CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1081-iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

PUBLIC ADMINISTRATION select COMMITTEE

 

 

OMBUDSMAN ISSUES: PENSIONS

 

 

Wednesday 28 June 2006

 

MS ANN ABRAHAM

RT HON JOHN HUTTON MP and MR CHRISTOPHER EVANS

Evidence heard in Public Questions 127 - 257

 

 

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

 

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

 

 


Oral Evidence

Taken before the Public Administration Select Committee

on Wednesday 28 June 2006

Members present

Dr Tony Wright, in the Chair

Mr David Burrowes

David Heyes

Kelvin Hopkins

Mr Gordon Prentice

Grant Shapps

Jenny Willott

________________

Ms Ann Abraham, Parliamentary and Health Service Ombudsman, in attendance.

Examination of Witnesses

Witnesses: Rt Hon John Hutton, a Member of the House, Secretary of State for Work and Pensions, and Mr Christopher Evans, Head of Private Pension Policy and Regulation, Department for Work and Pensions, gave evidence.

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 per cent of the MFR level, members who were not yet retired would receive significantly less than 100 per cent of the benefits that they had accrued. The Actuaries highlighted that they were really concerned that the shortfall could be significantly below 100 per cent of what somebody should be entitled to. Indeed, we had an example last week from a gentleman who was expecting about seven per cent 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 per cent 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 per cent 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.

Q140 Jenny Willott: If that is a general point and people believed that if a pension fund did have 100 per cent 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 per cent of MFR in their Cardiff branch and 104 per cent 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 ten 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?

Q160 Chairman: It is the one referred to in paragraph 22.1 of the Government's response. It says the changes including the development of the MFR had been introduced as "the Government wanted to remove any worries people had about the safety of their occupational pension following the Maxwell affair." It then went on to add that the minimum funding requirement "was intended to make sure that pensions are protected" and then the next bit is in emphasis "whatever happens to the employer". That could not be clearer as an indication about the safety of these schemes, could it?

Mr Hutton: That was a specific reference of course to fraud and Maxwell had defrauded his company pension schemes and the Act did introduce a fraud compensation scheme.

Q161 Chairman: I am not sure you are convinced by that reply, John, even as you give it.

Mr Hutton: As far as we are aware, none of the schemes involved in this investigation involved fraud. You have chosen a particular passage of PEC3 which relates to fraud.

Q162 Chairman: It was designed to be illustrative because one only has to read, as I say, the exhaustive textual analysis of these leaflets the Ombudsman has given us to see that it cannot be sustained that the Government was giving - let us just be clear what the DWP's own guidance was in relation to information. Its guidance was that the information given had to be "accurate and up-to-date, with no significant omissions". That is what the DWP had said in the wake of inherited SERPS. The Parliamentary Ombudsman says, having looked at all the information, that it was "sometimes inaccurate, often incomplete, largely inconsistent and therefore potentially misleading", and that this constituted maladministration. It is pretty straightforward, is it not?

Mr Hutton: That is a very straightforward allegation and there is a very straightforward rebuttal of that in the two letters to the Commissioner from the Permanent Secretary, where we set out in some detail why we did not feel that was a full and fair description of those leaflets. It is very clear these leaflets were designed as a brief summary of the changes, not a complete and authoritative statement of the law. In relation to the point about significant omissions, I do not believe there were significant omissions, given the declared purpose of this particular leaflet which was, as I say again, a brief summary of all the changes in the Pensions Act which was intended as general guidance. That is to re-run the argument about whether these were maladministrative or not. We have set out a full explanation as to why we do not accept that these leaflets were in the letters of the 27 January and 28 February, and the fuller argument is contained in the response we laid before the House in June. That is the Government's view of the leaflets and the issues raised by the Ombudsman's report.

Q163 Chairman: When Lord Turner was here last week he said he thought it was very important not to use the language of guarantees in relation to schemes that were not guaranteed and yet we do find these words "safe", "protected by law", "guaranteed" in what the Government was saying. It should not have done, should it? The fact that it should not have done is evidenced by the consequences of doing so, and the failure to mention the inherent risks which the actuaries had pointed out in pretty stark terms just emphasises the point.

Mr Hutton: I have set out the Government's argument in relation to all of this. We felt and we still feel that the leaflets were a fair and accurate description of the policy intention at the time. They were not described and designed as a detailed and comprehensive statement of the law. We were very clear that people should take proper advice before they enrolled or joined or remained in an occupational pension scheme. I know there is a very clear recommendation to the Ombudsman's report that these were maladministrative and we can go on rehearsing the arguments about why you say they are and why I say they are not, but the argument is clearly set out in those letters from the Permanent Secretary and I cannot add anything to the argument that we have set out.

Q164 Chairman: I understand what you are saying and I do not want to keep going round the same circuit, but we had a trade union representative here last week and we had a trustee here last week telling us how they had been seen as a source of authority for their members and they had referred, as they would, to all the literature that was available, and that gave them the assurances that everything was going to be fine and what a huge sense of responsibility they now felt because they felt that they in turn had misled people about the security of these schemes?

Mr Hutton: This was quite clearly a responsibility that was shared between the government to have the right legislative framework in place, and the then government tried to do that, and then to explain the policy intent in the way that they did. There is clearly a set of responsibilities on scheme trustees to operate within the law to discharge their common law responsibilities as well. I am not surprised - because they are decent, honest people involved in scheme administration - that they did feel that sense of dismay as to what has happened, we all do, but the issue for government and taxpayers is were the leaflets maladministrative? The Ombudsman says yes. We disagree strongly. And even if they were maladministrative, were they the cause of people's financial loss? Again, I am afraid, on that occasion too we do disagree with the causal argument that is contained in the report. It is for the combination of those two reasons that we have not been able, as I said, to accept her recommendations.

Q165 Chairman: Ann Abraham?

Ms Abraham: Only to say that the causal argument is not in the report. The report does not say that the maladministration which has been talked about in terms of the leaflets caused the financial losses. It did not say that.

Chairman: Thank you for that.

Q166 Kelvin Hopkins: Can I pursue that point a little. We had from the real world a former convenor of shop stewards, who had advised his own trade union members to carry on with their occupational schemes. They lost their money but he lost out as well. Describing himself as a "lifelong Labour man", he felt very hurt by what had happened. Even if he had gone to his full-time union pensions officer, would they not have looked at that leaflet and said, "You're all right. We have got a Labour Government now. The leaflet says it is okay. Carry on"? If someone of a more middle-class inclination, not a union member but someone who was a Member of Parliament or whatever, goes to their accountant and says, "Am I okay?" they might say, "Yes, the Government has given a guarantee now. You're okay." I am sure that that sort of thing happened and the Government has a responsibility to people who suffered as a result.

