Memorandum by Dr Ros Altmann
PARLIAMENTARY OMBUDSMAN REPORT
SUMMARY COMMENTS
Background
— Government said occupational pensions
were safe, but failed to make sure they were.
— Government encouraged people to join
their company scheme—it was official policy.
— Changes to the law reduced security
of members' accrued pensions on wind-up.
— Government had special knowledge
of this, but failed to tell members.
— The law means their contributions
pay other people's pensions, and they get nothing.
Why did members lose pensions after post-Maxwell
changes, which started April 1997?
— MFR was supposed to ensure proper
funding (but Government secretly decided only to give 50% protection)
Purported to increase protection—actually reduced it.
— Unfair statutory priority order,
removed trustee discretion to divide assets fairly on wind-up.
— Impact of wind-up and priority order
has devastated "non-pensioners" pensions!
— MFR completely inadequate to ensure
sufficient funds to pay pensions on wind-up.
— Even members' own contributions and
money transferred from other schemes not protected.
— Government lulled members into false
sense of security.
What happens on wind-up?
— Independent trustees appointed—their
fees paid first.
— Assets used to buy annuities for
those already drawing pensions.
— Annuities are very expensive—if
there is no money left after buying these, other members get nothing.
— Irrespective of age, length of service,
contributions paid in etc.
— Can work for 40 years, be one week
away from retirement and still get no pension!
Effect of our Pensions System
— Like forcing members to bet their
retirement income on one share in the stock market.
— If that company fails, they can lose
all their money (and their job too!).
— No-one ever explained this to them,
they were completely unaware of the risks.
— Government legislation created those
risks, but never warned members.
— Even solvent employers could walk
away leaving members' pensions decimated.
— Maladministration of MFR changes,
which ignored member security on wind-up.
Members had no idea
— Government promoted and encouraged
joining but never warned of the risks.
— Employers were allowed to make membership
compulsory.
— Inland Revenue prevented any other
pension once in company scheme—no diversification.
— Official documents contrasted "safety"
of final salary schemes with "risky" money purchase.
— Government priority order removed
trustee discretion, preventing fair division of assets.
— No financial company could get away
with telling people something was guaranteed and not compensating
when it wasn't paid in full.
Why lack of warning caused injustice and loss
to so many
— If they had been warned, members
would have had a chance to protect themselves.
— Some could have retired and secured
their pensions, but were not told of the effects of the priority
order on non-pensioner security—they were denied an informed
choice.
— Some would have saved in other ways,
or taken insurance before it was too late.
— Members could have pressed employers
to contribute more.
— Solvent employers would not have
been able to put in only the MFR level.
CLEAR EVIDENCE
OF GOVERNMENT
MALADMINISTRATION
Government actively encouraged people to put
their money into their employers' scheme. It was official Government
policy to encourage people to join their employers' pension scheme
and the Government put out materials which it said were designed
to encourage membership.
Government led people to believe that, after
putting their money into their company scheme, their accrued pension
rights would be safe and protected by law. Effectively, the Government
gave the employers' pension promises an official endorsement,
by encouraging people to join and telling them they were protected,
without mentioning the risk of pension losses on wind-up. From
the public's point of view, these schemes had a Government "kitemark"
of approval.
Government took it upon itself to issue pension
information and education leaflets to help the general public
understand the benefits—and risks. 1998 Pensions Green Paper
from DSS said: "We published a new series of DSS pension
leaflets in June 1998 . . . providing clear and unbiased information'.
"We have already taken steps to ensure people are better
informed about pension issues generally…they need to know
where they can get information and advice from sources they can
trust . . . this will include promoting awareness of the benefits
and risks".
The Government led the public to believe that
salary-related pensions were secure, and not dependent on investment
returns or employer solvency. The DWP booklet "Occupational
Pensions Your Guide" October 2002 p 11 said: "The pension
you get in a salary-related scheme is based on: The number of
years you belong to the scheme as an employee and: how much you
earn (usually your earnings when you retire or leave the scheme)".
This was contrasted on page 12 with "In a money purchase
scheme, your contributions (together with your employer's) are
invested. The pension you get is based on the total payments into
the pension fund, and how well these investments have done . .
. You use the money this builds up to buy an `annuity' from an
insurance company when you retire". No mention of the problem
of having to buy annuities when a final salary scheme winds-up,
nor the impact of the legal priority order. The leaflets only
mention seeking financial advice if salary-related scheme members
work part-time, get divorced or want to transfer a pension when
changing jobs.
Government was aware that members were concerned
about the security of their pensions—especially after the
Maxwell scandal. 1998 DSS Green Paper on Pensions: "People
should join their employers pension scheme, but will only do so
if they believe their pension rights are properly protected. Security
is of paramount importance". It seems that the Government
decided to tell them they were safe, even though they weren't!
Government at the time did not believe it was
trustees' duty to protect members' pensions. Government knew this
was the responsibility of the Government itself, but is now trying
to pretend otherwise. For example, Pensions Minister Jeff Rooker
in 2000, told Parliament: "we are aware of the importance
of protecting members' rights. If we cannot do that, they have
no-one else to look to".
