Examination of Witnesses (Questions 100-119)
DR ROS
ALTMANN, MR
BOB DUNCAN
AND MR
ANDREW PARR
22 JUNE 2006
Q100 Jenny Willott: How long does
it take on average to do a wind-up?
Dr Altmann: On average it is about
seven years, I believe. In 1999, the Government, under Stephen
Timms, started an inquiry into speeding up pension fund wind-ups
and issued a report saying: "We must speed up the wind-ups."
I feel it is somewhat ironic that the only recommendation of the
Parliamentary Ombudsman that has been accepted—now some
seven years on—is that the Government should speed up wind-ups.
Q101 Jenny Willott: Both Mr Parr
and Mr Duncan are in what could be seen as the fortunate position
of being ex-employees of companies that have actually gone into
insolvency. What should be being done and what is being done for
those where the pension scheme has been wound up but the company
is still solvent and operating?
Dr Altmann: They are being excluded
from any assistance. Quite frankly, the situation of solvent employer
scheme wind-ups is the most dramatic evidence of the maladministration
that the Ombudsman has found in many ways, because, when a solvent
employer just decided that it wanted to wind up the scheme, it
was legally empowered to do so and the only payments that needed
to be made into the scheme were funds sufficient to bring it up
to 100% funding on the minimum funding requirement. Government
weakened that minimum funding requirement. Government took decisions
about the MFR which failed to consider the position of wind-up,
even though the original policy intention was to ensure security
of members' accrued pension rights on wind-up, but solvent employers
could walk away only having to put in enough to meet the MFR,
even if they could afford more. Indeed, I have examples of schemes
which, when they decided to wind up, were 104 or 105 or more per
cent funded on this MFR and the trustees had to pay money back
to the shareholders to bring it back to 100% funding, leaving
members without their pensions, but the shareholders getting some
of the money. Those were the direct results of the Government's
oversight of the minimum funding requirement, which became a maximum
funding requirement and was totally inadequate for delivering
the original policy intention, which was to secure pensions for
everybody who was already getting a pension in full with annuities,
and a transfer value giving a reasonable expectation of full pensions
for anyone who was not yet drawing a pension. Even that reasonable
expectation was never explained to the public. What it meant was
that there was only a 50:50 chance of you actually getting your
full pension but that was weakened further and nobody was actually
told or warned about that.
Mr Parr: Perhaps it is worth making
a comment on that. Both the Government and the media tend to portray
employers as one of the evil parties in all of this. With a solvent
employer, a solvent employer could be in a position where they
are in competition with cheap overseas imports or something like
that and are trying with the best will in the world to preserve
jobs. It is not that solvent employers are taking money out of
the pension fund to increase their profits. In most cases it is
that they are going into the scheme wind-up because it is that
or the company closes with the loss of jobs. The employers are
not always the evil parties that they are portrayed as.
Q102 Mr Prentice: On this business
of the wind-up, seven years, you said, on average to wind up the
scheme. Why does it take so long? If that is the average, there
must be wind-ups that take 10 years.
Dr Altmann: More.
Q103 Mr Prentice: What is the longest
wind-up that you are aware of, because you have gone into this
in great detail?
Dr Altmann: I think there are
some still from the early to mid nineties. The reason is the process
that you have to go through on wind-up, first of all. Again, part
of the problem was caused by the changes in 1997 as well. Before
that, the Government would take all these guaranteed minimum pension
right back into the state scheme as a whole, but, since that time,
trustees have to agree every penny of the guaranteed minimum pension
right with the DWP. That is part of the reason. Part of the reason
is that the scheme records themselves were kept in an appalling
state. Many of them are incomplete. Many trustees did not take
enough care over scheme records—that is true—but partly,
also, the independent trustees who are appointed have to go through
all these processes of trying to find out if there is any money
owing to the scheme. Partly, I suppose, there might be an element
of: trustees are paid for the amount of work they do: there is
no control and no limit on the amount they can charge a pension
scheme. They have first call on the assets, so, perhaps, to some
people, the longer you go on, the more money you earn. I would
hate to suggest that that is a primary cause at all.
Q104 Mr Prentice: It is a nasty world
out there.
Dr Altmann: But it certainly does
not give the independent trustees any sense of urgency in finalising
the wind-up.
Q105 Mr Prentice: What happened to
the Stephen Timms' review that you spoke about a few moments ago?
Is it still chundering on?