Mr Hutton: We are rehearsing the argument again about the cause of loss and so on and so forth. In relation to the leaflets that the Ombudsman has said are maladministrative, and therefore that does create the obligation on government to compensate, I dispute very strongly the argument that having looked at leaflet PEC3 a professional would just rely on the leaflet to advise his or her professional clients; absolutely not. They have a wider set of responsibilities in advising clients professionally than simply to refer to a general leaflet produced by government. Again, this comes to the heart of argument about responsibility for loss and whether the leaflets were a significant cause of loss. We have set out our arguments fully as to why we do not accept that they were.

Q167 Kelvin Hopkins: In the light of the Chairman reading out the words of advice, how many accountants, how many shop stewards, how many union pensions officers would have said, "Ah, well, don't believe any of that. When it comes to the crunch the government will let you down and it is all very dodgy"? How many would have said that in the light of that advice?

Mr Hutton: Said what, sorry?

Q168 Kelvin Hopkins: Would have said, about joining a scheme or carrying on with an occupational scheme, "You will be on your own in the end, so be very careful." How many would have actually given negative advice, countering the advice being given by government which has been read out very carefully by our Chairman?

Mr Hutton: As I think you probably know, I am not in a position to give you an answer to that question.

Q169 Kelvin Hopkins: I suspect the answer is none.

Mr Hutton: But neither are you. You did not sit in on any of these conversations between accountant and client. It is quite impossible for anyone to come to a definitive answer to that question. I just come back to my original observation. The heart of this argument, as I see it - and maybe I am wrong, maybe I have got it wrong - is that because the leaflet said the words that Tony said, it implied a guarantee that things were safe and that was a sufficient condition on which people could then make investment decisions, when the leaflets themselves made very clear that was not so, that there was a need to take proper, independent advice, and that they should do so. That is one of the hubs of this particular argument.

Kelvin Hopkins: I do not know too many workers in schemes who would have chosen to pay an accountant to advise them.

Q170 Jenny Willott: Could I ask one quick question on that point which Kelvin was raising. You say that they should have taken further advice. Presumably one of the people they would have turned to was the members' trustee on the board of the pension fund who would be relying on the information in the Trustees' Handbook, which was also completely misleading and I read you a quote from it earlier. How would you expect people to be able to understand truly what the situation is when not only the information they are getting is inaccurate and incomplete and therefore misleading but the information that their member trustees are getting as well is inaccurate, incomplete and misleading?

Mr Hutton: As I say, we do not accept that the information was inaccurate, misleading or incomplete, and therefore it is quite obvious that if you are a scheme trustee the scheme would be receiving professional advice and it would be entirely appropriate for scheme trustees to seek professional advice about the investment strategies, the minimum funding requirement, what it meant for their schemes and so on. It is quite difficult to argue that the leaflet absolved everyone at all points in the system from taking any responsibility for seeking professional advice.

Q171 Jenny Willott: I am not talking about the leaflets. I am talking about the Trustees' Handbook and the fact that ---

Mr Hutton: Or the Trustees' Handbook.

Q172 Jenny Willott: --- and the fact that if a scheme was up to 100 per cent MFR and the Trustees' Handbook, which is what they are supposed to be basing their decisions on, refers to the minimum amount of funds that would be needed in order to meet the scheme's liabilities, do you not think it would be justified if they assumed therefore that if they were at 100 per cent MFR that the money in the scheme would meet the scheme's liabilities?

Mr Hutton: No, for the reasons that we have already set out very clearly and the leaflets themselves made very clear, that people have to have a responsibility for taking proper advice themselves.

Q173 Jenny Willott: These were the people who were giving the advice. I am talking about the trustees not the members reading the leaflets. I am talking about the trustees reading the handbook.

Mr Hutton: They have a responsibility to take proper professional advice themselves about the MFR. The MFR certificate that every scheme is required to have would make it very clear what the extent of liabilities were in the scheme and the extent of cover of MFR. Again it is a fundamental argument here. The essential underpinning, as I see it, of your argument is that because there was a leaflet produced to scheme trustees that absolved the scheme trustees from any further obligation to seek or obtain professional advice about the scheme, particularly in relation to MFR.

Q174 Jenny Willott: With respect, that is not what I said.

Mr Hutton: You were saying it would be appropriate for the scheme trustees to rely on the leaflet.

Q175 Jenny Willott: No, I said the information they had been given by the Government not in a leaflet but in the Trustees' Handbook says specifically that the MFR is the minimum amount of funds that should be in the scheme to meet the scheme's liabilities. If you are saying that is not enough and instead they should have read the MFR certificate, I think that is a very peculiar argument. You are saying that the basic information that is being given to all trustees of pension funds, particularly the member trustees who are not experts in the area, that they should not be able to rely on the information being given in a handbook on their role as a trustee because it is not accurate and instead they have to read the small print on the MFR certificate?

Mr Hutton: There is no question of small print anywhere. The requirement is very clear and specific in the legislation about what a MFR certificate must include and contain. I am saying yes I do believe it is and was a responsibility of scheme trustees to take proper advice about what MFR meant for their scheme and to make sure that that was properly understood and communicated amongst the trustees and, yes, amongst the members. That is one of the reasons why we have a difficulty with the Ombudsman's report here which says it is ultimately the responsibility of the taxpayer to address these issues of compensation. I do not believe it is and I think there is a responsibility on the part of the scheme trustees, a very clear one, in fact the Handbook itself makes it very clear, to take proper advice.

Jenny Willott: We have got to come back to this. That is not what it says.

Chairman: I am going to suspend the Committee for 10 minutes.

The Committee was suspended from 3.18 pm to 3.38 pm for a division in the House.

Chairman: Let us continue where we left off. I am afraid it was a politician's promise about ten minutes. We thought there would be two divisions but, in fact, there turned out to be only one. I apologise for that. I think, Jenny, you had just finished a question.

Jenny Willott: Yes.

Chairman: Could I move on to Grant.

Q176 Grant Shapps: You mentioned previously you have the leaflets with you.

Mr Hutton: Someone has got them.

Q177 Grant Shapps: Perhaps whilst I am asking some other questions Christopher can find out about them. Which of these leaflets actually warn members that the scheme needs to be at the minimum funding requirement savings level to be protected? Perhaps you can find the reference in these leaflets.

