Article for PMI Magazine ‘Support for Compensation’
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
I would like to focus your attention on one of the greatest social injustices of our time which the whole UK pensions industry is involved in – at least indirectly. 60,000 or more people have lost most, or all, of their promised occupational pension when their employer schemes were wound up. For those in their 50’s and 60’s, relying on an employer pension to fund them through retirement, after saving all their working life for a comfortable old age, it is too late to do anything else. The distress and suffering this situation is causing is enormous.
Finally, the Government has listened to demands for compensation for these people. The Department for Work and Pensions has announced it that it is setting up a Trust Fund to take in the assets of schemes in wind-up and will add £400 million of Government money to the fund to pay pensions to those who have lost out when their scheme wound up. This is a major breakthrough and has come as a welcome relief to those whose lives have been devastated by the loss of their pension. We do not have full details yet, but it is a very positive step in the right direction.
At last the Government has recognised that the taxpayer must help these people. They are the innocent victims who believed Government promises that their pensions were safe and have lost out dreadfully. Their plight has done major damage to confidence in pensions and I believe that confidence can only start to be rebuilt once the public see that these people’s pensions are restored.. I would like to explain to you why I believe helping these people is morally correct and why the taxpayer should bear the cost.
The Pensions Bill currently going through Parliament is designed to restore confidence and ensure security for employer pensions. However, many of those who have lost out on wind-up believed the last Government, which claimed the 1995 Pensions Act would provide security for pensions after the Maxwell scandal. Members truly believed they were protected by the law. Less than ten years later, people are being told once again that this Pensions Bill will ensure protection for pensions and restore confidence. However, unless the Government agrees to reinstate the pensions of those who trusted the last measures, which did not work, it is difficult to believe confidence can be restored. Why should members trust the Government’s current proposals, if they know that when things went wrong last time, members were left without the pension they contributed to for decades?
For years, we have been proud of our pension system and it was the envy of other countries. But, how can it be a great system if it is destroying people’s lives? Members were never warned that the receipt of their pension depended on their employer staying in business and deciding not to wind up the scheme. Official documentation and statements, often described the accrued pensions as guaranteed and protected by law. Even OPRA – the official regulator – sent out a guide for trustees telling them that ‘the MFR refers to the minimum amount of funds that should be in the scheme at any one time in order to meet the scheme’s liabilities if it were to be discontinued.’ This was not correct, being fully funded on the MFR does not ensure full pensions can be paid, but trustees believed it and told members the same. If older members had any idea their future pension depended on the survival of their employer, they have told me categorically they would never have left their money in the scheme. They were lulled into a false sense of security.
There are many reasons why taxpayers must fund compensation. Successive Governments promoted and encouraged individuals to join their employer’s scheme and there was even a time when employers could make membership compulsory. Once in the employer scheme, Inland Revenue rules prohibited any other pension, so members could not diversify their pension assets. This system, with hindsight, was like forcing members to invest their entire retirement savings in the shares of one company. No-one would advise putting all one’s investment capital into one stock. But these members contributed confidently to their company scheme, and never thought about needing any other savings. Why would they even consider another pension when, firstly the employer contributed to the scheme, secondly the employer promised a ‘guaranteed’ pension, thirdly everyone told them it was safe and fourthly, the media was full of stories about people receiving compensation after transferring out of final salary schemes because it was best to stay in?
The Government itself is directly implicated in the failure to provide proper risk warnings to members. In 2000, the Institute of Actuaries told the Treasury that members erroneously believed their contributions were fully protected and advised, at the very least, disclosure to members of the risk to their pensions on insolvency. After lengthy consultation, the Treasury decided to ignore the actuaries’ advice and not to warn members. Worse still, official Treasury publications continued to tell members that their employer pensions were guaranteed. An example of this is the ‘FSA guide to the risks of opting out of your employer’s pension scheme’, sent out in 2002. It states ‘Some types of employers’ schemes (the ones called ‘final salary’ or ‘defined benefit’ schemes) give you a guaranteed pension. The amount of pension you get from a personal pension is unpredictable’. This booklet mentions nothing about the risks of scheme wind-up, and members, relying on such assurances, believed their accrued pensions were fully protected.
