Examination of Witnesses (Questions 140-159)
RT HON
JOHN HUTTON
MP AND MR
CHRISTOPHER EVANS
28 JUNE 2006
Q140 Jenny Willott: If that is a
general point and people believed that if a pension fund did have
100% of the minimum funding requirement that meant there was enough
money in there for their pensions to be protected, that is not
a specific question about an individual's pension, that is a general
point about government policy. Can you say which leaflets made
it clear that that was not the case?
Mr Hutton: I rather repeat myself
and I do not want to do that, but necessarily I think I need to
because the leaflets were not designed to provide that level of
specific and detailed information.
Q141 Jenny Willott: It is not specific
and detailed information; it is a very general point about a government
policy.
Mr Hutton: I think it is because
the risk of an employer falling into insolvency and not meeting
its liabilities under an occupational pension scheme is very,
very small indeed. The leaflets were designed—and we made
this point in our letters to the Ombudsman—to provide general
advice about the policy that had just been enacted by Parliament.
They were not designed to provide specific information and intelligence
to the public about the liabilities in their own scheme that they
were thinking of joining or the scheme that they were already
members of. That is why we did not seek to provide that level
of information.
Q142 Jenny Willott: I do not know
what the rest of the Committee feels but I do not think personally
it is a specific piece of information. I think that is a piece
of general information that should have been made available in
leaflets, but I am sure others will have their say later. The
Actuaries also told the Government in 1999-2000 that there were
problems particularly with the level of the MFR being set because
of increasing longevity and also because the cost of annuities
was rising hugely. What did you do about it?
Mr Hutton: Which specific advice
are you referring to?
Q143 Jenny Willott: It is in the
report—
Mr Hutton: Is this about disclosure about
the purposes of MFR?
Jenny Willott: It is the Review of the
Minimum Funding Requirement: A Report to the Secretary of State,
Pensions Board, Faculty of Actuaries, May 2000.
Mr Hutton: I think this was the
report, if I am right—and maybe Chris would have the specific
details in front of him—containing recommendations by the
actuarial profession about MFR and was actually designed for scheme
trustees. It was not aimed at government to review the material
that it presented. It was a discussion amongst the actuarial profession
about what more they should be doing to alert scheme members as
to the minimum funding requirements. So we did not take that as
a cue to review the literature or the leaflets that we had put
out.
Q144 Jenny Willott: I was asking
about the level of the MFR not the leaflets, the fact they highlighted
problems caused by increasing longevity and about the rising cost
of annuities. I was just asking what the Government's reaction
to that information was given the concerns they raised about the
level of the MFR.
Mr Evans: In the Government's
further response published in June, number 40 of the response,
taking it through the different recommendations by the profession
to adjust the MFR, I think the one you are referring to is the
May 2000 recommendations because there were recommendations in
1998, 2000, 2001, and subsequently 2003. If I am following you
correctly, it is this recommendation in May 2000 that you are
referring to. The Government considered those and did not accept
those recommendations to change the level of the MFR. I do not
think that was part of the review.
Mr Hutton: That went out to consultation,
I think, at the time, in the context of the Government's review
of MFR and our intention to replace it. I think the result of
the feedback and the consultation was that we should not make
those changes at that moment in time. As I understand it, the
Ombudsman did not find that that decision was made in maladministration.
Q145 Jenny Willott: I am not suggesting
it was. I was just seeking your reaction. The Government has argued
that some of the schemes that went bust did not actually have
the MFR levels in the pension fund at the time that the company
went insolvent so scheme members should not have expected to have
received the whole of their pension, which may well be a very
fair point. However, to use an example on insolvency that is particularly
pertinent to my constituency, Allied Steel and Wire had 101% of
MFR in their Cardiff branch and 104% of MFR in their pension fund
for their Sheerness branch, so scheme members in those two areas
had a right to expect that their pensions were protected based
on the Government's information about the MFR. Have you got any
estimates of how many of the schemes that were affected according
to the Ombudsman's report were funded at or above MFR levels and
how many of them were below MFR levels at the time of insolvency?
