Memorandum by Ronnie Sloan
Independent consulting actuary, Ronnie Sloan,
who has been advising Ros Altmann and the Pensions Action Group,
comments on: The DWP's Response to the Report by the Parliamentary
Ombudsman: "Trusting in the Pensions Promise"
(sic).
Having studied last week's DWP response in detail,
my main observations are:
(1) When rejecting the findings of the Parliamentary
Ombudsman published on 15 March, the Government stated that the
£15 billion cost of the full compensation recommended by
the Ombudsman was unaffordable by the taxpayer. Despite this,
many informed commentators, including Ros Altmann on behalf of
the Pensions Action Group, immediately said that the cost could
not realistically be more than about £5 billion, and challenged
the Government to justify its figures.
(2) Now the Government says that the Net
Present Value of full compensation is only about £3.3 billion,
which is just over 20%, or one-fifth, of the originally stated
cost. Regardless of lame excuses such as that the £15 billion
cost was "in cash terms", ie in inflated future money
terms, the fact is that the Government deliberately exaggerated
what it must have known to be the true cost of only £3.3
billion in order to frighten the public into acquiescing with
its stance of rejecting the Ombudsman's recommended remedy of
full compensation.
(3) Given that the Government admits to
having known the Ombudsman's findings since December, and that
it had full access to the resources of the Government Actuary's
Dept, there can surely be no excuse for the Government having
perpetrated such a blatant attempt to mislead the public—and
moreover Parliament. So much for "Trusting in the Pensions
Promise", which was of course the very subject of the complaint
on which the Parliamentary Ombudsman ruled on 15 March.
To back up these assertions, I set out below
some more specific examples, taken from the DWP's Annex, of the
general vagueness of the DWP response:
(4) In paras 6 & 7 it is stated that
a small number of schemes thought to be reasonably representative
of the total number were taken as a sample. The specific data
of the 1,300 members thereof was then used to calculate the pension
benefits for each individual in the sample, which would then be
scaled up to replicate the total position. However, this is then
promptly contradicted in para 10 where it is stated that the average
pension "is assumed to be around £3,300 per year."
(5) Because the sample must result in some
potential variation from the full actual data, the DWP has quite
reasonably undertaken a sensitivity analysis, which was modelled
on four alternative pension ages, three alternative deferred pension
revaluation rates, and three alternative survivors' benefit levels.
But how this resulted in the stated "thirteen scenarios",
rather than 36 (viz 4x3x3), remains a complete mystery!
(6) This confusing gobbledegook, of which
these are but two examples, is perhaps best exemplified by the
enlightening statement in para 9 that: "This process leads
to a complex but robust model, based on actual data, rather than
a number of generalisations and broad assumptions. It does, however,
mean that any simplifications of the model may be misleading,
if the sophistication of the model is not taken into account."
Crystal clear—or what?
(7) Despite the stated "robustness"
of the model, in para 23 the Government excuses itself from bothering
to reduce the disclosed cost of compensation by the increased
tax revenue and saving in means-tested benefits, on the grounds
that "it is difficult to estimate precisely | what the cost
would be after taking these adjustments into account." But
surely not as difficult as it is for these severely disadvantaged
pensioners to survive on a fraction of their expected—and
promised—pensions!
As regards the mathematical difference between
the original £15 billion cost "in cash terms" and
the subsequent admission that the Net Present Value (ie cost today)
is only £3.3 billion, I would explain as follows:
(8) The nominal sum of the emerging future
pension amounts, allowing for inflation, will evidently differ
considerably from the discounted present value (ie cost today),
with the period of discount, based on age, clearly being one of
the most significant factors. By way of a few examples, for pensions
payable from age 65, the multiples that the nominal sum (in cash
terms) bears to the Net Present Value (NPV) are:
Member currently aged 35: cost in cash terms
is nine times NPV (true cost today)
At age 45 it is five times, at age 55 it is three
times, and at age 65 it is 1.7 times NPV.
So, it is little wonder that the overall differential
is some 4.5 times NPV (15 billion by 3.3 billion).
(9) The methodology for discounting future
pension amounts, allowing for inflation, has since 1984 been set
out in Actuarial Tables published by the Government Actuary's
Dept for use by lawyers in calculating compensation in court cases.
As these tables are now in no less than their Fifth edition, last
updated in November 2004, there can be little excuse for the Government's
apparent lack of understanding of such basic financial matters.
15 June 2006
|
