Profession Pensions Board told the Government that the MFR was too weak and should be strengthened, even before it is abolished, because it was much weaker than the original intention. Again, Government ignored this.
In April, DWP revised its leaflets and added a new section ‘What do I need to do now?’ which told the public ‘If your employer offers access to an occupational scheme it is usually worth joining’. Still no mention of the risks of losing pensions on final salary scheme wind-up.
Pensions Minister, Malcolm Wicks replied a Parliamentary question from Oliver Heald MP on 14 July, about the effect of the MFR changes on security of pensions on wind-up. Mr. Wicks stated that there had been two recommendations by the Actuarial Profession on the MFR and both had been implemented. (He did not mention that there had been four recommendations, but only the two that recommended weakening were accepted, not the two for strengthening it).
In December, Parliamentary pressure was building for the Government to acknowledge the plight of those who had lost out on scheme wind-ups and Kevin Brennan MP tabled an Early Day Motion calling for compensation for the victims of this situation.
In response to a Parliamentary question from Nigel Waterson MP, asking whether he accepted that those who had lost their pensions on scheme wind-up would have had more if the MFR basis had not been changed twice, Malcolm Wicks said ‘All I can say is that that was the recommendation of the Faculty and Institute of Actuaries at the time’. ‘Although one is occasionally tempted into partisanship, it is normally sensible to listen to what the actuarial profession advises’.
The Prime Minister, publicly acknowledged for the first time, the problem of members who lost their pensions when their company scheme wound up. Replying to a Parliamentary question from Tony Lloyd on 21 April, he said ‘I hope we can come forward with a solution’.
In May, the Government – facing its first Commons defeat as the majority of backbenchers from all parties were poised to insist on compensation for those who lost their pensions on wind-up – announced a £400m Financial Assistance Scheme (FAS) claiming this ‘represents significant help to those who have lost the most…the coverage must ensure that those suffering losses are helped according to the principles of openness, fairness and operational practicability’.
As it was clear that this FAS would not remedy the problems faced by those affected, a case was put together to ask the Parliamentary Ombudsman to investigate the circumstances in which members of ‘safe’ final salary schemes had ended up with little or no pension.
Sandra Osborne MP tabled an Early Day Motion – calling for schemes to stop annuitisation and a £75m a year compensation scheme to be agreed before the general election.
Pensions Act was passed in November and the Government said that no new money would be allocated to the FAS before March 2008, so it would be funded from existing funding for now.
FAS qualification criteria announced – only members 3 years from scheme pension age will qualify, and will receive only 80% of core pension, will lose all their inflation linking, no tax free lump sum, capped at £12,000 a year and no payments under £10 per week…Assistance will not be paid until age 65 (irrespective of scheme pension age) and until the scheme has finished winding up by buying annuities. Solvent employer schemes will be excluded – ‘As solvent employers have a duty to support their schemes and provide the benefits members were expecting, it is right that the FAS focuses on insolvent employers. We expect employers to stand by their pension promise to their employees and will take a dim view of the solvent employer who seeks to avoid their responsibilities.’ Of course, there is nothing members can do to force the employer to pay!
June 2005: Government announced that the FAS would make some interim payments by end 2005 to help those terminally ill (defined as having less than 6 months to live) or already over age 65. These interim payments, however, will only be 60%, not even 80% and will not be paid if entitlement to the 60% amounts to less than £10per week.