Mr Hutton: I do not think we have
got any detailed information about the numbers that met MFR or
the numbers that did not. Clearly there would have been some that
did meet the MFR requirement and a number that did not, but we
do not, I am afraid, have that specific information.
Mr Evans: That is correct. We
collected some information about funding levels of schemes in
relation to making estimates for the Financial Assistance Scheme
but the actual MFR-related funding at the relevant time is not
information that we have. It is likely some were at the MFR level
and some were not. I take your point that may well have been the
case for ASW. We do not have that information for all the schemes.
Q146 Jenny Willott: Would that not
be quite basic information to have if you are then making judgments
about whether or not people should have expected a full pension
or not?
Mr Hutton: It would be very difficult
to collect that information. The responsibility for managing MFR
as a policy was the responsibility of the scheme trustees, not
the responsibility of government. They were the ones who had decisions
to make in relation to their own individual pension schemes for
which they had responsibility.
Q147 Jenny Willott: Sure, but if
the Government is rejecting suggestions of maladministration by
the Ombudsman, do you not think it would be a good idea to be
in possession of the full facts of the situation before rejecting
it?
Mr Hutton: Of course it would.
We would very much like to have more information than we currently
do. We have begun to assemble quite a rich database now through
the creation of a financial assistance scheme and that might well
provide us with more information in due course, but right now
I am afraid for the Committee I cannot give you a specific number
for those who met MFR and those who did not.
Q148 Jenny Willott: I have been looking
at some of the specific examples of individuals who have been
affected, and I know that one element of the Government's response
is that you have extended the Financial Assistance Scheme beyond
people who are within three years of retirement to those within
15 years. I just wanted to give you an example and ask you what
you thought that individual should do. An individual here has
worked at Allied Steel and Wire from the age of 18 to being made
redundant at the age of 49 (and therefore he does not fall within
the limits of the Financial Assistance Scheme) earning £20,000
a year at the end. In a final salary pension scheme an eightieth
of his pension entitlement by the age of 49 was £7,750 per
year. Assuming he loses almost the whole of the pot, which is
likely to be the case, and I have looked at the figures, he would
need to rebuild £164,000 by the age of 65 to be able to buy
an annuity to replace that £7,750, plus obviously paying
into a new pension from the age of 49 to 65 to make up for the
next 16 years of his life. That means on top of his regular pension
payments he would need to save £6,500 a year to be able to
have enough to buy an annuity to replace his pension. That is
a third of his salary and he is not getting any help at all from
the Government because he is too young and it appears to be that
the Government considers it reasonable that he should be expected
to have enough time to replace the pension that he has lost. Do
you think that is reasonable?
Mr Hutton: There is a limit to
how much financial assistance we can provide. We have always been
very straight with people about that. Some of that of course goes
back to the discussion I had originally with the Chairman about
who is liable for the losses here, and we do not think the Department
for Work and Pensions and the Government and taxpayer are. We
have been able to provide significant amounts of financial assistance
to help people in these circumstances, but quite clearly the amount
of help we can provide is going to be limited. We have had to
make some very difficult decisions about the extent to which we
can extend the scheme and how much financial assistance we can
provide. We have never sought to claim that we can fully compensate
people in these circumstances and the Financial Assistance Scheme
of course does not attempt to do that. It provides a very significant
amount of financial support where otherwise there would be no
help whatsoever, other than reliance on pension credit and maybe
other means-tested support that is available for people once they
have retired. That would not be acceptable. I said earlier that
I think it is a proper responsibility of government to take responsibility
to ensure that extreme financial hardship in those cases is mitigated,
and I think we have done that fully and responsibly in the way
that we have extended the Financial Assistance Scheme. What I
cannot do, for perfectly sensible reasons, is to provide any kind
of detailed financial advice to people. Clearly the person that
you have drawn our attention to is someone who sounds to me like
they will not receive qualification for financial assistance under
the Financial Assistance Scheme. I have a very great deal of sympathy
for people in that situation. What we have felt we have needed
to do with the Financial Assistance Scheme is concentrate the
most help we could on those who were closest to retirement and
who were clearly therefore not in any reasonable position likely
to be able to make provision for themselves. There is an argument
to be had about how far away from retirement that help should
extend and where it should continue. We have made a judgment that
15 years from retirement is a reasonable period of time in which
the taxpayer will provide additional financial support. For people
who are not going to qualify then, yes, we are saying to people,
"I am afraid there will be a need for you to try and make
as much provision as you can for your retirement in those circumstances,
although there may well be additional financial help for you through
the pensions system when you retire if you find yourself in need
of additional help." In all of these cases, yes, it is about
the limit of how much financial assistance the taxpayer can provide.
