Examination of Witnesses (Questions 127-139)
RT HON
JOHN HUTTON
MP AND MR
CHRISTOPHER EVANS
28 JUNE 2006
Q127 Chairman: Let us make a start. I
am delighted to welcome John Hutton, Secretary of State for Work
and Pensions; accompanied by Christopher Evans, who is Head of
Private Pension Policy and Regulation, both with the Department
for Work and Pensions. Thank you both very much for coming along
and helping us with our inquiry following the Ombudsman's report
on Trusting in the Pensions Promise. You have given us
the Government response, John, and you have also written a note
to us, but would you like to say anything by way of introduction?
Mr Hutton: No.
Q128 Chairman: Let me then ask you
this: why has the Government decided to trigger a constitutional
crisis?
Mr Hutton: We have not.
Q129 Chairman: Let me try again.
Why has the Government repudiated uniquely an Ombudsman report
in the way that it has?
Mr Hutton: Well, let me say two
things on that, Chairman. I do not think this is unique. I think
there have been previous occasions where governments have not
been able to accept a finding of maladministration. We do so with
extreme regret and extreme reluctance, but I think the legislation
setting up the Ombudsman clearly did not require governments to
accept findings, on the assumption that sometimes there will be
a disagreement, and that has happened from time to time. We have
made the decision that we have done with, as I have said, extreme
reluctance. If you look at the Department's record in relation
to working with the Ombudsman, this is the first time in nearly
40 years that we have felt obligated to respond to the Ombudsman's
report in the way that we have and, as I said, we have done that
with extreme reluctance and having looked very carefully at the
arguments that she presented to us. We have not rushed into this
lightly. We have thought very carefully about the actions that
we have taken and it is for the reasons that are set out very
clearly in the response that we produced to the House earlier
this month and also in the letters that the Permanent Secretary
sent on 27 January and 28 February. So we did try and set out
very clearly the full reasons for why the Government has acted
in the way that it has done. Let me also say one other thing:
prior to the establishment of the Ombudsman's inquiry into the
allegations of maladministration, we had already decided to look
at the situation and see to what extent we could provide ex
gratia payments to those who have suffered loss in these circumstances.
We have the very greatest of sympathy for people who have been
caught up in this situation. That is why the Government 18 months
ago or so set up a Financial Assistance Scheme. It is why the
Prime Minister announced that we would be expediting the review
of the Financial Assistance Scheme that the Chancellor announced
at my party's conference in October. We did take full and proper
account of the Ombudsman's report in announcing the very significant
extension to the Financial Assistance Scheme only a couple of
weeks ago. So we are very conscious of the predicament that many
people find themselves in. We did not accept her findings of maladministration
for the reasons we have set out, I think very fully. We do not
accept there is a responsibility on the Government to compensate
in the way that she recommended that we should, but we have tried
to respond to the financial plight that many people have found
themselves in with a very substantial scheme of financial assistance.
Q130 Chairman: Thank you for that
but let us just be clear about the constitutional territory that
we are in. The Government has cited various previous cases of
government disagreement with the Ombudsman and in its original
response to the Ombudsman's report you have cited the Barlow Clowes
case, which does not sustain the current position because remedy
was provided. In your letter to us just this week you have cited
another case, the Channel Tunnel Rail Link case, which I remember
well, where again initially the Government sought to reject but
finally accepted and paid remedy. So when the Ombudsman writes
to us in her recent memorandum, having reviewed the whole recent
history of her office and says: "However, in no case did
Government both reject findings of maladministration and refuse
to consider righting the injustice that had been sustained in
consequence of that maladministration. Nor has an injustice remained
unremedied in any previous case. There is, therefore, no precedent
for the Government's response to my report."
Mr Hutton: I think in the Barlow
Clowes case, if I am right, the Secretary of State made it clear,
he said: "I want to make it clear the Government do not accept
the Parliamentary Commissioner's main findings. Nor are the Government
legally liable." It then went on to make an offer of financial
assistance available. We have done the same in this case. We have
a financial assistance scheme available which is designed to provide
some measure of compensation. I accept that it is not the full
compensation that the Parliamentary Commissioner recommended that
we take but we have, nonetheless, tried to respond to the predicament
that many people have found themselves in, whilst reserving the
right and I think the Government must always be able to express
a view on Parliamentary Commissioners' reports and findings of
maladministration. I think it would be very odd if the Government
were not able to express a view in these cases. We have tried
very hard, Chairman, and we have reflected very carefully on what
the Parliamentary Commissioner said in her report and we have
taken that fully into account in the extension of the Financial
Assistance Scheme.