Dr Altmann: I believe they looked
at it around 1999/2000 but nothing seems very much to have changed.
Perhaps it went on to the back burner. There was also a report
by OPRA, the Regulator, which suggested there had been some success
in speeding up some of the wind-ups because there were fewer schemes
which had been in wind-up for over 10 years before.
Q106 Mr Prentice: This causes terrible
injustice if these wind-ups take forever, does it not?
Dr Altmann: First of all, it is
the insecurity and uncertainty to which people are subjected,
because they do not have a clue what they are going to get. Second
of all, the people who reach pension age or the people who become
terminally ill are denied their pension as well, so they start
their retirement without the pension they saved for. When they
get an interim pension during the wind-up, before it is completed,
the trustees send them a small payment, saying, "This is
your interim payment but we might have to take it back from you
when wind-up finishes," so, even when they get a bit of money,
they do not know whether they are going to be able to spend it
or maybe have to pay it back. The final problem which has been
so acute is that, the longer it went on, the worse annuity rates
became—year by year, as Bob was describing. In 2000, he
might have got 40% of his pension. Annuity rates have plummeted.
There are only one or two providers, so it is quite a monopoly
situation, and longevity has increased, et cetera, so the amounts
you get each time reduce—which is another problem with the
Financial Assistance Scheme of course as well. The very fact that
there is the Financial Assistance Scheme is incurring expenses
to each of these schemes. In order to deliver this assistance
to some of the members, all the assets of the scheme are reduced,
so anyone who does not qualify for assistance will get even less
pension than they would have done if there was not an FAS.
Q107 Mr Prentice: That is the sting
in the tail, is it not? Can I just talk about the role of the
trustees. The Government response to the Ombudsman report makes
it quite clear that the trustees were the people who really should
have been aware of what was happening to their scheme. In paragraph
32 of the response to the Ombudsman's report, the Government says
this: "It is clear that the only people who could give information
about the specific circumstances of their scheme were the trustees
and sponsoring employer of the scheme in question." I suppose
my question to this—because Mr Duncan and Mr Parr you were
trustees—is what kind of training did you get about what
it meant to be a trustee?
Mr Duncan: I became a trustee
about a year before it went into liquidation. They sent us to
Leeds for one day.
Q108 Mr Prentice: Is that typical
of what a trustee could expect?
Mr Duncan: I should not have thought
so, but the company did, because the company had to pay for it.
Whether they took it out of the pension scheme for sending us
there, I do not know. I was convenor. I heard what you said about
it is only the trustees which run pension schemes, but when people
work on the shopfloor they just do not think that way. People,
especially in a full union shop, they trust the union man. I was
trusted as a union man and I went and got all the leaflets. This
was before I became a trustee. The leaflets and the brochures,
all came into my possession over the time, because people brought
them. People on the shopfloor will come and talk to the union
man before they will go and talk to trustees. I know there are
member trustees now, and I was a member trustee, but it is still
the union they go to.
Q109 Mr Prentice: I asked the Ombudsman
the same question when she was before us. What did the union do
to tell you about the responsibilities that you would have as
a trustee? Did you get any separate training from the union?
Mr Duncan: No.
Q110 Mr Prentice: None at all?
Mr Duncan: Just the basic training,
when you go away for a couple of days' basic training. It was
everything to do with the union, and that was years and years
ago anyway.
Q111 Mr Prentice: Sticking with this,
in paragraph 34 of the Government's response to the Ombudsman's
report, the Government says, "There were, and are, substantial
responsibilities for trustees, many of whom act in a voluntary
or unpaid capacity. It is nevertheless the case that all"—that
is people like you—"would have had professional advice
available to them. Indeed, the law required and requires that
to be the case." I do not want to quote at great length,
but did you ever think of getting in touch with the scheme's actuaries
or the professional people involved, because the Government seems
to suggest that this is the kind of thing that you, as an independent
trustee, ought to do.
Mr Duncan: I talked to the actuaries.
We used to have a meeting with the actuaries every three months
anyway. As I say, I was only a trustee for round about 10 months.
I never really asked to see the actuaries. The actuaries came
into the factory every three months and we always had a meeting
with them. The only thing they were saying was that the scheme
was to the MFR. They were quite happy with that. I had the OPRA
book before I was a trustee and that is what I always read. I
kept reading that OPRA book and page 28 told us that the pension
was safe and guaranteed. It is all right for the Government saying,
"You should say this and say that," but that is what
I had and that is what I read and that is what I went by.