There is a limit. If there is a limit—if people accept there
is a limit; you may not—then there has to be some set of
criteria and eligibility established and established clearly so
that people know precisely what financial help will be provided
for them and what help they have to make for themselves in that
situation. That is where the line has been drawn in this case.
It is a significantly more generous scheme than the one that was
originally announced in 2004.
Q149 Jenny Willott: Can I ask two
final questions about cost. The Pensions Commission said that
"expressing the cost of pensions in cash terms"—and
Mr Evans will have heard me say this morning at the other Committee,
"is the least useful because it exaggerates how expensive
something will feel." The Treasury Select Committee recommended
that the Government publish cost estimates for compensating lost
pensions in net present value terms not just in cash terms. Why
was the decision taken when announcing initially the cost of replacing
benefits of £15 billion only stated in cash terms by the
Prime Minister, by I think you and by the Minister of State in
your Department as well, and nobody mentioned the net present
value until I think it was two months later?
Mr Hutton: No government has ever
used net present value and those calculations that flow from it
as a way of making decisions about public spending. We do not
take chunks of money now and invest it and then rely on the income
that comes from that investment to fund future public expenditure
commitments. That has never been the policy of any government
since time immemorial. The net present value figure, of course,
has value in this context and it is significantly less than £15
billion. Of course it is and we have published that. However,
that is not how governments publish information about accounts.
Spending reviews are done in cash terms. They have to be done
in cash terms.
Q150 Jenny Willott: Sure but a spending
review is three years and we are talking about expenditure over
50 to 60 years. It is completely different.
Mr Hutton: No, you are quite wrong.
Spending reviews are about three years but the public spending
forecasts express the figures in cash terms and they have got
to because if you lose that discipline you get into the sort of
trouble we have been in before in public spending in this country
where money starts to run out and the cheques start to bounce.
Cash accounting is very very important. We do it for CSR purposes
and we do it for long-term expenditure forecasting. We did it
in relation to the Pensions White Paper when we published the
estimates of the full costs of the reforms we are setting out.
It is simply untrue to say that it is somehow disingenuous to
produce these figures in cash terms.
Q151 Jenny Willott: I asked why it
is only in cash terms when the recommendation was that it should
be in net present value as well.
Mr Hutton: We have published the
figures in net present value terms.
Q152 Jenny Willott: Two months later.
Mr Hutton: There was no attempt
to hide or manufacture the intelligence here or torture the data
until it confessed. The material is in the public domain. We have
never sought to deny there is a lower net present value associated
with this, but that is simply not how governments fund public
spending commitments. To say the cost was only £2.9 billion
I would have to say is doubly disingenuous when the cash costs
(which are the real costs here) are nearer £15 billion.
Q153 Jenny Willott: Can I ask one
further question which is on the scale of the help to compensate
people. It would cost in net present value terms between £60
and £100 million per year over a period of time. DWP spends
£60 million a year on leaflets and PR which is one of the
elements that caused this crisis in the first place. Do you not
feel embarrassed saying you cannot spend the same amount to put
it right?
