Select Committee on Public Administration Minutes of Evidence


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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