Examination of Witnesses (Questions 220-239)
RT HON
JOHN HUTTON
MP AND MR
CHRISTOPHER EVANS
28 JUNE 2006
Q220 Mr Prentice: Yes. The Financial
Assistance Scheme that we are just on to now, Ros Altmann—and
I quote her because she is an acknowledged expert in this area—told
us that the Financial Assistance Scheme is really not everything
it is cracked up to be and that the Government has said publicly
that the Financial Assistance Scheme will pay 80% of the expected
pensions of those within seven years of scheme pension age. Then
it goes on. She says this is not correct. She tells us, and why
would she invent this, that of the people who could be helped
they could lose about half their expected pension because the
Government did not take into account tax free lump sums and other
things.
Mr Hutton: It is a limited scheme
and I have tried to make it clear, and we have never hidden the
fact, that it is not designed to provide full compensation. There
is a cap up to £12,000, it is 80% of the core pension and
there is a taper depending on how far away you are from retirement
age. As I said earlier, these are all necessary and inescapable
decisions given that there is going to be a limited amount of
resource available to provide financial assistance. If you take
the view that there should be unlimited financial support available
well then obviously you end up with a very different scenario
but we have decided that there is some help we should provide,
there is a limit to the help that we think we can and these are
the inevitable consequences of having a scheme that is limited.
The priority has got to be on providing as much compensation as
possible for those nearest the point of retirement because they
can do the least to adjust to the situation they find themselves
in. I think it is a question of equity and fairness and that is
why we have made the decisions that we have.
Q221 Mr Prentice: Yes. She told us
that the Government had invented this idea of core pension. What
do you mean by "core pension"?
Mr Hutton: It is essentially the
payment that will go to the individual scheme member but it will
not include things like indexation, it will not include survivor
and spouse benefits either.
Q222 Mr Prentice: No lump sums?
Mr Hutton: No, that is right,
and it will only pay out at 65 whereas maybe under the pension
schemes themselves someone might be entitled to an earlier payment.
It will be inflation proofed in the intervening period.
Q223 Mr Prentice: Yes.
Mr Hutton: We have never pretended
that the Financial Assistance Scheme is designed to provide 100%
compensation, it never had that purpose.
Q224 Mr Prentice: No. It kind of
takes the shine off it though when you remind us of all these
qualifications. If someone expected a pension at 60 and their
occupational pension scheme just dissolved in front of their eyes
they would have to wait until they are 65 before they could get
a very limited pension through the FAS.
Mr Hutton: It is a limited scheme
but I think it is a very important safeguard and provides serious
financial assistance for people who otherwise would get absolutely
nothing whatsoever.
Q225 Mr Prentice: You see I got the
impression, and maybe other colleagues did as well, when you spoke
to the House on 16 March, a day after the Ombudsman had published
her report, you did not refer to net present value at all, you
referred to the £15 billion cash and so did the Prime Minister,
and there were a lot of people saying "That is a lot of money".
Why did you not refer, when you were making your statement on
16 March, to net present value?
Mr Hutton: Because the Government
does not account for public spending in those terms.
Q226 Mr Prentice: Okay. The same
answer as you gave earlier. Did you consult the Government Actuary
on this? When you were pulling together the Government's response
to the Ombudsman's report, did you say to the Government Actuary,
"We have costed this in cash terms at £15 billion, are
you satisfied as actuaries that we are doing the right thing and
we are not inadvertently misleading people"?
Mr Hutton: I think the estimates
were made by officials in the Department for Work and Pensions
and it was based on proper actuarial advice and anyone can check
the figures and tell me whether they think they are right or wrong.
Q227 Mr Prentice: So it was not a
big deal, the £15 billion, you did not have the kind of discussion
around the table in the office saying, "How are we going
to cost this?" It was just the officials in the Department
giving you a bit of paper, "Mr Hutton, it is £15 billion"
and you said "Fair enough".
Mr Hutton: They told me what the
professional advice of officials was and I accepted the professional
advice of my officials, yes.
Q228 Mr Prentice: We also heard about
how long it takes to wind-up some of these schemes. I think we
heard last week that the average time was seven years and, of
course, as an average you could get schemes that would take 10
years to wind-up or 12 years to wind-up. Ros Altmann reminded
us that the Government had commissioned a review by our colleague,
Stephen Timms, on how we could accelerate the winding up process
because it keeps people just hanging there. What has happened
to the Timms Review?
Mr Hutton: It is underway and
will be completed in the autumn.
Q229 Jenny Willott: When did it start?
Mr Hutton: I do not know exactly.
I think some time earlier this year.
Mr Evans: Yes. The current review
of the speed of wind-up began earlier this year.
Q230 Jenny Willott: Was there not
a previous one that was started in 1999 that ironically seven
years later still has not found out how to speed up wind-ups that
take on average seven years?
Mr Evans: I think a number of
changes were made to the regulations following an earlier review
and one of the things that this review will do is to look at how
effective those have been and also look at possible other measures
which might be done possibly through action by the Pensions Regulator.
One of the things we are doing is talking with the Pensions Regulator
about ways of encouraging trustees to speed up wind-up.
Mr Hutton: It takes too long and
we need to improve it.
Q231 Jenny Willott: Has there been
any decrease in the length of time it takes to wind-up since then?
Mr Hutton: Not significantly.