Mr Hutton: I said earlier this
is not about money. We have not made this decision because of
the price tag that comes along with it; absolutely not. We have
looked at the evidence of maladministration and we have looked
at the link the Ombudsman suggested there was between that maladministration,
which we do not accept, and the losses that individuals have sustained.
It is because of our view of those facts that we have decided
we could not entertain her conclusions that we should compensate
fully in the way that she suggested. That is why we made the decision.
We did not argue backwards from the price tag and say we cannot
accept her recommendations; no. If there is any evidence that
that was the established practice in the DWP, it could not account
for the decision in relation to the SERPS case where the net present
value is probably six times higher than the net present value
in relation to this particular set of recommendations from the
Ombudsman. That analysis is for the birds. The reason why we have
not been able to accept fully her recommendations about compensation
are for the reasons the Permanent Secretary set out very clearly
in his two letters, which I have made clear in the House, which
the Prime Minister has made clear and which our response to the
House also set out fully as well.
Q154 Chairman: It is quite likely
we are going to have an interruption by a division shortly so
I will suspend the Committee for 10 minutes or so. Before we do
this Jenny mentioned the Institute of Actuaries Report in 1999.
What it said was: "It is a key conclusion of the review that
there should be full and clear disclosure to members of the objectives
and limitations of the MFR test and the consequences if their
scheme should be wound up. We recognise that this enhanced disclosure
could have major consequences, as almost all employers and trustees
have until now tended to stress the security aspects of occupational
pension schemes in their communications with members. We believe
it will be necessary to create a better understanding amongst
members of the public of the issues involved." That could
not have been a clearer warning to government about the need to
start flagging up the risk, could it?
Mr Hutton: I think it was directed
to scheme trustees, that advice was to scheme trustees.
Q155 Chairman: It says here "members
of the public".
Mr Hutton: But it was a recommendation
that scheme trustees should do that.
Q156 Chairman: " . . . better
understanding amongst members of the public". Surely the
government was in the business—that is why it was issuing
leaflets about pensions, was it not—of informing the public?
Mr Hutton: We did try to discharge
that responsibility to inform the public about the policy but
my understanding is that is a piece of advice from the profession
to scheme trustees that they should better communicate the risks
to scheme members.
Q157 Chairman: What it said was:
"The actuarial profession is keen to work with government,
employers and pensions organisations to promote a greater awareness
and understanding of these issues amongst scheme members."
So it wanted to work with government to flag up these insecurities
and risks with scheme members but that was not reflected in any
alteration the government made to the information that it was
putting out.
Mr Hutton: No, because for the
reasons I have said, our thinking then was that this was advice
from the profession as to how scheme trustees should better inform
scheme members of these issues. It was not taken by us as a recommendation
that we should re-visit the literature or the leaflets we had
produced. It was advice within the profession to scheme trustees.
Q158 Chairman: I think what people
find very difficult to understand is when the Ombudsman has analysed
exhaustively all the literature put out during the relevant period
and the statements that were being made—and it is absolutely
clear what the tone of that literature and those statements was—and
it was all about reassurance, about the integrity of occupational
pensions schemes, it used words like "safe" and "protected"
and "guaranteed", it is not surprising that people thought
that a kind of government kite mark was being given to these schemes,
is it?
Mr Hutton: That goes to the hub
of the argument and you have expressed your view about that and
I am expressing the view of the Government in response to the
Ombudsman's report. The leaflets were general. They were very
clearly expressed in those terms. People were advised they were
not a complete statement of the law and that they should get proper
professional advice in all of these cases. I think in that context—and
again it comes back to our original exchange—we do not accept
that these leaflets were incomplete, inaccurate or misleading.
Q159 Chairman: It is not a question
of full statements and so on. If I look at the leaflet issued
in January 1996?
Mr Hutton: This is the PEC3 one?
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