Q131 Chairman: You will be asked
about that shortly. We do not want to go over every case but in
the Barlow Clowes case, which you have mentioned again, the Government
did eventually provide a remedy and it said it was doing it: "
. . . in the light of all the circumstances of this particular
case and out of respect for the office of the Parliamentary Commissioner,"
because it recognised that the status of the office was in question
in terms of the Government response. That is why I say beyond
the particular case there is an underlying constitutional issue
here about this office that Parliament set up 40 years ago to
do a particular job for it. The assumption was that the Ombudsman
would decide what maladministration was and governments would
accept that. There can be room for discussion about remedies but
there can be no room for discussion about whether the Ombudsman
had found maladministration or not.
Mr Hutton: I think again, with
respect, we can trawl over this ad nauseam but if you look
at how the Government responded to Barlow Clowes, they made it
very clear and I am quoting directly from the Secretary of State:
"The Government do not accept the Parliamentary Commissioner's
main findings." They then went on to offer an ex gratia
compensation scheme, that is perfectly true. I am trying to argue
that although we have taken the same view as the then Government
did in relation to that case, on this occasion we do not accept
her main findings of maladministration. Out of respect for the
Ombudsman's office we have taken fully into account her report
in reviewing the extension of the Financial Assistance Scheme.
We have extended very significantly indeed the assistance and
financial support that is available to people who find themselves
in this situation. We have not accepted her recommendation, of
course—and it is clearly set out in the Permanent Secretary's
letters to the Commissioner and also in my statement to the House—and
we do not accept the Government has a liability to compensate
fully in the way that she recommended all of those who have suffered
loss. That is, I accept, an issue between us. She would have liked
us to have gone significantly further. We feel we have gone as
far as reasonably we can go in extending the Financial Assistance
Scheme in the way that we have done, and in doing that we have
taken full and proper account of the Parliamentary Commissioner's
report.
Q132 Chairman: The Government clearly
is a party to the dispute and that is why Parliament decided 40
years ago to set up its own independent office who would investigate
the actions of government to see whether maladministration had
taken place. If you look at the government's own official guidance
on all of this from this document called, excitingly, Government
Accounting, it could not be clearer. It says: "In the
light of investigation of a case, the Parliamentary Ombudsman
will decide whether complainants have suffered injustice because
of maladministration and whether any injustice has been or will
be remedied. The Parliamentary Ombudsman's findings on maladministration
are final." It is categorical about the authority of the
Ombudsman's position in relation to maladministration.
Mr Hutton: I would simply ask
the Committee whether it is also the view of the Committee that
that is properly reflected in the legislation. I would say it
is not. It is quite clear from the actions of successive governments,
not just Labour governments but Conservative governments as well,
that there have been occasions where they have not been able to
accept the main findings of the Parliamentary Commissioner. That
is I would say, Chairman, an indisputable fact of history. It
is an extremely unfortunate position we find ourselves in and,
as I have said, we have not rejected the Parliamentary Commissioner's
findings lightly. We have looked very, very carefully indeed at
whether we could accept her findings of maladministration. As
we have made very clear and as the Permanent Secretary made clear,
I think, in those two letters, for all the reasons that he set
out in some detail, we are not able to accept them on this occasion,
the first ever occasion this has happened for us to publicly take
issue with the Ombudsman in the way that we have done. As I said,
we do this with extreme reluctance but I do believe very strongly
we have a right to say this and it must always be open to government
to take a view on the reports of Parliamentary Commissioners.
If Parliament intended anything different, it would have made
that quite clear in the legislation. I think it is perfectly proper
for government to take a view on these matters, but I think we
have always tried to take full and proper account, showing full
respect to the Office of the Ombudsman in responding to her reports.
As I said, I think on this occasion although we were not able
to accept her main findings (and that has happened before) we
were able to take her report fully into account in the deliberations
that took place across government in deciding to what extent we
could further extend the Financial Assistance Scheme. We have
provided a very substantial extension of the Financial Assistance
Scheme in the answer that I made on 25 May and it will extend
significantly further and give new opportunities for people to
receive a measure of financial assistance when they find themselves
in these situations.
Q133 Chairman: I think we are confusing
findings and recommendations. It is absolutely clear that government
has to account to Parliament for any action it takes or does not
take in relation to findings that the Ombudsman comes up with
in relation to maladministration, but there is no question that
Parliament intended the Ombudsman to discover whether there had
been maladministration or not and to tell it whether there had
been maladministration or not. That is what the Ombudsman does.