Mr Evans: There may be changes
under the forthcoming review now with the advent of the Pension
Protection Fund for schemes newly starting to wind-up where the
wind-up is controlled by them. One of the issues is that some
of the data on the speed of wind-up itself has been rather limited
in the past. It reverts to our previous conversation about data
so it is difficult to answer the question about whether there
has or has not been a speeding up, there may have been some increases
in the speed of wind-up and we are aiming to make it faster still.
Q232 Mr Prentice: The Chairman was
talking earlier about the policy context and he read out a list
of things which the Government had done to shape the context in
which people made their pension decisions. I just wonder if you
have had a look at this and you have thought to yourself in view
of the collapse of these occupational pension schemes, of all
these people out there who will be left with absolutely nothing,
and some of them will be helped in the way you have just described
but there are other people who will get nothing. What needs to
be changed in terms of pension policy?
Mr Hutton: The Pensions Act 2004
set out a series of changes that we would be making in this area
including the creation of the Pensions Protection Fund Scheme
for specific funding, the creation of new regulatory authority
bodies as well. The White Paper that we have recently published
set out a further set of work that the Department for Work and
Pensions would be initiating to make sure that the overall regulatory
framework was delivering the right outcomes for us. There has
been a significant amount of work gone in over the last two or
three years in the Department for Work and Pensions and, in fact,
more widely across Government to try and make sure that the regulatory
oversight arrangements are efficient and effective.
Q233 Mr Prentice: Let me give you
one example and you will tell me if the policy has changed or
not. When schemes go belly up there is a priority order and the
banks take precedence over scheme members, the Government itself
takes precedence and people out there may think that is a bit
unfair. I just wonder if this priority order has been revisited
and, if not, why not?
Mr Hutton: I do not think it has
been revisited—
Mr Evans: No. This is the priority
for debts on insolvency.
Q234 Mr Prentice: Yes. Have I misunderstood
it?
Mr Evans: I am not aware that
has been revisited. There is the separate priority order as to
how assets are distributed between different classes of scheme
member. One form of that was introduced in 1997 with extras and
that has been changed in more recent years.
Mr Hutton: Indexation.
Mr Evans: Yes. The balance between
what pensioners and non-pensioners get has changed but that is
within the assets available to the scheme. I think what you are
referring to, if I am correct, is the amount of priority debt
on the insolvent employer and I am not aware that has been changed,
at least not to a significant degree, with regard to the pensions
and the failed pension scheme getting money from the insolvent
employers, no.
Q235 Jenny Willott: Can I just clarify
one point on that as well. That only applies presumably if a scheme
winds up when it is under the MFR level? Actually if a scheme
is at 100% or more of MFR level, it does not count as a debtor
at all, is that correct?
Mr Evans: It depends on when the
wind-up takes place. If a wind-up were to occur now then the debt
would be to provide sufficient for full buy-out.
Q236 Jenny Willott: No, sorry, with
the schemes that are covered by the Ombudsman's report, with the
wind-ups in that period, those covered by the FAS technically,
if the pension fund winds up at 100% or more of MFR then they
do not count as a debtor?
Mr Evans: I think that is correct.
Ms Abraham: I am not going to
pretend to be an expert. My understanding of the point that is
being made here, certainly in relation to the schemes which are
talked about in the report, is that there is a priority order
when companies become insolvent and their assets are distributed
which starts with the Revenue and Customs, and other public bodies,
goes on to secured loans, unsecured loans, and the bottom of this
pile is all of the creditors, of which the pension scheme is one.
Is that the point?
Mr Prentice: Yes.
Mr Evans: If I may, just to amplify
my previous reply, the arrangements whereby the employer is required
to provide the money to allow for full buy-out actually came into
effect from 2003 so you said it would cover the cases covered
by this report and the answer is possibly some, but not all.[2]
Q237 Mr Prentice: It is probably obvious
to everyone by now that I am not a pensions expert, I am just
struggling through this like a lay person, but what concerns me
is whether the regime was fair or unfair. When we had people before
us last week we were told that the employer could make membership
of the occupational scheme compulsory and that once they were
in the scheme they were locked into it, that the Inland Revenue
prevented any other pension once a person was in the scheme. Even
if you had someone who really got genned up on all this pension
information and decided he or she wanted to diversify, the rules
were such that they could not.
Mr Evans: It is certainly true
that the rules until recent tax changes affected the possibility
of being in more than one pension scheme.
Q238 Mr Prentice: I do not know if
it was Mr Parr or Mr Duncan, but one or other of them made that
point, they were locked into it, and that is unfair, is it not?
One of you?
Mr Hutton: I am not sure I can
advise the Committee about the fairness in that sense. Maybe this
is something we might need to write separately to the Committee
about. The Committee is asking for more technical detail or appraisal
of the tax treatments and fairness in this context, and I will
be very happy to do that.[3]
Q239 Chairman: Gordon was running through
the limitations of the Financial Assistance Scheme, of course
one of its limitations is that it does not apply to people with
solvent employers, does it?
Mr Hutton: No, it does not.
2 There may have been some confusion here over whether
the discussion was about those schemes covered by FAS (i.e. insolvent
employer wind ups) or those covered by the Ombudsman's report,
which also would include solvent employer wind ups. To clarify
the matter, the position of solvent and insolvent employer wind
ups are different. In the case of a solvent employer wind-up,
regulations increased the debt on the employer in March 2002 and
again, to full buy out, in June 2003. The employer debt in the
case of an insolvent employer wind-up was increased to full buy
out from February 2005. Back
3
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