Compensation - Won't Cost A Penny For Years - Ros Altmann

    Ros is a leading authority on later life issues, including pensions,
    social care and retirement policy. Numerous major awards have recognised
    her work to demystify finance and make pensions work better for people.
    She was the UK Pensions Minister from 2015 – 16 and is a member
    of the House of Lords where she sits as Baroness Altmann of Tottenham.

  • Ros Altmann

    Ros Altmann

    Compensation – Won't Cost A Penny For Years

    Compensation – Won't Cost A Penny For Years

    Compensation – Won’t Cost A Penny For Years

    by Dr. Ros Altmann

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

    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?

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