Mr Evans: Yes.

Q178 Grant Shapps: If I carry on and perhaps someone can have a look at that.

Mr Evans: Yes.

Q179 Grant Shapps: Great. In 1997 the chancellor famously raided the pensions funds by abolishing the tax credit for dividends income. That has been repeated every year and there has been a resultant loss in liquidity in the stock market. So to quite a large degree the government is responsible for a lot of these private pension losses, are they not?

Mr Hutton: No.

Q180 Grant Shapps: You cannot take money out of something, reduce liquidity and then say there is no responsibility for it.

Mr Hutton: No. I think the tax changes to dividends, tax credits, which you are referring to were part of a package, if you remember, which were welcomed by business at the time because they incorporated other reductions in corporation tax. Now you can frown if you like, I am just telling you the facts.

Q181 Grant Shapps: Because business is one thing, a business might welcome something because you reduce corporation tax, as you say, that does not help their pension position. What we are talking about here is pensions. There is no doubt - I do not think you can realistically say this or tell me if you are - that by abolishing tax credit on dividends income did not reduce the pot of money available for pensions.

Mr Hutton: No, I think that is true. The significant impact for pension funds would not be changes to dividend tax credits but the reassessment of liabilities in the light of increased longevity and the undisputed fall in the value of equities which took place over this period.

Q182 Grant Shapps: What I am trying to suggest to you, I suppose, is that the two are linked. If you take liquidity out of the stock market, five billion pounds over nine years, you will argue it is a little bit less than five billion because of the technicalities of the way that abolishing tax credit works but let us say for the sake of argument it is 30 or 40 billion pounds, you take that out of the stock market, the stock market goes down, pension funds, which are largely invested in the stock market, have less cash, you have helped to create this problem.

Mr Hutton: No, we have not helped to create the problem in the way that you suggest. Presumably if you felt that was the case we would have heard a commitment from your party to reverse those ---

Q183 Grant Shapps: Hold on a second. We are here as a Committee and I am making this point to try and understand the background to the situation that we are now in. I am not trying to make it as a party political point at all. I think you have admitted this already, if you take money out of the system then it means there is less in the pot to pay out in pensions, and I think you have already conceded that point. I am trying to make the further link that by taking the money out of the liquidity of the stock market when pensions themselves invest in the stock market that further reduces the value of people's pension funds.

Mr Hutton: No.

Q184 Grant Shapps: It does not increase it, does it?

Mr Hutton: What we are talking about today are insolvent employers who are not able to meet their liabilities under the legislation that your Government enacted. That is the issue that we are discussing here. I do not believe that the tax changes have anything to do whatsoever with that fundamental issue before the Committee today.

Q185 Grant Shapps: Hold on a minute. What we are talking about here today is what the Committee wants to question you on. What the Committee wants to find out is the extent to which the Government might have been responsible for maladministration. The Ombudsman, as we have heard, says the Government is 100 per cent responsible for that maladministration. I am putting it to you that the reason the Government is in such a hole, in other words that these pension funds are not worth what they should be, is partly to do with the Government's own position.

Mr Hutton: No, I do not accept that.

Q186 Grant Shapps: Who then, tell me, made the decision to ignore the ruling of the Ombudsman about maladministration: you, the Prime Minister or perhaps the Chancellor?

Mr Hutton: It was a collective decision of ministers.

Q187 Grant Shapps: So it was not, as we might assume, the Secretary of State of the DWP?

Mr Hutton: Of course I was involved in that decision because this primarily affects my Department's responsibilities but this was, as I said again, a collective decision of ministers.

Q188 Grant Shapps: That is quite interesting. Was it a Cabinet decision? Was it discussed in the Cabinet?

Mr Hutton: It was discussed by ministers in the normal way through correspondence.

Q189 Grant Shapps: Yes, but "ministers" could just mean you and your junior ministers. I am trying to understand at what point in Government this was discussed.

Mr Hutton: It was a cross government decision involving ministers from other departments in a way that normally decisions are made in government.

Q190 Grant Shapps: It would have included then the Treasury and the Chancellor?

Mr Hutton: Of course.

Q191 Grant Shapps: The Chancellor who has, in my view, helped to create a position whereby there is insufficient liquidity in the stock market and, therefore, a problem with pensions leading to the accusation of the Ombudsman of maladministration is also involved in deciding that the accusation of maladministration is, in fact, entirely unfounded?

Mr Hutton: That is a proper exercise of ministerial responsibilities.

Q192 Grant Shapps: I am just trying to link up the way here that the Chancellor in particular in this particular case is linked in the whole circle of this with both helping to create the problem along with a lot of other things, like people's longevity, which is a good thing I think we probably assume, and other factors, but in the mix here is the fall in value of equities and the raid on the pension funds themselves which has created a problem which the Ombudsman says is maladministration in terms of the way that has been dealt with and the Chancellor has a hand in saying "No, no, no, it is not maladministration, this is absolutely fine. We are going to ignore those findings".

Mr Hutton: I do not think there is a connection between any of those points. In relation to the wider issue about ministerial responsibility, this is how governments make decisions. They consult and they make sure that ministers are in agreement.

Q193 Grant Shapps: How can you say there is no connection between these points? If the amount of funds in pension benefits has reduced you cannot say that is not connected to the fact that there is a problem with the amount of money available to pay out in pension funds.

Mr Hutton: In the first instance we are talking about employer insolvency, this is the root of the problems that we are discussing here. The changes to dividend tax credits did not create employer insolvency.

Q194 Grant Shapps: It is not just employer insolvency, is it, because in particular the minimum funding requirement makes it seem that as long as you are at 100 per cent of MFR then you are effectively pretty much protected. As we have heard through the cases in Cardiff and elsewhere that has not always been the case, even when the employer is not insolvent people are having these problems. I wonder how we are doing on the first question?

Mr Evans: I think the main relevant booklet was one produced by the Occupational Pensions Regulatory Authority in 1999 which was specifically a guide to the minimum funding requirement. I think your question was where is it explained in the leaflets.

Q195 Grant Shapps: Yes, I want to know which of these leaflets warns scheme members that they need to be at the minimum funding requirement in order to have the same protection. I do not see it clearly stated in the information that went out.

Mr Evans: This was a guide booklet essentially for trustees and their advisers. It says that a scheme which complies with the MFR will either already be funded to at least the minimum level required by the law or will be aiming to have that level of funding within certain time limits. It goes on to say this will not necessarily ensure that all of the schemes liabilities can be met fully if the scheme were to be wound up. However, the MFR sets a benchmark against which the trustees must measure the funding level of the scheme.