Government failed to keep the costs of scheme
wind-up and implications of any changes in annuity rates and MFR
levels under review, to ensure members' pensions were secure.
Government failed to take notice of the soaring costs of buying
bulk annuities on wind-up and the fact that increasing proportions
of the assets were being taken up in securing the "pensioners"
pensions. It ignored the warnings about this from the Institute
of Actuaries which explained that "non-pensioner" members'
pensions would be substantially reduced if the scheme had to wind-up,
which was clearly contrary to the "original intention"
of the MFR. The Parliamentary Ombudsman found no record of the
position of wind-up being properly considered when deciding to
weaken the MFR and this is clearly maladministrative. When taking
such a decision, Government must properly consider all relevant
factors. It had the option of not weakening the MFR, even if actuarial
advice was to do so, if there were particular reasons to do so.
Surely, the situation of members losing their pensions on wind-up
would have been such a situation.
Even after schemes started collapsing, post-1997
with non-pensioner members suffering huge losses, Government still
produced official material assuring members their pensions were
safe and failing to mention the possibility of pension losses
on wind up. Until 2004, official material continued to give the
clear impression that final salary pensions were safe and policy
continued to encourage people to contribute to their scheme, without
mentioning any risk. DWP booklet, "Occupational Pensions
Your Guide, October 2002 p 15 `How do I know my money is safe?'
As a scheme member, you are protected by a number of laws designed
to make sure schemes are run properly and to make sure funds are
used properly." No mention of what these laws could do to
accrued pensions on wind up.
Government told people that their pension was
kept separate from their employer, so that, members were given
the clear impression that the security of their past pension rights
did not depend on the employer. DWP booklet "Occupational
Pensions Your Guide" October 2003 p 15 "Although your
employer pays into the scheme and may be a trustee, the assets
of the pension scheme belong to the scheme, not to your employer".
Page 16 "Opra can act quickly to protect your interests if
the trustees who run your scheme, or your employers, do not meet
their obligations".
Government led members to believe that the Inland
Revenue ensured contracted-out schemes would provide benefits
at least as good as those they would have had in the state pension
scheme. This was not true, but members were never told it might
not be true, or that they needed to consider whether their state
pension rights could be lost as well as all their private pension.
DWP booklet, Occupational Pensions Your Guide, October 2002 p
12 "For a salary-related scheme to be able to contract out
of the additional State Pension, it must pass a test of overall
scheme quality. They must offer benefits that are broadly the
same as, or better than, the State Second Pension".
In its educational material and official leaflets,
Government even mentioned the possibility of what might happen
if an employer became insolvent, but did not talk about the risks
of wind-up! For example, DWP booklet "Occupational Pensions
Your Guide, October 2003 section headed: What if things go wrong?"
said "Although it's rare, if an insolvent (bankrupt) employer
has removed a pension scheme's assets dishonestly, the Pensions
Compensation Board can make compensation payments to the scheme."
So it discussed the particular issue of employer insolvency, but
did not mention the risk of wind-up at all and led members to
believe they would be compensated!
IMPORTANT QUOTES
FROM THE
OMBUDSMAN'S
REPORT
1998 pension reform Green Paper said "The
concept behind the MFR is a straightforward one—that is,
people who have built up pension rights should be able to draw
their pensions in full, even if the employer is no longer there
to pay extra contributions'.
January 2000: DSS officials report on recommendations
from Actuarial Profession to strengthen MFR: "if we introduce
these changes to the MFR we are likely to come under pressure
to similarly change the assumptions used in the calculations of
(contracting-out) rebates which would be to make them more expensive
to government. We do not have Treasury agreement to this".
May 2000: After the Actuarial Profession recommended
members should be warned their pension are not secure on wind-up,
officials wrote to the Pensions Minister that telling the public
would require careful handling, since disclosure to members would
highlight the fact that the objectives of the MFR mean that non-pensioners
only have a "reasonable expectation" of receiving their
benefits.
October 2002: DWP evidence to Parliamentary
Select committee "The Department is actively promoting a
pension education publicity campaign that is supported by a range
of simple, impartial guides".
May and November 2000 Alistair Darling: "There
is a clear responsibility to ensure that the information that
Departments provide is accurate and complete. We shall also provide
redress for those people who were wrongly informed and who, had
they known the true position, might have made different arrangements".
"As a matter of principle, when someone loses out because
they were given the wrong information by a Department, they are
entitled to expect the Government to put it right".
COMPARISON WITH
PENSIONS MIS-SELLING
SCANDAL, WHICH
COST FINANCIAL
COMPANIES BILLIONS
IN COMPENSATION
| Pensions Mis-selling Adviser Role
| Occupational Pensions Government Role
|
| |
| |
| People ask adviser what to do about pension
| Government tells people what to do on pensions
|
| People place trust in adviser | People place trust in Government material
|
| People encouraged to invest | People encouraged to join employer scheme
|
| Tell people about benefits—over-claim
| Explain benefits of employer scheme |
| Fail to explain risks | Fail to mention risk of wind-up
|
| People lose money after poor performance |
People lose money when scheme winds-up |
| Adviser found guilty of mis-selling | Government found guilty of maladministration
|
| Adviser forced to compensate in full | Government refuses to compensate!
|
| |
|