Dr Altmann: Bob is the one who
showed me the 1997 OPRA handbook for trustees—which was
wrong. It was factually wrong. The DWP says, "Well, OPRA
corrected that in 1999, so it does not matter that the 1997 one
was wrong," but the 1997 one said: "If your scheme is
100% funded on the MFR, it will have enough money to pay all of
accrued rights on discontinuance"—on wind-up. The fact
that it was corrected in 1999 was never brought to Bob's attention.
He only got the 1997 one.
Q112 Mr Prentice: I am just trying
to get clear in my own mind about the responsibility of the scheme's
actuaries because the Government in its response tells the world
that they would know what was going on and the scheme's actuaries
would give a true assessment of what was happening to the scheme.
But that is fanciful. It just did not happen in practice. That
is what you are saying.
Mr Duncan: The actuaries were
just telling you that the scheme was fully funded. To an ordinary
layman that is what they were telling them anyway.
Dr Altmann: There was no requirement
to disclose what would happen on wind-up. The Government could
have required disclosure. Indeed, that was the heart of the actuarial
profession's recommendations in 1999 to the Treasury and to the
DSS. The Institute of Actuaries said to the Government, "We
must disclose the fact, because members think 100% MFR means they
have enough money to pay pensions and it is not true." Government
ignored that advice.
Q113 Mr Prentice: So you have the
faculty of actuaries, or whoever they are, making this recommendation
to the Government and the Government ignoring them. That is what
you are telling us.
Dr Altmann: And the Government
somehow failing to see the connection that meant it needed to
do something itself. It seems to have ignored that. You could
argue that it was concerned about not undermining final salary
schemes because of the implications that that would have for public
spending on pensions. That is something, again, we should not
lose sight of here. The basic pension in the UK is so low that
it is only these additional pensions that give people any hope
of some kind of decent standard of living in retirement. The Government
has been able to pay such a low basic pension because of these
schemes. There was some hidden perhaps policy intention to pretend
it was safe, even if it was not. The Government itself said, "We
are responsible for protecting members' rights" in 2000.
The Pensions' minister said, "We are aware of the importance
of protecting members' rights. If we cannot do that, they have
no one else to look to." So they knew at that time that it
was not the trustees' responsibility, it was their own. We are
now, in 2006, trying to reinvent history.
Q114 Paul Rowen: Can you tell us
how many people roughly are affected by this particular decision?
Dr Altmann: It is at least 75,000.
The Government's response suggests there may be 125,000. We do
not know the exact number, but I would imagine it is somewhere
between those figures.
Q115 Paul Rowen: Have you done any
calculations? The Government has quoted this figure of £15
billion. If you were to go back to the guarantee, what would that
cost estimate be?
Dr Altmann: The £15 billion
figure is not correct anyway. I think one has to make that clear.
Even if you assume that the Government calculations are appropriate—which,
as I have explained, I do not—the £15 billion takes
no account of the fact that these payments would be taxed and
there would be also a net saving to the exchequer from not paying
means-tested benefits. The proportion of the costs of any compensation
scheme that would comprise reinstating people, for example, back
into the SERPS system, as they would have been en bloc
before 1997, is difficult to estimate, but I would expect it may
be half, on average. As I say, the amount of GMP will differ between
members depending on their length of service, how long they were
contracted out for and so on. I have seen a number of people's
entitlements and a number of people's statements, and I would
say that, from an anecdotal point of view, seems a possible estimate.
Q116 Paul Rowen: Mr Duncan, as a
trustee, what is the role of company trustee? Were they advising
you of any problems when this was happening?
Mr Duncan: The company nominated
trustees?
Q117 Paul Rowen: Yes.
Mr Duncan: They knew as much as
I did. I am sure they did. They were not senior managers or anything
like that, the company trustees, they were just junior managers,
and they knew as much as I did. The companies still recommended
the pension scheme. They always did and always had, but they were
reading roughly the same material I was.
Q118 Paul Rowen: Who was providing
the actual information to say that the scheme was okay? Were you
getting independent advice?
Mr Duncan: Independent actuaries,
yes.
Q119 Paul Rowen: They were supporting
what the company was saying and what the DWP was saying.
Mr Duncan: That is right. The
MFR was all right, so . . . There was only a valuation every three
years. They company I worked for went bust and they had already
done one two years ago, so it was another year before we were
going to get an up-to-date actuary report.
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