Article in The Times on Financial Assistance Scheme empty promises
by Dr. Ros Altmann
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There is a black cloud hanging over our pensions landscape. After being compelled to join their company pension schemes, and contributing loyally for decades, thousands of people – some of whom were only a short time away from retirement – have found their pensions snatched away from them when their company schemes wind-up. Yet, after Maxwell and the 1995 Pensions Act, they believed Government had introduced laws to ensure proper pension funding and protection. They trusted official assurances that their pensions were safe. They did what society asked of them, tried to provide for themselves and never wanted to live on State handouts. Many are in their 50’s and 60’s, with no time left to make alternative pension arrangements. However, the Government has not accepted any responsibility for the losses these people have suffered.
After massive pressure from MP’s, media, trade unions and scheme members, the Treasury agreed to pay £400million over 20 years, for a ‘Financial Assistance Scheme’ (FAS). But this response is completely inadequate. Essentially, it is a woefully small defined contribution (which will be further reduced by the administration costs of the scheme) to meet an unquantified, much larger, defined benefit liability. £400million is nowhere near enough to correct the dreadful injustice suffered by over 65,000 people.
Details of the FAS are still unclear. Ministers have already put off the consultation, (originally promised by end-November 2004) until ‘Spring’ 2005. Some commentators are concerned that Government knows the FAS cannot sort out this problem, but wants to delay admitting how inadequate the assistance will be until after a 2005 General Election. If no details are actually announced, Ministers can claim to be still working on them.
The FAS promises ‘signficant’ help to those who have lost the ‘most’, but for nearly all those affected, this is a false promise, which is particularly cruel as their plight is due to believing false assurances that company pension promises were protected by law.
We do not know when payments will start or how much will be paid. We do know, however, that the Treasury will not actually provide money for the FAS before 2008, so any payments made before this must come from existing DWP budgets. The scheme will be reviewed after 3 years, but not to provide more money. We recently learnt that any FAS pensions will be capped at £12,000 a year (less than half the cap for the proposed future Pension Protection Fund) only older members might be helped and those losing under £10 a week will be excluded. So, after suffering years of uncertainty and misery, members still have no idea who will get any help, how much help they will get, or when they will get it!
Even if the FAS pays £20million a year for 20 years, it cannot help most of those affected. £20million would buy a £12,000 pension annuity for around 65 people (possibly for 100 people if they have no inflation-linking)! One could argue that the whole package does not really provide any ‘new’ money anyway. £20million a year is simply what it would cost to pay Pension Credit to 15,000 of the 65,000 or more people affected.
Compensation is urgent. In some schemes, members reaching retirement age are getting no pension and even existing pensioners have had their pensions cut. This problem has arisen because, although the assets of these schemes are protected, the law requires, on wind-up, that the money is used to buy annuities for all members already drawing a pension. Annuities are very expensive and, if buying these annuities uses up all the funds, then other members, even those who are in their 60’s, contributed for decades, transferred money in from other schemes, or stayed on after they could have retired, will get nothing. Moreover, many schemes were contracted-out of the state pension scheme, but members are not even getting their ‘Guaranteed Minimum Pension’ (GMP). In practice, these GMPs, which Government indicated should be at least as good as the state pension given up, have turned out to be neither ‘guaranteed’ nor a ‘minimum’, and members are ending up worse off than if they had never been in their company schemes at all. No other country would permit such a serious erosion of individuals’ social security rights.
How can Ministers deny responsibility here? Successive Governments encouraged members to join company schemes and Government departments issued information, wrongly telling members that their pensions were safe. The DWP was responsible for the Minimum Funding Requirement (MFR), which is so inadequate that ‘fully funded’ schemes have nowhere near enough money to pay promised pensions. Furthermore, in 1999, an Institute of Actuaries’ report, commissioned by the Treasury and DWP, detailed how pension scheme members thought the MFR provided proper protection and had no idea they could actually lose their pensions on wind-up. The actuaries strongly recommended that, at the very least, members should be warned of the true position. The Treasury and DWP ignored this advice and proceeded to weaken member security further by relaxing the MFR funding standards. Yet Government departments still continued to tell members that occupational final salary pensions were safe and ‘guaranteed’. Members relied on this information and were denied any opportunity to protect their retirement income.
What should Government do? The best way to sort this problem out is to require these winding-up schemes to stop buying annuities and pool all their assets into a central fund. If the Treasury then commits to adding £75million a year, index-linked, for 40 years into this fund, estimates show that it would be able to pay at least 90% of promised pensions to most of the members affected.
Fears that such compensation would set a dangerous precedent are unfounded, because this case is unique. No other group was told by Government that their pension contributions would deliver a certain pension. Government lulled members into a false sense of security.
If these people are not compensated, how can pension confidence be restored? All other political parties have committed to compensate. It is right for taxpayers to fund the compensation because these people were inadvertently let down by Government and by a pension system that had not carefully enough considered their security. In addition, of course, a healthier pension system will benefit society as a whole. That is presumably why all taxpayers fund the £10billion a year pensions tax relief, which goes only to those contributing to pensions.
The Parliamentary Ombudsman is investigating Government’s failure to administer occupational pensions satisfactorily and trade unions are challenging the legal framework itself. But why should these people have to wait any longer? The stress they are suffering is unimaginable. Sadly, the FAS has done precisely what Ministers always said they would not do. It has raised false hope. These people are suffering, some have died, often in despair. The Government is responsible and must correct this injustice. No more delays. Act now.