If you want to know the law you go to a judge. If you want to
identify a bird you go to an ornithologist. If you want to find
out what maladministration is you go to an Ombudsman. That is
what Parliament intended, an independent person servicing Parliament.
It was not conditioned by "we may like what she says"
or "we may not like what she says"; that was the nature
of the office. She would be the authority on maladministration
and tell Parliament.
Mr Hutton: I accept, Tony, that
that is the job of the Parliamentary Commissioner. I am not disputing
her role is to make findings of maladministration. What I am saying
is it has happened on previous occasions that governments have
not, unfortunately, been able always to agree on those main findings.
Q134 Chairman: This is quite unprecedented
in terms of rejection of the findings and refusal of a remedy.
Never before have those two conditions not been met in the way
that has happened in this case. That is why the Ombudsman says,
quite rightly, we are in extremely serious constitutional territory
here. We feel that we are. Let me ask you this: is this a decision
that the DWP took or is it something that was raised within Government
and therefore became a collective Government position?
Mr Hutton: Yes, it was raised
in discussion across Government.
Q135 Chairman: Right, so we can take
it that the Government has now developed a new view on the position
of the Ombudsman?
Mr Hutton: No, we have not developed
a new view on the relationship with the Ombudsman. We have found
ourselves in a position where we have, I am afraid on this occasion,
not agreed with her in relation to the main finding on maladministration,
and that has happened before. We have been able to extend significantly
the Financial Assistance Scheme that is available. I accept that
that does not fully compensate in the way that she recommended
all of the 125,000 people who may be involved in this situation.
We think it will provide significant support to up to 40,000 of
those 125,000 people. I accept that that is not a full remedy
in the way that she advised us to so consider, but we did, as
I said Chairman, look very carefully at her report in looking
at how further we could extend this remedy through the Financial
Assistance Scheme. We have extended it very significantly and
in extending it significantly we did take full and proper account
of the Ombudsman's report. Also we are keen to make this very
clear: we have nothing but respect for the Office of the Parliamentary
Commissioner. This is one of those occasions, I am afraid, where
we were not able on the facts and on the evidence that she presented
to us to share her view that this was a clear case of maladministration.
I know we are at risk of going back to the very beginning of this
conversation and we could probably start again if you would like,
and I suspect we probably will, but that is basically at the hub
of this. This is not a case of the Government saying that we are
indifferent to the plight of people caught up in this situation;
absolutely not. We have recognised, for the first time by any
government, that there is a requirement, in fact a moral obligation
to make sure there is not extreme hardship inflicted on people
in these circumstances. That is not the same thing as accepting
our responsibility financially and legally for the losses they
have sustained because we do not.
Q136 Chairman: People will say and
indeed are already saying what on earth is the point of going
to the Ombudsman with complaints about public bodies if government
can reject the findings out of hand? Is not the problem here that
it would have been possible for you to accept the findings in
relation to maladministration that she found? Indeed nobody reading
the Ombudsman's report—and we will come on to this in a
moment—and reading all the literature that has been produced
at the time could possibly doubt that there was maladministration
here. It would have been possible for the Government to have accepted
that but still have taken issue with the recommendations about
redress. Is not the problem because the Government was so anxious
not to accept the recommendations about redress, that it felt
it had to repudiate what the Ombudsman said about maladministration?
Does that go to the heart of it?
Mr Hutton: No, I do not think
it does. I can only tell the Committee what I saw and what I heard
others say at the time when we were looking at all of these issues.
We have of course to account to Parliament for the proper use
of public resources. I do not think really that can be contested.
It is the job of ministers. We are accountable to Parliament for
how public money is used. There was another case recently, and
I know many members of the Committee might want to refer to it,
in relation to the SERPS case, where it was quite clear that there
was maladministration, and the Secretary of State at the time
made it absolutely clear that that was so. This was a scheme that
we were directly responsible for ourselves. There was no-one other
than ourselves who should take proper responsibility for the losses
people received. This was a scheme run and administered directly
by the Department for Work and Pensions and to make matters worse
(if they could have been in that case) we were aware of individual
cases where people had sought advice from what was then DSS but
now DWP officials and got the wrong advice. We accepted the findings
of maladministration because they were clear in the way that I
have just described. The cost to us was very, very significantly
more than the costs involved, even if we had been prepared (which
we were not for the reasons that we set out) to accept her recommendations
to compensate in this case. There will be a discussion later,
I am sure, about whether you should use cash or net present value.
