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?