Criticism of Pensions Bill Measures for Failure to Restore Confidence
by Dr. Ros Altmann
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The Pensions Bill has missed something important. How can we restore confidence in pensions, without compensation?
The Government needs to understand that agreeing to restore the pensions of those who have lost out when their employer has failed, is fundamental to the restoration of confidence in pensions for the future. A Commons All-Party committee recently concluded that there is a crisis of confidence. The Pensions Bill is designed to address this and provide more security, by promising a new regulator, improved trusteeship, new funding arrangements and an insurance scheme if the sponsoring employer goes bust.
However, those 40,000 or so who have ‘lost’ their pensions since the last major Government initiative to restore confidence and improve security in occupational pensions, are being left with nothing. Far from being protected, the measures have robbed them of their pensions.
The Maxwell scandal produced the 1995 Pensions Act and scheme members were told at the time that the new law would make sure their pensions were protected and safe. In particular, there would be a new regulator (the one that’s now being replaced), member-nominated trustees to look after the funds, protection for accrued rights and a minimum funding standard to ensure that there would be sufficient assets in the schemes. Sounds familiar? This is exactly what the new Pensions Bill is promising to do. In fact, members were told – and believed – that, after the 1995 Act, their employer pension was guaranteed and protected. Yet they have since found that the measures introduced by the last Government, with such good intentions, have not worked. These people have contributed, in many cases, for 30 or 40 years, but find that when their employer fails, they can end up with no pension. Worse than this, many are finding that, because of the regulations, being in their company scheme means that they are now going to get a reduced State pension. In other words, they would have a higher pension if they had never gone near their employer’s scheme at all and never contributed a penny to an occupational pension. They could have put this money in the bank and still have it, they feel as though they have been robbed. Is it a wonder that confidence has been lost?
What if the current measures, although designed with the best of intentions, turn out to be as bad for future pensions as the 1995 Act measures were? No-one foresaw today’s problems back then (and it’s not even 10 years ago.) If people are reassured that the Government will make good any mistakes that might inadvertently be made by these latest measures, then confidence can truly start to be restored.
That is why I believe compensation is at the heart of the measures needed to re-build the trust that has been lost. People need to see that our pension system is fair and that Government will rectify any unintended lapses of protection. After all, part of the problem is that the State pension is so inadequate, on its own, to ensure a decent standard of living in retirement and successive Governments have continually tried to shift the burden of old age support onto the private sector. People are encouraged to save for their later years, but if they find that doing so leaves them worse off, or almost no better off, why should others do the same? Government wants to provide pensions on the cheap, but this means that it must ensure those who do what it wants, are actually treated fairly. Otherwise, the system breaks down.
Agreement to compensate those who have lost their pensions after decades of contributions, which they were assured were protected, is urgent. The Government could do this at lower cost and greater effectiveness, if it agrees now. There are certain steps which must be taken. The schemes must not buy annuities and Government could eventually use all the schemes’ assets, to pay out the pensions over time as they become due. This will enable the Exchequer to right this injustice without having to find new money for many years. During this time, Government can set aside funds to continue paying all members’ pension entitlements. I estimate that this will cost under £100 million a year on average. This sum is easily found within the DWP budget (there is already £100million unallocated this year, £150 million next year and £200 million the year after which could be earmarked for this purpose). It would be a tiny price to pay, to restore some confidence in employer pensions.
If the Government is concerned about agreeing compensation before the Pension Protection Fund (PPF) starts, why not bring in the PPF on the interim basis immediately? Since the initial premiums will only be flat-rate, perhaps the insurance could be introduced now, rather than waiting until next year. Then, no more people should find their pension contributions taken away by the current unfair laws and proper plans could be drawn up to organise the compensation.
If Government waits too long, all the schemes may have wasted their assets on buying expensive annuities from the only two providers who are now offering them and the cost to the taxpayer will be much higher. Also, if Government is forced to do this by the union case being brought in the European Court, rather than agreeing voluntarily, the opportunity to restore confidence will be much reduced. Government should show members that they can trust the system when the law says you are protected.
So come on Ministers. Put the annuity purchase on hold, use scheme assets to pay all members’ promised pensions immediately and find the money to continue the payments later. Then, and only then, can we begin to truly trust pensions again.