Supplementary memorandum by Rt Hon John
Hutton MP, Secretary of State for Work and Pensions
When I appeared before the Committee to give
oral evidence on 28 June 2006, I promised to provide you with
further written evidence on a couple of points. I have also received
a further letter from you asking some additional points.
QUESTIONS PUT
AT THE
HEARING ON
WEDNESDAY 28 JUNE
2006
1. Prior to 1988 employers could make joining
their scheme a condition of employment. However, this option was
abolished from 1988 and since then an employee can, not only leave
the company scheme, but can also transfer out their accrued rights
into a different pension saving product.
2. Prior to April this year, the tax rules
prevented a person from contributing to more than one pension
concurrently. If they were a member of an occupational pension
scheme they could not also be contributing to a personal pension,
for instance. This, of course, did not prevent them from saving
in a non-pension product, although they would not have access
to the pension saving tax advantages (nor, of course, would their
savings be subject to the restrictions on pension savings).
3. From April 2006, the tax rules were simplified
and now an individual can contribute to more than one pension
saving product and receive tax advantages, up to a specified maximum.
FURTHER QUESTIONS
ON THE
GUARANTEED MINIMUM
PENSION
4. It might help the Committee if the basic
structure of the Guaranteed Minimum Pension (GMP) is explained.
For the period April 1978 to April 1997 if an employer wanted
his scheme to be contracted-out (and thus see his and his employees'
National Insurance contributions reduced) he had to ensure that
the rules of his scheme produced a pension that was at least as
good as the statutory minimum - the GMP. Thus the guarantee was
given by the employer to the Government and was based on the structure
of his scheme rules. Many employers had schemes that produced
a pension that was more generous than the GMP.
5. The GMP rules were broadly (but not exactly)
the same as the State Earnings Related Pension Scheme (SERPS).
In some cases, particularly where a person leaves the scheme early,
the GMP can be significantly higher than SERPS.
6. When a person takes his State Retirement
Pension his SERPS is reduced to reflect the fact that he has not
paid full National Insurance contributions. This reduction occurs
even where the individual concerned does not, in fact, receive
a private pension—the trigger is the payment of reduced
National Insurance contributions.
THE CHANGES
THE 1995 ACT
MADE TO
THE GMP PENSION
SYSTEM
7. The Pensions Act 1995 abolished GMPs
in respect of future accruals from April 1997. Accrued rights
were not affected by this and the GMP rules still apply to these
rights.
WHAT GMP RIGHTS
THOSE AFFECTED
BY SCHEME
WIND UP
RETAIN?
8. Whether the members actually get a full,
partial or any GMP secured would depend on the level of funding
in the scheme as a whole and the priority order under which the
scheme is winding up.
Solvent Employers
9. Prior to March 2002 if a scheme went
into wind up with a solvent employer, the trustees could require
the employer to fund the pension scheme up to the MFR level. The
trustees and/or the relevant trades unions could, of course, negotiate
for this minimum level to be improved on.
10. From 19 March 2002 the employer debt
on solvent employer wind-ups was set at an amount that brings
the scheme's assets up to a level sufficient to meet the scheme
actuary's estimate of the costs of buying indexed annuities for
pensioners and cash equivalent transfer values, on the MFR basis,
for people who have not retired.
11. Subsequently, on 15 March 2004 a "full
buy-out" requirement was introduced to ensure that where
a scheme is wound up and its sponsoring employer is solvent, the
debt on the employer is calculated on the basis of buying annuities
for all scheme members. Trustees can utilise these Regulations
if their scheme started to wind-up on or after 11th June 2003.
Insolvent Employers
12. For insolvent employers, whether the
scheme is paid the full amount owed depends on the value of the
employer's assets when he becomes insolvent.
13. Where the scheme has insufficient funds
to secure the benefits in full, the priority order comes into
play. The order applicable to schemes that commenced to wind up
between April 1997 and 9 May 2004 has GMPs (for non-pensioners)
as, effectively, the fourth category, after Additional Voluntary
Contributions, insurance contracts and pensions in payment (without
increases).
14. From 10 May 2004 the priority order
was amended, so that contracted-out rights were no longer treated
differently from other accrued rights for non-pensioners. Effectively,
non-contracted out rights were moved up the priority order.
AT WHAT
STAGE WOULD
THEY GET
THEIR GMP—IS
THIS AFFECTED
BY DELAYS
IN WINDING
UP?
15. The scheme's liability with regard to
the GMP is not usually handled any differently from other liabilities.
The trustees have to identify how much they have for each member
of the scheme and the scheme's liability. Generally they deal
with pensioners first as they are most easily identified and,
because their funds are annuitised, there are usually no options
that the member has to consider. After this they deal with individual
members as the position of each becomes clarified.
ADDITIONAL QUESTIONS
What is the government doing to encourage solvent
companies which wound up schemes to accept their obligations to
former scheme members?
16. The Government has made it clear that
it expects employers to take their pension obligations seriously.
They made the promise to their employees and should make this
promise good, when they can. The Government sets the minimum amount
that employers should pay into schemes that are in wind up. This
does not mean that employers cannot pay more than that minimum.
What legal recourse, if any, do former scheme
members have in such circumstances?
17. Where an employer has met their statutory
requirements under pensions legislation, a member has a legal
recourse only against the trustees and on the basis that they
had failed to discharge their duties under trust law. For instance,
if the trustees had entered into a compromise agreement with the
employer and accepted a lower amount than they could legally demand,
the scheme member could challenge this action through the courts
or raise their concerns with the Pensions Regulator.
18. There may be other remedies that trustees
could pursue in respect of any deficiency in the scheme. For example,
it might be that the scheme rules specify a higher debt on wind-up
than the employer debt legislation, or the trustees might negotiate
with the employer to meet a higher level of debt, even where there
is no legal requirement to do so. These, and other potential remedies,
would depend on the specific circumstances of each individual
scheme.
10 July 2006
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