Compensation - Won't Cost A Penny For Years

by Dr. Ros Altmann

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Pension rights of members of UK final salary schemes have not been protected by pensions law. The Government is denying responsibility for compensation, but I believe there is an overwhelming moral and legal case for it. Not only this, but it would not cost the Government anything for years! The schemes of failed companies have sufficient assets to pay their pension commitments, on an ongoing basis, for the next 5 to 10 years, at least. If they do not have to buy index-linked annuities for all the pensioners, the scheme assets can meet the ongoing costs. For example, my calculations show that the ASW Sheerness scheme assets are sufficient to pay pension commitments of all members - including all those not yet retired, but due to retire in future with rights under the scheme - for 10 years, before the taxpayer would need to pay a single penny.

The workers are mounting legal challenges to force the Government to pay compensation. When they win, as they surely must, the taxpayer will not only have to pay the pensions, but a huge legal bill too. Having estimated that the cost of agreeing compensation could be zero, in the short term, the political case for resisting these people's claims is hard to fathom. It is, in large measure, the fault of well-intentioned, but flawed, legislation that their accrued pension rights were left unprotected. Legislation that was brought in by the Tories, not this Government.

Article 8 of the European Convention requires Governments to protect pensions and Article 1 of the Human Rights Act requires Governments to protect people's property rights. Pensions are deferred pay and employers have been allowed to 'promise' to pay a certain level of pension to their workers, without any risk warning.

Examining the facts, it is hard to comprehend how the Government can claim that the law has indeed protected people's pension rights. Members had a reasonable expectation of receiving their 'promised' pension from their employers' schemes.

Workers were forced to join their company schemes - the law allowed employers to make membership a condition of employment. Once in, Inland Revenue rules did not allow any other pension arrangements. The Government even offered financial inducements (tax relief) to persuade people to join pension schemes.

The environment in which UK final salary schemes operated, led members to reasonably believe that contributions to their employers' schemes were protected. Pension assets were kept in trust, separated from employers' assets, professional advisers oversaw the investments, employers offered 'guaranteed' pensions and promoted their schemes to staff. No-one was required to give any warning that pension contributions may not be safe. Professional advisers, the NAPF and even official government documents all recommended being in an employer's final salary scheme.

Why The Government Bears Responsibility

After the Maxwell scandal, the Conservative Government introduced the 1995 Pensions Act, supposedly to protect pensions. In fact, its measures have inadvertently undermined protection for all non-retired members. It is only pensions already in payment that actually have any proper protection. What did the law do?

Firstly, the Minimum Funding Requirement (MFR), led workers to believe that they were in an adequately funded scheme, when, in practice, they were not. Billed as a measure to ensure that pension schemes were 'properly funded', even schemes which are fully funded on the MFR (as ASW was), may have insufficient assets to cover their liabilities to non-retired members on wind-up.

Secondly, the 'Transitional Priority Order', requires that, on insolvency, assets of schemes in wind-up, must be used first to provide full index-linked protection (buying index-linked annuities) for pensions already in payment. If there is no money left after this, then active and deferred members will get nothing. Irrespective of how long or how much they have contributed, how close they are to retirement, or how much money they transferred in from other schemes.

So, non-retired members' contributions are taken, by law, and used to pay pensions to other people - i.e. today's pensioners. 'Funded' schemes have become 'pay-as-you-go' - or perhaps more accurately 'pray-as-you-go' (pray that you retire before wind-up).


These people's property rights have not been protected and they must be compensated. The Government has so far denied responsibility, refusing to agree. Meanwhile, it has proposed insurance protection for members of insolvent schemes, and altered the priority order to enable trustees to divide assets up more fairly in future. However, there is no provision to compensate those who have suffered in the past, nor indeed people whose employers fail between now and whenever the new legislation is enacted (estimated 2005).

This is unacceptable. The sooner policymakers do the decent thing on this issue, the sooner we can restore some confidence in both pensions and the Government. And it won't cost the Treasury a penny for years!
The outlook for final salary schemes is grim. Quite simply, many companies cannot afford to honour the pension promises they have made. Why are we in this crisis and what can be done?

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