There is also a powerful public interest argument for taxpayers to pay compensation. These people did everything society asked of them, they contributed all their lives to ensure they could look after themselves in retirement. Yet they their contributions are being used to buy pensions for other members instead. Indeed their sense of injustice is compounded by the obvious unfairness of the current priority order rules. For example, Directors of some schemes have taken early retirement before the company failed (at ASW Cardiff, a Director retired aged 52 shortly before insolvency) getting their full pension protected, whereas workers in their 60’s, who have contributed for decades, get almost nothing. In order to restore confidence in our pension system, these dreadful injustices must be put right. Surely, we all want to see our pension system thriving again and it must be in the public interest for this to happen.
In the face of all this evidence, it is surprising that the Government has taken so long to offer any help. Perhaps Ministers were afraid it would lead to other groups demanding compensation too. However, the circumstances of this case are unique. Others were not assured by Government that their money was protected by law, nor assured that their contributions would deliver a guaranteed amount of pension in future. Government has acted without due care. This amounts to official ‘mis-selling’ of employer pensions. Successive Governments encouraged people to put money into their employer scheme, assuring them they could rely on these pensions for their retirement. Members trusted and believed this but have been stripped of their pensions. Financial advisers or companies that persuaded people to invest money with such false assurances, would be forced to fully compensate investors for any losses. The same rules should surely apply here, with Government paying compensation.
There has obviously been concern about the potential cost of compensation. Precise data are not available, but my estimates suggest it will cost under £75 million a year, for 30 years. Compared with the £14billion spent every year on tax relief for pensions, this is a tiny sum. The sum of £20million a year for 20 years, which Government has so far agreed to set aside for this compensation is, therefore, not going to be enough to help everyone concerned, but is an excellent start. More is needed and a commitment to pay more may come when the scheme is reviewed in 3 years’ time. For the moment, all scheme assets could pay out pensions for several years to come, without needing to call on Government money yet. There will be time to assess the exact scale of the problem and do more precise costings in due course. Now that the principle of helping these people is established, we can then seek extra funds in future, as required.
Ministers also questioned whether it is right for all taxpayers to fund compensation for scheme members, when not all taxpayers are members of schemes themselves. This concern, in my view, is not valid. The £14billion a year which taxpayers spend on tax relief, only goes to people contributing to a pension. Furthermore, £75 million a year is easily affordable within the current DWP budget forecasts (there is over £100 million in the next three years’ budgets ‘unallocated’, which could be earmarked for compensation, without any extra strain on public finances). I would have liked to see this earmarked for paying future pensions to these people.
The members affected need to be helped now and should not be expected to suffer any longer.. Their stories are dreadful. Let me give you some examples, which give a flavour of the suffering that the situation has caused. A member of the Dexion scheme, aged 62, who contributed for 38 years, will now not even get his full GMP. He could have retired at 60 but was asked to stay on and promised a higher pension. He would have been better off never putting a penny into his company scheme and just relying on SERPS. He says ‘I’ve worked since age 15, never been on the dole, only claimed one week sick pay. I did everything I was asked. I saved for our future. For what?’ Or the member of BUSM, aged 61, with 40 year’s contribution who now has to sell his house because he has lost the pension he was relying on. He says ‘It is impossible to imagine the stress I‘m under. Many other colleagues also contributed for over 40 years and have lost it all’. The ASW member, aged 60, who is now stacking shelves at Sainsbury’s on £4.39 an hour and says ‘The stress in unbearable. I’m on the verge of a nervous breakdown.’ Or the 52 year old member-nominated trustee of the Sara Lee scheme who says ‘I was never told of the risk of insolvency, we were always told the accrued pensions could not be reduced’. She transferred 20 years of contributions from the previous money purchase scheme into the new final salary scheme, set up in 1996, and has now lost it all.
In summary, I believe compensation is essential to restoring confidence in pensions.. These people are a unique case and the cost of restoring their pensions is tiny, compared with total pension spending. The Government must quickly work out details of the proposed Trust Fund and I do hope that it will agree to pay compensation to all those who have lost out badly, when their scheme wound up with insufficient assets to pay the promised pensions. This is a major victory for social justice and a significant step in the right direction for pensions in future. There is more to do, but the vital first step has at last been taken.