Ros’ 2007 Top Five pension events
by Dr. Ros Altmann
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- Dynamite revelations about Gordon Brown’s 1997 decision to remove ACT relief
It was revealed that the Chancellor Gordon Brown, in 1997, was advised that there was no information on the impact of removing dividend tax relief from smaller pension schemes and was warned that such a move would worsen the funding position of all schemes and also risked damaging the stock market. His advisers suggested that he might like to phase the changes in, for example reducing Act relief by 5% each year for 4 years, rather than removing 20% all at once. This suggestion was rejected, despite the uncertainties surrounding the likely effects of the decision.
This decision weakened many of the smaller pension schemes, which were already in deficit and whose sponsors were struggling, resulting in scheme failures that left thousands of members with no pension. The removal of ACT relief came just weeks after sweeping changes had been introduced in April 1997, which were supposedly designed to protect members’ pensions if their scheme wound-up. Removing dividend tax credits risked undermining the new funding regime – Minimum Funding Requirement (MFR) – but Gordon Brown ploughed on regardless. This cavalier disregard for the interests of pension scheme members has been a hallmark of pension policy since 1997.
- Government defeat in Judicial Review hearing February 2007
In February, the High Court ruled that the Government had been wrong to reject the Parliamentary Ombudsman’s findings of maladministration and ordered the DWP to reconsider its response. The Judicial Review verdict stated that ‘no reasonable Secretary of State could rationally disagree’ with the Ombudsman. Sadly, however, John Hutton did continue to disagree with the Ombudsman and lodged an appeal against this verdict in which the DWP claimed that both the Parliamentary Ombudsman and the High Court judge were themselves irrational! The verdict in that appeal has not yet been delivered. However, a second Judicial Review is being heard which claims that the extension of the Financial Assistance Scheme, announced in March 2007, was not an adequate response to the High Court verdict and does not sort out the inadequacies of the FAS. The FAS still does not pay from a members’ scheme pension age, does not permit tax free lump sums, has no ill-health provisions and no inflation linking, making it vastly inferior to the Pension Protection Fund. Until the FAS payments are increased to at least the same as the PPF, there cannot be any fair resolution of the wind-ups scandal.
- Northern Rock building society customers offered 100% guarantee for all their deposits
In September, there was an unprecedented bail-out of Northern Rock building society, which saw the Government underwrite the entire retail and wholesale deposit base of a company that had a flawed business model, putting billions of pounds of taxpayers’ money potentially at risk and resulting in the situation that building society accounts are now much safer than pensions. The PPF does not pay 100% of members’ pensions if their company fails and the Government has always refused to underwrite the PPF with taxpayers’ money. Yet again, the Government’s attitude to pensions seems to compare unfavourably with its attitude to the banking sector.
- Lifeboat amendments and Young Review
In July, the House of Lords passed an amendment to the 2007 Pensions Bill which called for the FAS payments to increased to at least the PPF level, with the Government issuing an emergency loan to fund payments immediately and then the Treasury finding ways of mitigating the costs to the taxpayer by using scheme assets, rather than buying annuities and by using unclaimed assets – without specifying where the assets should come from – that would be up to the Government to decide. These amendments were then defeated in the Commons, despite a rebellion by a number of backbench Labour MPs and the Government prevented any further debate in the House of Lords by invoking Parliamentary Privilege and killing off the amendments that would have brought an end to the pensions wind-up scandal. Rather than settle the matter, the Government insisted that the issue of funding improvements to the FAS should be decided by the DWP’s Review of Scheme Assets, led by Andrew Young, Deputy Governemnt Actuary. This Review published its interim report in July, and showed there are still £1.7billion of assets in falied schemes and that halting annuitisation of scheme assets and running the FAS along PPF lines, plus potentially organising a scheme to collect unclaimed life assurance policies, would provide more than enough funding to allow FAS to increase without extra costs to the taxpayer.
- Pensions Act 2007
This adopted much of the state pension reform proposals from the Pensions Commission report. This was billed as the biggest reform of state pensions since Beveridge, but in reality the measures were to a large degree ‘smoke and mirrors’. The Basic State Pension is to be tied to earnings from 2012 or so, but offsetting the extra cost of this, the Second State Pension will no longer be tied to earnings and will become flat-rate, while the age of entitlement to both these elements of the state pension will be increased from 65 to 68 in coming years. The Pension Credit will continue in future, and at least one third of pensioners will still need to claim means-tested benefits by 2050. Therefore, state pensions will continue to undermine private pension provision for the foreseeable future.