Q196 Grant Shapps: So the trustees are told this information but actually anybody ---

Mr Evans: It is available.

Q197 Grant Shapps: It is going to trustees rather than members of the funds.

Mr Evans: It would not have been distributed automatically by the government to all members of schemes but it was available.

Q198 Grant Shapps: It was intended for the trustees.

Mr Evans: Yes.

Q199 Grant Shapps: Is it not a strange omission that it was not mentioned in the leaflets which were intended for the individual participants of such schemes?

Mr Hutton: I think this comes back to a discussion we had some time ago about what the purpose and intent of those leaflets was. I have tried to explain what the purpose and intention of those was.

Q200 Grant Shapps: The picture that is gathering in my mind here as I listen to all the evidence this afternoon is a crisis in pensions which has, in part with other issues to do with people living for longer and what have you, been created by this Chancellor who makes a single decision which continues to have ramifications for years to come about abolishing tax credit for dividend income. That creates a situation of not only less money directly in the pension funds because they are having their cash taken out in a different way but also a lack of liquidity in the stock market which creates a problem where millions are affected. I would be interested to ask you how many people you think are affected by this particular pension crisis that we are talking about. Do you have a number for us?

Mr Hutton: No, and I think again, with great respect to you, you are making an unsustainable leap of logic, if I can use that expression in a different context. If you want to focus on the decision taken then to change the regulations around how we treated for tax purposes dividends in this context I think you have got to look at the wider impact of what has happened in the economy as well. In that period we have had 21/2 million more jobs and that is a factor as well that has to be taken into account. I simply do not accept your fundamental argument that it was either maladministrative or in any way contributed to employers going insolvent which is the root of the problem that we are discussing today, that the Government made changes to dividend tax credits in 1997 or whenever it was.

Q201 Grant Shapps: Yes, but my question was how many people have been affected by this?

Mr Hutton: Are we talking about in the context of the Parliamentary Commissioner's report or what?

Q202 Grant Shapps: Yes in the context of exactly what we are discussing.

Mr Hutton: I thought we had agreed figures. It was about 125,000 people. I thought there was no argument about that.

Q203 Grant Shapps: I am not sure that is the case but others might want to return to it. It seems to me that we have a circular situation here. What happened was the Ombudsman reports saying that there is maladministration. We now know that ministers, we are not sure which but certainly the Chancellor of the Exchequer, were involved in deciding whether there was maladministration. You did not like what the Ombudsman said so effectively you just ignored it.

Mr Hutton: I tried to set out very clearly at the beginning of my remarks how we approached this issue. We gave full and proper consideration to the report. We looked at it very carefully in the run-up to publication. My officials spent a very great deal of time looking at it and we always want to discharge our responsibilities in these matters with proper respect for the authority of the Parliamentary Commissioner.

Q204 Grant Shapps: Yes, but you have not though.

Mr Hutton: In this case we were not able to accept her findings of maladministration. As I said, again in the context of some previous examples, some involving Conservative governments, some involving Labour governments, that has happened in the past. Now we have done it with very great regret and we have tried, notwithstanding the fact that we have not accepted her principal findings to look at extending the financial assistance that is available for people who are caught up in this situation. Again, with great respect, Grant, I think that is the responsible course of action for Government to take. We have not kicked this into the long grass, that is completely inappropriate.

Q205 Grant Shapps: Sorry to interrupt, John, you are doing a great job of answering the question that I have not asked you, now we are leading on to something else. What I am trying to understand is how it was that you ignored the Ombudsman. Parliament sets up a system, that system is the Ombudsman. The Ombudsman decides there is maladministration. That is the job of the Ombudsman to decide upon it. I think the Chairman pretty clearly established in the opening remarks that you ignoring that maladministration was not the same as has happened in other cases, and you would like to refer back to this Government and other governments taking decisions on it, and I thought that was quite clearly demonstrated in the earlier evidence. Then you decide to ignore the findings. This is just simply kicking Parliament in the face.

Mr Hutton: No, it is certainly not doing that. Let me just remind you what I said. I was quoting from Nicholas Ridley - I think it is probably the first time I have ever done this in my life - "I want to make it clear that the Government do not accept the Parliamentary Commissioner's main findings nor are the Government legally liable." That was in the context of the Barlow Clowes affair. It is true, of course, that the Government went on to consider an ex gratia compensation payment without accepting liability. What I am saying is very similar, we are not able to accept the Parliamentary Commissioner's main findings on this occasion, with regret and reluctance, but we have gone on to look at how much further financial assistance we can provide for people who are caught in this very, very difficult situation.

Q206 Grant Shapps: I would accept that governments usually are not responsible for things which happen in private marketplaces and the thing which makes this different is you have not just accepted the wide, broad parameters within which pensions now operate, you actually effectively raided those pensions, reduced liquidity, created the problem and then walked away, even when the Ombudsman tells you it is maladministration, and say "It is nothing to do with us".

Mr Hutton: No, I just do not accept that is true or accurate or a proper reflection of what has happened in these particular cases.

Q207 Chairman: Just on this though, Grant does open up the question of the wider policy context in which all this has to be seen, not the narrow argument about maladministration but the wider context. Leaving aside the dividend tax credit argument - and of course this history we are looking at spans two parties, two governments - the Ombudsman said to us when she gave evidence, "I was not saying that the Government had sole responsibility here but I cannot see how the Government could say it had no responsibility here". The reasons for that which she gives are central to the policy context behind which this issue sits. It was Government which established the legal framework for regulating pension schemes. It approved the level at which schemes were funded. It decided that the MFR should provide only a 50 per cent chance of securing benefits if their scheme wound up. It set the priority order for payments on wind-up which removed the discretion from the trustees. It prescribed what trustees had to tell members. We are talking about massive Government intervention in the context around which this issue is discussed. The idea that the Government has no responsibility in the matter is just not sustainable is it?

Mr Hutton: I am not arguing that the Government has no responsibility. I am arguing that the Government discharges its responsibilities properly and fully. We have got to see in the context of all of this - and this is why there is a substantial difference here between the Parliamentary Commissioner's report and what happened in the SERPS case - that there were other people involved in this tragedy. We have got to take a proper view and look at all of that as well.

Q208 Chairman: Why did the Government not say, "Okay, we accept our share of responsibility and therefore we accept our role in trying to clear it up"?

