Financial Adviser feature on Financial Assistance Scheme
by Dr. Ros Altmann
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Confidence in pensions is probably at an all-time low. The UK’s marvellous retirement savings culture has been crumbling in the last few years. There are many reasons cited for this, falling stock markets, tax and regulatory changes, mis-selling scandals and Equitable Life are but a few. One scandal, however, stands out from all the others. The pension losses suffered by members of winding-up final salary pension schemes. This must surely rank as one of the greatest social injustices of our time.
These tens of thousands of people were encouraged – by Government – to save in their company pension schemes and were told this would generate a guaranteed, safe pension. These people wanted to provide for their own future, never wanted any state handouts and did what they were told. They believed and trusted our pension system. Governments never warned them there was any risk to their pensions. Government did not require anyone else to tell them either. Even the FSA said these pensions were ‘guaranteed’, without mentioning any risk! This surely amounts to official ‘mis-selling’ of pensions. These members contributed their money, in good faith, relying on their company scheme to provide a defined level of pension when they retired. They were lulled into a false sense of security by successive Governments and the FSA, and were never warned that they could lose their entire pension, if their company scheme was wound up.
It is impossible to over-estimate the devastation caused by loss of a pension. Their lives, their health, their families have all suffered terribly. Some have died, many are ill and desperately need their pensions. They did not have extra insurance to cover critical illness or death, because their company pension scheme provided this for them. Their families and friends will not touch pensions again. Who can blame them? Confidence and trust in our pension system has been undermined.
There is even part of these lost pensions which Government called a ‘Guaranteed Minimum Pension’, which has turned out to be neither ‘guaranteed’ nor a ‘minimum’. Yet Government does not believe this has to be made good. People contracting-out of the state pension scheme, putting their National Insurance contributions into company schemes, were assured these had been ‘approved’ to provide at least this ‘guaranteed minimum’ amount of pension. And then when they do not get even this amount, Government simply says ‘hard luck – you’ll have to take less!’ Anyone in the financial services industry must be amazed at the double standards here.
Just imagine a financial adviser or a financial company promoting and encouraging people to invest in something, telling them their investment was safe with a ‘guaranteed’ return, failing to mention any risk, or the possibility that the returns may never materialise and they could lose all their money! Compensation, in full, would be required for any losses suffered. Investors would not have to fight and beg for years, to be offered some help.
Yet this is what Government has forced members of winding up schemes to do. Only after enormous media pressure and on the brink of almost certain Parliamentary defeat by backbench MP’s, did the Treasury agree to set aside £400million over 20 years, to provide a ‘Financial Assistance Scheme (FAS)’ – not compensation! They knew that properly compensating people would cost over £3billion, so the £400million is nowhere near enough.
Consequently, last November, the Parliamentary Ombudsman launched an investigation into the Government’s handling of occupational pensions. The inquiry – headed by Iain Ogilvie, (who is also in charge of the Equitable Life investigation) – is looking at claims, from MPs and affected members, against the DWP, Treasury, OPRA (Occupational Pensions Regulatory Authority) and Inland Revenue National Insurance Contributions Office (NICO).
I have been helping provide evidence which focuses on Government oversight of the Minimum Funding Requirement (MFR) – the official minimum funding standard for pension schemes, introduced by the 1995 Pensions Act – which was weakened twice since 1997. Members have also complained of carelessly-worded information provided by OPRA and the DWP, giving false assurances of safety, without any risk warnings, even after Government was alerted by the Institute of Actuaries that members mistakenly believed their pensions would be safe in all circumstances; the investigation will also consider Government’s handling of GMP reconciliations, and failure to ensure that these pensions were, in fact, ‘guaranteed’ or ‘minimum’.
The investigation should be completed by early July, acknowledging the need for urgency, given the extreme distress and hardship which those affected are suffering. If the investigation finds Government maladministration has caused injustice to scheme members, it will recommend redress to Parliament, to remedy that injustice, which could also include compensation for distress suffered.
Most recently, to their credit, Secretary of State, Alan Johnson and Pensions Minister, Malcolm Wicks, have tried to clarify the FAS, finally announcing that members, who were within 3 years of scheme pension age last May, could be entitled to 80% of ‘core’ benefits, up to a cap of £12,000 a year. This should be a major step forward. The DWP deserves credit for trying to alleviate the suffering caused by the uncertainty of pension losses, but the sad truth is that, without more money, the FAS cannot deliver what is needed. Those who have lost out are really angry at the recent announcements. Firstly, they want more than just 80% and believe the £12,000 cap is unfair. Secondly, what about those just over 3 years from pension age – many people in their 50’s and 60’s still do not know if they will be helped? But they are most upset by all the conditions and caveats which were hidden in the ‘small print’ of the announcement. They fear this could just be political manoeuvring ahead of an election. All Opposition parties have pledged to compensate properly. The victims know that, without more money – and the DWP has promised to ‘review’ the funding, but not committed more money – the FAS simply cannot work. The problems that have come to light since the announcement include:
Nothing will be paid until a scheme finishes winding-up, which can take years;
Even if scheme pension age is 60, no-one will get any FAS payments until they are 65 – a huge loss of pension rights
No provision for those in ill-health , who desperately need their pensions
Members of schemes where the employer is still solvent are excluded – even though they have no means of forcing the employer to pay up
There will be no inflation-linking and no tax free lump sum, meaning a significant reduction in benefits
So they feel there is still not enough clarity about how much people will get or when they will get it!
The Treasury needs to release more money and accept its responsibility for proper compensation, not just ‘assistance’. If financial services organisations have to abide by such rules, so should Government.
Firstly, GMPs should be reinstated – in full – in the state scheme. It was Government who called these ‘guaranteed minimum pensions’, not employers, nor trustees, nor advisers and, if Government never mentioned that such pensions might not actually be received in full, then it must compensate. These are the rules which everyone involved in finance must live by.
In addition to this, Government should make up for loss of pensions from members’ own and their employers’ contributions. Taxpayers must compensate for inadvertent Government mistakes. The weakening of the MFR standard, without considering what was happening to bulk annuity rates and wind-up, was careless. At the very least, there should have been risk warnings to members and tougher requirements for solvent employers who were choosing to wind up their schemes and could well afford to put in more than the minimum. This is not the members’ fault.
Compensation for these people is essential, to restore their lives and also to restore some confidence in pensions and Government. The same as would be required of anyone else in financial services who ‘mis-sold’ an investment. If these people are left to fight and beg for what they were told was safe and could be relied on, who will ever trust assurances about pensions in future? The uncertainty and unfairness of their plight are unacceptable. If Government does not do this voluntarily, I hope the Parliamentary Ombudsman will force this through Parliament in the next few months and finally end the misery being suffered by these good people..