Mistakes resulting from Tory legislation in 1990s
by Dr. Ros Altmann
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Maxwell debacle in the early 1990’s led the Tory Government to
realise legislation was needed to enhance protection for pension
scheme members. There were two major pieces of pensions
legislation after Maxwell. 1993 Pension Schemes Act and 1995
Pensions Act. Most of the provisions of these Acts came into
force from 1997 and, although designed with good intentions, have
resulted in false sense of security and worrying lack of protection
for members who are not yet retired. They have also caused a
significant increase in costs for UK final salary pension schemes.
extra burdens placed on schemes and extra regulations can be seen,
with hindsight, to have been well-meaning in intent, but extremely
damaging in practice. Some of the major problems are listed
Introduction of transitional priority order for winding up
Pensions Act introduced a ‘transitional priority order’ for
sharing out the assets of a pension scheme which winds up when an
employer is insolvent. The ASW and UEF cases were caught badly
by this. The provisions introduced in 1997 state that pensions
in payment must have first call on all pension fund assets, and this
will include all index linked increases for life. In effect,
this means that anyone who is already drawing a pension will have an
index linked annuity bought for them (very expensive) to cover their
entire pension promise, even up to huge amounts of pension.
Once these annuities are bought, if there is no money left in the
pension fund, then all other scheme members who have not yet retired
(even those 1 day away from retirement!) will get nothing at all.
This transitional order was to be in place for 10 years and then, in
2007, the order is due to change so that pensions in payment are met
first, but without their inflation-linked increases. This
means that only non-indexed annuities will need to be bought, which
is much cheaper and then other non-retired members will have next
call on the assets, so that workers will be much more likely to
receive something from the fund.
transitional priority order is grossly unfair and could be changed
today. Just bring
forward the 2007 order to today and only protect level pensions,
rather than full index linking, giving non-retired members much more
chance to receive their pensions.
Of course, ultimately, the only way to really protect members
is to have some kind of insurance scheme in place.
Introduction of LPI (limited price indexation)
1997, all pensions accruing were required to be indexed up to 5% per
year (i.e. must be increased in line with inflation up to a maximum
of 5%). This was meant to give better pensions to members, but
has resulted in enormous extra costs for schemes. It is
estimated that the extra cost of providing index-linking adds 30% to
scheme funding and has added to the unsustainability of our pension
system. Employers are being asked to bear all the inflation
risk, which is proving too expensive.
has caused huge problems. The MFR was billed and perceived as
ensuring that pensions were protected, so they would be properly
funded and prevent employers underfunding their schemes, (a la
Maxwell). In fact, it was misrepresented and misunderstood.
It does not guarantee proper funding, has added huge extra costs
onto schemes because they need to comply with it and have actuarial
calculations done to calculate it, and the assumptions used to
calculate it are so outdated that even fully funded schemes now
offer less than half the promised pension to members who are not yet
retired. The actuarial assumptions are out of date and the
method of calculation is flawed. It is used as the basis for
calculating transfer values or to prescribe what a solvent employer
must put in on winding-up the scheme, which is currently allowing
employers to legally walk away from their pension promises even if
they can afford to meet them in full (example Maersk).
Member Nominated Trustees
requirement for a third of trustees to be nominated by members was
designed to increase member protection. Unfortunately, just
having member trustees does not help, because employers can choose
to ignore the trustees’ advice and the cost of nominating members
can add to funding pressures. This just adds to the illusion
of protection, but in practice it is lulling members into a false
sense of security, since employers retain the power to wind up the
scheme if they want to, (the ‘nuclear’ option) or refuse to
accept the recommendations, if they so choose.
Section 67 of the 1995 Act
provision prevents employers from making any changes to pension
schemes which might diminish members’ rights. In theory,
this sounds good, but, in practice, this has meant that employers
are prohibited from making any changes at all, even ones which
improve members’ rights, for fear of diminishing someone’s
future rights in any way. If even one members’ future rights were
somehow worsened, this would render the changes to the scheme void,
so the administration of the scheme would become impossible.
Another example of well-meaning legislation which was drafted in
such a way as to impose impossible burdens on schemes.
Pensions Regulator ‘OPRA'(Occupational Pensions Regulatory
Authority) was introduced, which was supposed to protect scheme
members. However, OPRA has operated at a very ‘micro’
level, focussing on whistleblowing for minor breaches of the rules
(for example pursuing employers who remit pension contributions a
few weeks late, or send letters out a few days late). While it
is looking after these minor breaches, members remain unprotected in
the case of wind-up. Huge chunks of their pension, or indeed
all of it, can be lost at a stroke, making all the low level
protections valueless. This is a gaping hole in our pensions
law and must be rectified.
The Bottom Line
the end of the day, any and all changes made in the 1990’s,
designed to improve UK pension schemes for members, are unhelpful in
the medium term, because the option of winding up the scheme remains
and means that huge swathes of people’s pension rights can
disappear at a stroke, with no protection in law. This makes a
mockery of our thousands of pages of pensions law supposedly
designed to protect people’s pension rights.