Mr Hutton: We believe we have discharged our responsibilities properly and fairly and that is why, I am afraid, again with regret, we were not able to accept the Parliamentary Commissioner's findings of maladministration. We have not just then left the playing field and walked away, we have put in a very significant amount of taxpayers' money because that is the only source from which any sort of financial assistance can come from, I think we need to be absolutely clear about that. We have put a significant amount of public money in to try and provide financial support for those people who are caught up in these terrible situations. So I think, again, with great respect, Chairman, we have properly discharged our responsibilities as a Government. You are right, the responsibilities span both Labour and Conservative governments here and I suppose there will be some people observing this from the outside who will comment on the irony, yes, of a Labour minister defending the actions of a Conservative government. But I can say with truth and honesty, because that is my responsibility to the House and this Committee, that I believe those responsibilities then were properly discharged by Conservative ministers and I believe they continue to be properly discharged by Labour ministers when there was a transfer of power in 1997. I also believe very strongly - I do not want to repeat the arguments again because I have done it several times - that it is a proper and utterly legitimate response for us to look to try and prevent acute hardship for those who have suffered loss. That, we would argue, is a proper moral responsibility for Government and we, very strongly I would argue, have done more than any previous government to discharge those responsibilities. There was no financial assistance scheme in 1997, and it has been put to me, "Well, we did not need one because pension schemes did not collapse". Oh, yes, they did, and there was no support, none, available for scheme members in those circumstances. I would say we have discharged our responsibilities properly and fairly.

Q209 Mr Prentice: Is this just one of those things? You know, like some days it rains, some days the sun shines, the collapse of these occupational pension schemes, are you telling us it is just one of those things?

Mr Hutton: Of course I am not saying that, and that is why Parliament itself has spent a considerable amount of time debating how we can strengthen the safeguards and protections that exist in relation to scheme members.

Q210 Mr Prentice: Okay. I do not want to use the word maladministration, I want to use the word negligent. I just wonder which of the actors were negligent, if they were negligent? Were the trustees negligent? Was the Institute of Actuaries negligent? Was the Government even a teeny weenie bit negligent? Was anyone negligent?

Mr Hutton: I can only speak for Government, it is not my job to attribute negligence, that is the responsibility of the courts. I think that question will have to be addressed by other people. The accusation has been made that the Government was maladminstrative and we have been discussing the detail of those accusations today and the findings of the Parliamentary Commissioner's report, and we strongly contest them. That is a matter of record now and everyone in this Committee will be aware of that.

Q211 Mr Prentice: People out there, people watching television and listening to the radio, would find it simply astonishing, I suggest, that you are unable to say whether any of the people involved in this were negligent in any way.

Mr Hutton: But it is not my job so to do, is it? I am not the final arbiter of professional behaviour, that is for others to decide.

Q212 Mr Prentice: Okay. You said that only the taxpayer could foot the bill, I am interested in what other options you explored and why you have rejected them. You talked about ex gratia payments and the Financial Assistance Scheme is essentially that but I just wondered if there were any other options, whether you have got your best people, the brightest people in the Department to work on this, to go away, look at the options and come back with solutions?

Mr Hutton: We did look at whether there were other sources of funding. We could not find any other sources of funding.

Q213 Mr Prentice: Just the taxpayer.

Mr Hutton: Well, where else?

Q214 Mr Prentice: I am going to tell you. We had Ros Altmann before us last week. You read the evidence, you have told us that, and she floated the idea that perhaps some of the billions locked up in the banks, the so-called orphan funds, could be used. Now was that an option you considered? Clearly not.

Mr Hutton: It has been looked at by Government on previous occasions. My understanding is there might be several hundred millions, that is the estimate that we have. I think the Chancellor has been discussing with the banks the extent to which those unclaimed assets, those unrepatriated, unclaimed, unknown assets, might be used to support a range of community initiatives focused on young people and so on. Those investments, if they are made, will be made by the banks, it is not public money. We have no plans to expropriate it.

Q215 Mr Prentice: When you were looking at this, and the Chancellor said, "Well, there may be good causes there. All this money locked up in the banks, it can be used for good causes", did you not say, "Hang on a minute, there are a lot of people out there who have just lost their pensions, this would be a good way of using these orphan funds"?

Mr Hutton: As I said there have been discussions about what use could possibly be made of those funds but we need to be absolutely clear, so there is no misunderstanding, there would not be anywhere near enough to meet the potential liabilities here that have been canvassed so I do not regard that as a serious option, no.

Q216 Mr Prentice: It is just a couple of hundred million you say.

Mr Hutton: I do not have exact figures but I understand it is several hundred million, it is certainly not the billions that will be necessary here.

Q217 Mr Prentice: I wonder, Mr Evans, do you know what the figure is?

Mr Evans: I have nothing to add to that. The estimates are necessarily somewhat uncertain but the best estimates we have are that it is in the order of several hundred million.

Q218 Mr Prentice: In other words it is not going to make a big dent in anything, is it, several hundred million. Goodness me, you are not going to finance many good causes if it is just a couple of hundred million.

Mr Hutton: The money is not public money. It is not available for these purposes.

Q219 Mr Prentice: I understand that. I am labouring the point here. A lot of people out there are crying into their beer and tea because they have lost everything. You have told us the only solution comes from the taxpayer and I am just testing that, that is your position.

Mr Hutton: Yes. 40,000 people will get some form of financial help and I think it is important we do not forget that.

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 per cent 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 per cent 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 per cent 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 ten 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 per cent 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 per cent 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.

Q240 Chairman: Why is that?

Mr Hutton: Because we feel that employers who are still solvent have ongoing responsibilities to their scheme members.

Q241 Chairman: I have constituents who have lost a vast chunk of their pension with a solvent employer, they have got no chance of having this made up, whatever you say about their employer, their employer is struggling, near to collapse.

Mr Hutton: While they continue to be solvent we think the principal responsibility continues to reside with the employer. A number of Members of the House have made representations to us about this particular issue and I think James Purnell, the Minister of State, is meeting a group of Members soon to discuss this particular issue and see if there is anything we can do to help in these cases. If there is, Chairman, we will try and find a way to unblock the difficulties here. They are quite difficult to find a way forward while the employers continue to be solvent.

Q242 Chairman: You are not ruling out finding a way to help those people with solvent employers?

Mr Hutton: I am not absolutely ruling it out but I am also very conscious, particularly in the context of this inquiry and the background to it, not to raise any false expectations either. We are continuing to have discussions with Members of this House who have brought this to our attention and I hope there is a way forward on this. We do not rule it out but we have not currently been able to find a satisfactory way of resolving this problem, and I am advised that it is going to be difficult to find such a way.