The net present value of accepting liability in the SERPS case
was £18 billion. The net present value of accepting liability
here might be £2.3 billion, maybe a little bit more,[1]
so it cannot be argued, I think, looking at the precedent here,
that the Department was always going to reject this recommendation
because of the price tag that came with it; absolutely not. Our
responsibility is to look seriously at the recommendations the
Ombudsman has made and of course her findings. That is what we
did. For the reasons that I think are very fully spelt out, in
my statement and in the letters from the Permanent Secretary and
in the document we published for the benefit of the House, we
were not able on this occasion to accept her findings of maladministration,
but we did go on to look again at the compensation that was available
through the Financial Assistance Scheme. We have very significantly
extended that. With respect to the Committee and obviously to
the Ombudsman, we have I think tried to discharge our responsibilities
properly and fully in this case. We have not sought in the Department
for Work and Pensions to sit down one night and say, "How
can we generate a constitutional crisis?" Absolutely not.
We have nothing but respect for the work of the Ombudsman. In
the last year she looked at something like 600 cases involving
the Department for Work and Pensions and we accepted every single
one of her recommendations in those cases. This is, as I said,
the first time ever we have not been able to reach an agreement
with the Parliamentary Commissioner. Of course, if there are wider
issues that spring from that, Chairman, that is a matter for this
Committee. I am sure they will report in due course to the House.
I do say again we have tried fully and fairly to discharge our
proper responsibilities in this case and we have given full and
proper and due account to her report and her findings. When it
came to the decision as to what further financial assistance we
could extend to people who are caught up in this case, I think
we have responded very, very fully in that way.
Chairman: Let me ask colleagues to explore
this further.
Q137 Jenny Willott: I would like
to ask some questions about the minimum funding requirement and
how it relates to these schemes. When it was first introduced
I believe the Government said the MFR was the cash equivalent
of the crude entitlement, similar to the transfer value, which
a member would receive if he or she were to leave the scheme early.
We have had evidence that in the OPRA Trustees' Handbook for trustees
of pension schemes, the 1997 edition, it said the MFR refers to
the "minimum amount of funds that should be in a scheme at
any one time in order to meet the scheme's liabilities if it were
to be discontinued." However, when the Faculty of Actuaries
reviewed the MFR in 1999 it was clear that even if the fund was
up to 100% of the MFR level, members who were not yet retired
would receive significantly less than 100% of the benefits that
they had accrued. The Actuaries highlighted that they were really
concerned that the shortfall could be significantly below 100%
of what somebody should be entitled to. Indeed, we had an example
last week from a gentleman who was expecting about seven% of what
he had been expecting. He was 64, he was a year from retirement,
and he was expecting seven pence in the pound from what he had
been expecting. Why did you do nothing to make sure people were
aware that the MFR was not 100% guaranteed?
Mr Hutton: This does take us right
into the heart of the issue. The reasons why I felt unable to
accept the Ombudsman's report are set out fully in the Permanent
Secretary's letters that I have referred to. We do believe that
in the context in which they should be read and the intent for
which they were prepared, the leaflets did provide an accurate
and fair description of the policy intent behind the minimum funding
requirement. The policy intention behind MFR was essentially two-fold.
It was to protect fully pensioners already in payment through
the purchase of annuities and it was designed to give younger
members a cashback that would allow them a reasonable expectation,
but quite clearly not a guarantee, of achieving retirement benefits
equivalent to those lost by again investing that amount in a personal
pension, and "reasonable expectation" for these purposes
meant an even chance.
Q138 Jenny Willott: That is not what
it says in the Trustees' Handbook.
Mr Hutton: Remember, all of these
leaflets came with very clear and specific declarations as to
what they were for and how they were being prepared. They were
basically there to provide general guidance. I do not think in
the context in which they were prepared, and again for the reasons
the Permanent Secretary set out very fully, that we could accept
and do accept the Ombudsman's conclusion that they were prepared
maladministratively.
Q139 Jenny Willott: Could you tell
me which leaflets the Government put out that did warn members
that even if a scheme was up to 100% of MFR it did not mean their
pensions were protected?
Mr Hutton: It was never the purpose
of any of these leaflets to provide that level of specific and
detailed advice. They were all designed to provide general advice
and they made very clear—and I think Committee will have
the copies of the leaflets and I have them here and we can quote
from them—what the purpose and intent was. I think they
all made very clear to people that they should take proper and
specific advice about their own personal circumstances.
1 The net present value of accepting the Ombudsman's
recommendations is estimated to be between £2.9 billion and
£3.7 billion. Back
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