Financial Adviser – More pensioners stripped of their pensions
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
Question: Are all UK final salary scheme members protected by the Pension Protection Fund if their scheme has paid its levies properly and the employer goes bust?
Many of you may remember the spectre of naked pensioners on British beaches at party conferences year after year, trying to get the Government to compensate them after they were ‘stripped of their pensions’ by faulty legislation. We were all told that this would never happen again. Unfortunately, this seems to be untrue.
Serious flaws in the Pension Protection Fund legislation have just come to light, leaving members of final salary schemes potentially at risk of losing their pensions.
It is only three years since the major breakthrough in our campaign to rescue 140,000 people who discovered they had lost some or all of their final salary pensions, because of failures in the protection promised by the 1995 Pensions Act.
Following Mirror Group boss Robert Maxwell’s death in 1992, he was found to have plundered his company pension scheme leaving members’ pensions in tatters, and the 1995 laws were introduced promising final salary members that their pensions would be safe in future. When these assurances turned out to be false, due to flaws in that legislation, 140,000 people lost some or all of their pensions. Their plight turned into a multi-year campaign to persuade the Government to take action, during which time many of those affected died without ever having their pensions restored.
After years of pressure, the PPF was set up by the 2004 Pensions Act to make sure anyone paying into a final salary scheme would be covered by an insurance fund which would ensure members would never again suffer such unexpected pension losses.
When these new laws were passed, members were told by Government that no one could lose their pensions in future when their employer failed. This turns out not to be true.
It seems that around forty members of the George & Harding pension scheme, whose company had been paying all scheme contributions and levies to the Pension Fund as required, have suddenly found they have no actual protection because of a legal technicality. The PPF has refused to cover their pension losses following the failure of the sponsor. In fact, the PPF has merely offered to return the PPF levy payments to the trustees, leaving the scheme members high and dry.
The problem appears to be caused by the legal definition of the word ’employer’ under the terms of the PPF legislation. Although the sponsoring employer has been paying contributions to the scheme, all scheme expenses and the PPF levy, it turns out the law does not consider it to be a ‘statutory’ employer under the required legal definition. This fiasco is another example of the ludicrous complexity of our pensions law, but this is not just about technicalities, it is people’s lives.
Having fought so hard to try to ensure all pension scheme members will be protected in the event of employer insolvency, I am devastated to discover that this could still happen.
The George & Harding scheme was taken over in 2002. At the time the scheme was already closed, but the company did not want to just wind it up (which it could legally have done at that time) because this would have left non-pensioner members without their pensions. So the company’s management, including Colin Harding who was Chair of Trustees, decided to support the scheme, and it has done so over the past years. It paid the PPF levies and all scheme expenses from its own resources, not from scheme assets and everyone assumed that the members were protected as promised by Government when the PPF was set up.
Unfortunately, during the recession, the company hit hard times and went into insolvency last year. The Scheme Trustees duly applied to the PPF and members believed their pensions were under its protection. Completely unexpectedly, the Trustees have received notification from the PPF that the scheme does not qualify.
The reason given is that in 2002, the scheme was already closed and no members were accruing extra benefits since that time. This means that although the employer responsible for the scheme under Trust and tax law is called the ‘principal employer’, it is not considered under the 2004 Pensions Act as a ‘statutory employer’ because it has not actually employed any members since it took over responsibility for the scheme.
It seems that, because under the terms of the 1995 Pensions Act, there is no Section 75 pension debt due, the PPF cannot accept the scheme. The complexity of our pension system is such that even those drawing up our laws cannot properly achieve their desired aims.
Saga is calling on the Government to correct this flawed legislation, before more people endure the extreme distress of losing the pension they were relying on. Conor Burns MP arranged a meeting with the DWP officials and Minister, at which the Chair of Trustees and the Scheme Actuary and Scheme Lawyer all explained why this situation had arisen, that they had done everything they were led to believe they needed to do and were devastated at what has happened. The Scheme’s Lawyer explained that there did not appear to be a possibility of re-opening the scheme to allow a Section 75 debt to accrue. I pleaded with the DWP to ensure this is sorted out quickly, so that members can get on with their lives.
Final salary scheme members were told that the PPF would ensure they would be protected properly in the case of employer insolvency in future. Indeed, they have been relying on such protection as they were reassured of this by Government. The assurances of PPF protection have turned out to be false. Will Government never learn?!
Members of the G&H pension scheme are facing the loss of much of their pension. And there are potentially more – some very large schemes – which could be similarly affected. The scheme’s lawyer, Fraser Sparks of Squire Sanders Hammonds, believes that the technical problems with the legal definition of the statutory employer could be solved by a legislative amendment to ensure that schemes like G&H are admitted to the PPF. He is also aware of other schemes, with thousands of members, which could potentially be in a similar position if their employer goes bust.
There was much sympathy, but no solution. But, so far, the DWP has not come forward with a solution at all.
What are members supposed to do? After witnessing the devastation that unexpected pension losses can cause, it is so distressing to see that this could be happening again.
The members are now at the mercy of the costs of annuities and the new legal wind-up priority order which will require trustees to buy out the PPF level benefits with annuities and reduce all members’ pensions pro rata to reflect the fact that there is not enough money.
The pensioners themselves, who have already been living on their pensions for years, will suddenly see their pensions reduced and those not yet retired will not get their pensions paid even at the PPF levels. They may lose more than half their pensions. In fact, the reductions could be even greater if annuity prices keep rising. Scheme assets are valued around £2million but the deficit is well over £1million.
There can be few things worse than members close to retirement suddenly finding their pensions have disappeared, or pensioners themselves suddenly being told the pension they are living on is being substantially reduced.
This legal loophole in the law should never have existed and I am calling on the Government to urgently introduce legislation to ensure that this scheme, and all others in a similar position, are covered by the PPF in future. The law must be changed!