Q243 Chairman: Might the same apply to the buy back issue, the guaranteed minimum pension issue where people become worse off in terms of losing their SERPS benefits because of what happened?

Mr Hutton: Deemed buy back is an attempt to try and make sure people do not have that experience, that it is possible to re-acquire what would otherwise have been forgone rights in the additional pension or SERPS. If there is a collapse of an occupational DB scheme it is designed to try and provide some restorative justice for people in this situation. The National Insurance Contributions Office has actually produced the advice material/leaflets on this and that has gone out. The truth is very few people have applied and received deemed buy back. I think it is as low as about 80 since it was introduced in 1997. It is very complicated territory to explore and people need to take proper professional advice about whether they should apply for deemed buy back or not. Deemed buy back, Chairman, was an attempt to try and provide a further pillar in the support mechanisms for people in this situation, it was certainly not an attempt to undermine.

Q244 Chairman: No, I do not want to explore this now because it is too late but we have been exploring the difficulties with that too so I hope what you have said about solvent employers might extend to consideration about the difficulties in that area as well.

Mr Hutton: We will look at any serious proposal that people have for trying to find a way to unblock this problem.

Q245 Kelvin Hopkins: I just want to turn very briefly to the core of that problem and that is really about maladministration and the Ombudsman's report. It strikes me, and one has to look at the motives for this, that the advice given by Government at the time, which we are disagreeing about, seemed to be pursuing a policy objective rather than the real interests of the people concerned. This is a motive, and you may disagree, but it seemed to me at the time that the Government was desperate, as was the previous government, to reduce the role of the state in the provision of pensions. It wanted therefore to ensure that whatever private bit of pension provision could be shored up was shored up. Yet at the same time the storm clouds were gathering over occupational pensions, and if they went down the Government would have a big job to pick up and deal with people's pensions for the future, going in the opposite direction to the ideologically driven view with which the Government came into office. In that sense the Government was putting out advice which was more in the style of an advertising executive in that the advice was for the benefit of the Government and its political objectives, and not necessarily for the people who were members of failing occupation schemes. It may be unfair but it strikes me that this advice was much more about pursuing the Government's long-term policy objectives than supporting the interests of the pension fund members themselves. Had they started to withdraw in large numbers or had many chosen not to join schemes at all, the Government's long-term privatising objectives would have been defeated. They would have had to reinvent a bigger role for the state in the provision of pensions. Is that fair?

Mr Hutton: No, I do not think that is fair and I do not think that is accurate and I do not think that lies at the heart of the Ombudsman's report itself. I do not think that features in her analysis of the problem or the predicament that eventually we ended up in. With great respect, Kelvin, I think it is a highly political analysis of the situation. I have no difficulty with you making it, I just fundamentally disagree with it. There was no benefit to Government in the way that you have described from these reforms, quite the opposite, I think the whole point of these reforms was to try and provide a proper framework for governance of occupational pension schemes and that is in the best interest of employees. Let us be absolutely clear about it, if we can find the proper governance arrangements here which immensely benefit employees, and I think the Government has a legitimate interest to that extent in the development of the policy perspective, the policy perspective has been on how do we find the best way to enhance people's retirement incomes and that cannot be done exclusively through the public sector, through state pensions. It is inconceivable that any government of any political persuasion could provide a state pension so generous at the point of retirement that you would not notice the difference between what you were earning at that point and what you got through the state pension. That is simply an impossibility as a policy objective. There has to be a mix in pension policy between encouraging saving and making sure it pays to save and a proper platform of a state pension that can operate, yes, in a more generous way, less means tested, to provide that support for saving. That is basically what we have come to put forward in the White Paper. I know there is always a hunt for a conspiracy theory here, you are very good at it, but I do not think, to be fair, that is the right analysis of what happened, the sequence of events and why it happened; I think that is simply not true and not accurate.

Chairman: I am quite keen not to go further than we need in general pensions policy.

Kelvin Hopkins: Just very briefly, the evidence of what I have suggested was the Government's refusal to re-link the basic state pension with earnings and the vast amount of money given in subsidies to the rich to carry on private saving. As for occupational pension schemes, the Government could see that these were a storm cloud on the horizon with which they would have to deal. Clearly you say government policy was for the benefit of pension fund members. It clearly was not to their benefit as the subsequent events have shown. That is where the maladministration was and that is why I agree with the Ombudsman.

Q246 David Heyes: The Ombudsman has sat right through this evidence and she is an inscrutable character and that is appropriate for the job she carries out but I have spotted a flaw in her inscrutability, which is her eyebrows.

Mr Hutton: Yes, I have noticed they have been going up and down a lot.

Q247 David Heyes: Yes, I want to come back to her later and ask her if she perhaps will share some of the matters with us that have caused her to raise her eyebrows but I spotted a couple of them as we went along. The first one, I need to test out the possible inconsistency with the evidence you gave in answer to the Chairman's questions very early on in this. I wrote your words down exactly, you were not disputing her findings of maladministration. Now that was either a slip of the tongue ---

Mr Hutton: I am pretty sure, David, I did not say that.

Q248 David Heyes: The record will show that you did but it was a mistake.

Mr Hutton: We very strongly contest the Parliamentary Commissioner's findings of maladministration. I do not dispute the fact that she made any finding of maladministration, how could I dispute that?

Q249 David Heyes: Let me pursue that point a little further. You also said that an allegation had been made that the Government has been maladministrative and I think we need to set the record straight on that. It is not an allegation, it is a finding, is it not? The Ombudsman says it is maladministration, it is maladministration.

Mr Hutton: There was an allegation of maladministration and then there was a finding of maladministration, yes, of course.

Q250 David Heyes: You also said, and this is the last time I am going to quote you back to yourself, that your job was to look seriously at the recommendations the Ombudsman made. I would like to know a little more about how you went about that, the extent to which the DWP maybe sought to engage in a dialogue.

Mr Hutton: A dialogue with me?

Q251 David Heyes: Between your Department and the Ombudsman.

