Money Marketing article about Northern Rock and FAS
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
The Government’s bail-out of Northern Rock, providing a 100% money-back guarantee to all its depositors, at taxpayers’ expense should be compared with the very different treatment of 125,000 pension savers in final salary schemes who were encouraged to contribute to their company pension, could not hav any other pension and were assured by the Government that they were fully and properly protected, without any risk warning at all. For ten years they have been battling this Government over their lost life savings and have consistently been told taxpayers cannot be expected to rescue them.
Yet Northern Rock savers were not told by the Government that their money was completely safe and protected by law. Northern Rock savers knew they were only covered by an insurance scheme that protected them up to around £35,000 each (and only 90% not 100%). Northern Rock savers had a choice as to where to put their money and were free to withdraw it or spend it. Northern Rock savers often chose to use Northern Rock because it offered higher interest rates than its competitors (a reflection of the higher risks entailed in its business model, of course). But they were 100% rescued at taxpayers’ expense.
Members of final salary schemes which failed after 1997 and before the Pension Protection Fund (PPF) started had no idea their retirement was at risk – they believed Government assurances that their pensions were ‘guaranteed’. That was the word used by Financial Services Authority in the information it sent out to the public. The Government – and this Chancellor himself – publicly announced that their pensions were safe and protected by law, even after Alistair Darling was warned by the actuarial profession in 1999 that members had no idea they were not really protected at all and should be told. These final salary scheme members were totally relying on their company pension for a decent retirement. Many of them lost everything, despite a lifetime of saving.
The unfairness of Gordon Brown’s Northern Rock rescue, after abandoning pensioners who had trusted his Government’s assurances of safety, is disgraceful. Earlier this year, a cross party group of MPs proposed a lifeboat scheme to help those abandoned by the Government.
The lifeboat would have ensure peoples’ pensions were topped up to the same level as the PPF (not even 100% of their pension). This was passed by the House of Lords by a huge majority but, despite a rebellion by some brave Labour backbenchers, the Commons defeated it and then, rather than going back to the Lords, Gordon Brown used the 1911 Parliament Act to torpedo the lifeboat and prevent further votes.
There are pensioners now, waiting for the Financial Assistance Scheme (FAS) to pay out, who have had to sell their homes or work through cancer or heart disease. About 125,000 people have been affected by the collapse of company pension schemes after Gordon Brown’s £5bn a year tax raid, which will drain more than £100bn out of the pensions system.
The FAS was supposed to help, but its terms are less generous than the PPF and it is leaving thousands of pensioners without the provision they paid for. The FAS rules mean most pensioners will get only about 65% of what they expected – some will have less than half. Providing blanket 100% underwriting to Northern Rock and any other financial institution cannot be squared with the treatment of wind-up victims.
The Parliamentary Ombudsman said the Government should pay 100% compensation, plus damages for stress and distress but Ministers still refused to help. They have also ignored Public Administration Select Committee, European Court of Justice and High Court Judicial Review verdicts that the Government should have protected these people’s pensions and failed. Since 2004, the FAS has paid out around £4m to around 1 in 5 of the victims already over age 65, while costing nearly £10m in administration. This one issue is consistently cited in surveys as a prime reason for the loss of public confidence in the Government’s word on financial issues. Is it any wonder people queued round the block despite official attempts at reassurance!
Over the last ten years, confidence in long-term savings has been destroyed: fewer people are saving for their retirement precisely because of what they have seen happen to their friends and relatives under Labour. Bailing out Northern Rock has merely compounded their suffering. The longer the Government refuses to treat these people fairly, the longer it will take to restore trust and recover the culture of self reliance, which was once so strong in this country.