Pension Mistakes Resulting from Tory Legislation in 1990s – 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

    Pension Mistakes Resulting from Tory Legislation in 1990s

    Pension Mistakes Resulting from Tory Legislation in 1990s

    Mistakes resulting from Tory legislation in 1990s

    by Dr. Ros Altmann

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


    Maxwell debacle in the early 1990’s led the Tory Government to

    realise legislation was needed to enhance protection for pension

    scheme members.  There were two major pieces of pensions

    legislation after Maxwell.  1993 Pension Schemes Act and 1995

    Pensions Act.  Most of the provisions of these Acts came into

    force from 1997 and, although designed with good intentions, have

    resulted in false sense of security and worrying lack of protection

    for members who are not yet retired.  They have also caused a

    significant increase in costs for UK final salary pension schemes. 


    extra burdens placed on schemes and extra regulations can be seen,

    with hindsight, to have been well-meaning in intent, but extremely

    damaging in practice.  Some of the major problems are listed



    Introduction of transitional priority order for winding up 


    Pensions Act introduced a ‘transitional priority order’ for

    sharing out the assets of a pension scheme which winds up when an

    employer is insolvent.  The ASW and UEF cases were caught badly

    by this.  The provisions introduced in 1997 state that pensions

    in payment must have first call on all pension fund assets, and this

    will include all index linked increases for life.  In effect,

    this means that anyone who is already drawing a pension will have an

    index linked annuity bought for them (very expensive) to cover their

    entire pension promise, even up to huge amounts of pension. 

    Once these annuities are bought, if there is no money left in the

    pension fund, then all other scheme members who have not yet retired

    (even those 1 day away from retirement!) will get nothing at all. 

    This transitional order was to be in place for 10 years and then, in

    2007, the order is due to change so that pensions in payment are met

    first, but without their inflation-linked increases.  This

    means that only non-indexed annuities will need to be bought, which

    is much cheaper and then other non-retired members will have next

    call on the assets, so that workers will be much more likely to

    receive something from the fund. 


    transitional priority order is grossly unfair and could be changed

    today.  Just bring

    forward the 2007 order to today and only protect level pensions,

    rather than full index linking, giving non-retired members much more

    chance to receive their pensions. 

    Of course, ultimately, the only way to really protect members

    is to have some kind of insurance scheme in place. 


    Introduction of LPI (limited price indexation) 


    1997, all pensions accruing were required to be indexed up to 5% per

    year (i.e. must be increased in line with inflation up to a maximum

    of 5%).  This was meant to give better pensions to members, but

    has resulted in enormous extra costs for schemes.  It is

    estimated that the extra cost of providing index-linking adds 30% to

    scheme funding and has added to the unsustainability of our pension

    system.  Employers are being asked to bear all the inflation

    risk, which is proving too expensive. 




    has caused huge problems.  The MFR was billed and perceived as

    ensuring that pensions were protected, so they would be properly

    funded and prevent employers underfunding their schemes, (a la

    Maxwell).  In fact, it was misrepresented and misunderstood. 

    It does not guarantee proper funding, has added huge extra costs

    onto schemes because they need to comply with it and have actuarial

    calculations done to calculate it, and the assumptions used to

    calculate it are so outdated that even fully funded schemes now

    offer less than half the promised pension to members who are not yet

    retired.  The actuarial assumptions are out of date and the

    method of calculation is flawed.  It is used as the basis for

    calculating transfer values or to prescribe what a solvent employer

    must put in on winding-up the scheme, which is currently allowing

    employers to legally walk away from their pension promises even if

    they can afford to meet them in full (example Maersk). 


    Member Nominated Trustees 


    requirement for a third of trustees to be nominated by members was

    designed to increase member protection.  Unfortunately, just

    having member trustees does not help, because employers can choose

    to ignore the trustees’ advice and the cost of nominating members

    can add to funding pressures.  This just adds to the illusion

    of protection, but in practice it is lulling members into a false

    sense of security, since employers retain the power to wind up the

    scheme if they want to, (the ‘nuclear’ option) or refuse to

    accept the recommendations, if they so choose. 


    Section 67 of the 1995 Act 


    provision prevents employers from making any changes to pension

    schemes which might diminish members’ rights.   In theory,

    this sounds good, but, in practice, this has meant that employers

    are prohibited from making any changes at all, even ones which

    improve members’ rights, for fear of diminishing someone’s

    future rights in any way. If even one members’ future rights were

    somehow worsened, this would render the changes to the scheme void,

    so the administration of the scheme would become impossible. 

    Another example of well-meaning legislation which was drafted in

    such a way as to impose impossible burdens on schemes. 




    Pensions Regulator ‘OPRA'(Occupational Pensions Regulatory

    Authority) was introduced, which was supposed to protect scheme

    members.  However, OPRA has operated at a very ‘micro’

    level, focussing on whistleblowing for minor breaches of the rules

    (for example pursuing employers who remit pension contributions a

    few weeks late, or send letters out a few days late).  While it

    is looking after these minor breaches, members remain unprotected in

    the case of wind-up.  Huge chunks of their pension, or indeed

    all of it, can be lost at a stroke, making all the low level

    protections valueless.  This is a gaping hole in our pensions

    law and must be rectified. 

    The Bottom Line 


    the end of the day, any and all changes made in the 1990’s,

    designed to improve UK pension schemes for members, are unhelpful in

    the medium term, because the option of winding up the scheme remains

    and means that huge swathes of people’s pension rights can

    disappear at a stroke, with no protection in law.  This makes a

    mockery of our thousands of pages of pensions law supposedly

    designed to protect people’s pension rights.

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