Mr Hutton: Yes, there was a very extensive dialogue and most of the correspondence is replicated in the Parliamentary Commissioner's report herself where she does record verbatim the principal objections the permanent secretary made to her report. I think it is all in the report. Again, if my recollection is correct, we received - I am sure the Commissioner will correct me if I am wrong - her first draft report before Christmas, I think on 21 December, and officials and myself looked at that over a period of weeks before the Permanent Secretary responded at the end of January setting out our view of her findings. I think the Parliamentary Commissioner is certainly very well aware then of the view of officials in the Department and there was extensive and very full correspondence between her and Leigh Lewis, the Permanent Secretary in the DWP, which of course I saw and was content with before that correspondence went to the Ombudsman. That is my proper role, I have oversight clearly of the work of the Department and, of course, it would be quite wrong for me to pretend that somehow this was all done by officials without me knowing it, absolutely not. I looked very carefully at what officials were saying to me. I looked very carefully at the draft report and it was the view of the Department by the end of January that we could not accept her findings on maladministration. I think there was a further report sent to us and I think we sent a very long letter to the Ombudsman again towards the end of February, setting out again a further set of reasons and articulating more fully the argument in the first letter. Again, I think all of that is fully set out in the report, so when people say to us, "You rushed to judgment", we did not. We took a very long and careful look at what the Ombudsman was minded to say in her report and took a view within the Department about how we would react to it. We never sought to hide that. It is not hidden in the Commissioner's report either.

Q252 David Heyes: The Ombudsman will no doubt give us her view on the quality of that dialogue and interchange. It seems to me from the information we have got before us that a lot of energy on the part of the DWP went into rebuttal and finding ways of rejecting the Ombudsman's recommendations. To what extent was there an attempt to find a way through this, to find some common ground, to find a solution to deal with the issue? Basically, what the Ombudsman was saying was that the finding was the Government was partially responsible and there may be a partial solution in the Government's hands. Was that ground explored at all?

Mr Hutton: We did look at all of this, of course. If we could have found a sensible way forward, we certainly would have reached for it. I think it does come back very fundamentally to the principal findings that the Parliamentary Commissioner made about maladministration. We looked very carefully at that and again at the material, the leaflets, we looked at everything. For the reasons that I think have been well publicised, we set out in the letters from the Permanent Secretary, in our report to the House and in the statements that I made on 16 March and so on, that we were not able to accept the findings of maladministration. I think consequences flew from that and developed from that, quite clearly they did. As I said earlier, David, we made that decision with extreme reluctance and I think the record of the Department for Work and Pensions, which I referred to earlier, is one against which I do not think the accusation can be made, that we just sit there waiting for the Ombudsman's report to come in and just reject them, we do not. This is the only time it has ever happened. We have accepted findings from the Ombudsman before which have come with a significantly bigger price tag than the one attached here, so that was not the issue. I want to be absolutely clear about that. This was a finding that we could not support because of our own view of the events and looking back at how we had behaved and how we had tried to discharge our responsibilities. That has put us into a very difficult position. Believe me, it is not a position I would have preferred to have been in. I do not feel I can discharge my responsibilities either, David, to the House, as a Secretary of State, and as I made my view clear about these matters as well and I have done that, the Government has done that. But again, without running the risk of rehearsing all of the material we have gone through today, we have tried very hard through the very significant additional investment that has gone into the Financial Assistance Scheme to find a way of making sure that those who have suffered the most receive a measure of financial assistance.

David Heyes: I have a couple more questions that I would like to put, Chairman, but it seems to me this is an appropriate point to ask the Commissioner if she wants to take up the opportunity to comment on what has just been said.

Q253 Chairman: I was going to do that. I was going to ask in particular about the suggestion that the Government seems to have made that she has suggested that somehow the Government took the entire responsibility for what happened and, therefore, it should pick up the entire bill from public funds. I think the Ombudsman believes quite strongly that is a misrepresentation of what she has said. I think you may like to say something on that, Ann?

Ms Abraham: Indeed. Could I make some general comments and I will certainly deal with that. I would just like to say a couple of things about precedent and respect, if I may. It has been suggested that somehow the Barlow Clowes case is a precedent here. I really find it very difficult to understand how that could be the case because although in the Barlow Clowes case it is true that the Government did not accept the Ombudsman's findings, they did remedy the injustice to the Barlow Clowes investors. Therefore, the entire population of those complainants in that case were included in the remedy and to suggest somehow that the Financial Assistance Scheme is the remedy, for me creates a real difficulty in saying somehow that is a precedent. If there are 40,000 people who get some help, there are 85,000 people who do not get some help, and, therefore, I find that difficult to see how that makes a precedent. I have reflected on whether I should say this, but I think I should. It is about this phrase "respect for the office" and, of course, I take at face value what is said about respect for the office, but it is very hard to feel there is respect for the office when the Government's report says that the report says things it does not say and that is repeated and has been repeated in the House yesterday and today. When the Government talked in response to my report on the day and subsequently again yesterday about "leaps of logic", which seem to me not be the language of respect, I think that gets in the way of dialogue, so I will say that and put that to one side. I hope the Committee will come back to the constitutional issues which have been discussed today because I do think they are important. I do think they are important because although this may be a one‑off, as has been described, it does encourage the others, and when I say "the others" I mean departments and other parts of government. It does go to the heart of public and parliamentary confidence in the office and that, it seems to me, is very serious. The urgent issue that I think is before us is about what can be done to get these people's pensions back. The central recommendation of my report was that because the Government was not a bystander here, that it had some responsibility - not all the responsibility, some responsibility - to organise a remedy, and I have been heartened in many ways by what I have heard this afternoon about the acceptance of the Government having some responsibility and recognising the hardship for these people. All I want to say is it is maladministration, get over it and let us get on to engagement with the real issues here. I have talked to the Committee about a pattern of behaviour and I have seen it in other cases and we have seen it with the MoD and Debt of Honour. We had correspondence with DWP, we did not have dialogue. All of those letters that I wrote said, "If it would be helpful to meet to discuss this, I would be happy to do so", but I did not get anything other than letters back. I will just read a bit about what I said in the report about maladministration: "The maladministration I have identified was a significant and contributory factor in the creation of financial losses suffered by individuals along with other systemic issues". Somehow to suggest that I said it was the sole responsibility of Government or that the taxpayer should pick up the tab was not what I said. What I was trying to ask the Government to do was consider what it could do to help these people who had lost their pensions. I did not say, "Write a blank cheque", but to organise a remedy. This is a general point, and I think it goes to the heart really of the relationship between my office and Government, and certainly what I have seen in recent months, the response is defensive, legalistic and it uses words like "liability". I do not use words like "liability". I do not talk about "causal links". It is unimaginative and does nothing to help these people. I suppose, as has been said, I was looking, maybe naÔvely, for Government to put its brightest and best people on to thinking about how can we organise a remedy that will do whatever Government and Parliament thinks is appropriate to provide redress for the people who suffered these injustices. I said they should do that by whichever means is most appropriate including, if necessary, payment from public funds. I suppose I had in mind there that these schemes have got their own assets, they are not devoid of funds, so there is money there. I had in mind thinking about changing the law on purchasing annuities, which is possibly not the best use of those funds. I did wonder whether the financial services industry might be prepared to come in and at least think about the rescue package and making a contribution. I thought there might be unclaimed assets and I thought about the role that might be played in enforcement action on wind-up and I thought about taxpayers' money, but I did not say, "Write a blank cheque". I did not expect the Government to get out its chequebook, but I also did not expect the Government to refuse to even think about what could be done. I did not expect it to put all its energy into defending its position. I suppose, fundamentally, what I am looking for in this report, and in everything I do, is a response which is not about defensiveness and denial, it is about constructive engagement and putting things right to whatever extent Parliament thinks is appropriate, not into defending what has gone wrong.

Mr Hutton: Would you like me to respond?

Chairman: I was going to say on the basis of that, how about a new start? How about constructive engagement from here on in? Before you reply, Gordon has another suggestion to add.

Q254 Mr Prentice: This may help. My suggestion may help. You have told us you reject maladministration and it is not about affordability. What did you say, £2.3 billion at net present value. We know that every year the Government spends £20,000 million, that is £20 billion, on tax relief for pensions and over half of that, over £10 billion, goes to top-rate taxpayers. Is there not a way, on the back of what the Ombudsman has just said, to go away and have another think about what the Government might be able to do to help those people who have lost everything because the money is there and it just needs to be divvied up differently?

Mr Hutton: I do not determine the taxation policy in relation to pensions, that is a matter for the Chancellor of the Exchequer. I know he looks very carefully at all these issues on a regular basis, Budgets and Budget times. It is for him to make any announcement he might want to make. I am certainly not in a position today to express a view about taxation policy in that regard. Those are judgments for Gordon to make. We have always had, I think, a good, positive relationship with the Parliamentary Commissioner. That is borne out by the engagement we have had in the past and our willingness to accept the reports of the Parliamentary Commissioner. This is a unique event and I think it would be quite wrong to assume this is part of a series or train or, in any sense, a harbinger for the future, it is not. I tried to set out as fairly and as fully as I could, Chairman, the reasons why we were not able to accept her findings, but in relation to this issue of compensation, we are not trying to be legalistic in that sense at all. I think it is important - the Parliamentary Commissioner has said she does not talk about causal links - there has got to be a causal link, there has got to be some connection between the maladministration and the loss. That is absolutely essential and it is widely on the record that we have a disagreement, sadly, with her about that issue. In relation to compensation, of course we have looked at the opportunity, we have gone over this a little bit this afternoon, about whether there could be alternative funds. The Parliamentary Commissioner referred to the existing scheme assets; they are heavily deployed in meeting the liabilities that those schemes have to their existing members. Many of them would have been used to purchase annuities, we cannot un-purchase the annuities. The Parliamentary Commissioner has expressed an opinion about whether annuities are good value and represent a sensible policy. I think they do. It not just my view, it is the view of independent professionals as well. There is always going to be a difference of view about annuities and I know some of you say one way of distributing the scheme assets would be to drop the policy in these cases of compulsory annuitisation. I think there is a real danger with that, the assets will run out and then liabilities will come back to the taxpayer in those cases because there will not be enough, clearly, by definition to keep payment indefinitely. That is obvious, otherwise we would not be here at all discussing these problems. It is inevitable in our view, and we looked very carefully at this, that if we wanted to fully compensate, and the Commissioner asked us to consider whether we can do that, there was only one source of resource and that was taxpayers' money. We have decided, again without rehearsing all the arguments, to take into account her report in the extension of the remedy that is available in these cases, the Financial Assistance Scheme. It is not what she asked us to produce, I understand that, she wanted what she has just described as a fuller remedy for people who suffered loss. We think that we have gone as far as we can in the circumstances, given that we are, I am afraid, in the position where we neither accept the finding of maladministration or the causality between such an event, if it happened, and the loss that people sustained. I do not believe, Chairman, that those are legalistic arguments. I think they are fundamental arguments and it is with very great regret that I deploy them today. Let us make this absolutely clear, this is not anything like the beginning of a new trend or a new constitutional doctrine that I think I have suddenly inadvertently stumbled upon, no. I do believe there is precedent before when ministers have not accepted findings of maladministration. They have gone on to look at remedies, I accept that, but I do very strongly argue that in this case we have tried to do the same.

Q255 Chairman: Christine Farnish, the Chief Executive of the National Association of Pension Funds was here last week, and she said that of course what had happened was monstrous, but it was only the Government that could organise any sort of rescue package for these people. Informed people in the industry think that a rescue package is available and that only the Government can do it

Mr Hutton: There is only one source of compensation here, that is public money. I do not believe there is any realistic prospect of some other pot of money being found that will relieve financial obligation on the Government. The question is to what extent the Government should and must act to relieve financial hardship. We have made our decision, we have extended the Financial Assistance Scheme and tried to extend it in that way. For example, when Andrew Smith announced, I think it is worth remembering this, the Financial Assistance Scheme back in May 2004, he invited contributions from industry. None was forthcoming.

Q256 Chairman: We have to end, but let me ask you this as we do end. You have said yourself this is a terrible calamity. It has been catastrophic for tens of thousands of people who have paid in loyally to their occupational pension schemes thinking this is the safest form of pension saving. Everything that they saw and heard gave them to believe that post-Maxwell things had been sorted out and now they have lost the great chunk of what they thought they were going to have. What I want to know just at the end is, from your point of view, is this the end of the story because all those people are hoping that this is not the end of the story, they hope that something still can be done? In some of the other instances where the Government has differed from the Ombudsman, eventually something has been done and what I really want to know is from your point of view have you put a line under it or are we still in some kind of constructive engagement on this issue?

Mr Hutton: Chairman, it has been a calamity for those people involved. I am not trying to pretend otherwise, it would be stupid for me to do so. I also believe that we have, again, tried to respond to the problems that those in the most acute need have experienced and faced. For the vast majority of people it was the right decision to invest in occupational pensions. We should not lose sight of that fact. This is a very small minority but an important minority who have lost out very significantly in some cases. I think overall the right thing to do was to invest in occupational pension schemes, I think that is clear. Is this the end of the road in terms of assistance and financial support? I think I have to be very clear to the Committee today, I am not coming here holding up a prospect of a further extension of the Financial Assistance Scheme. That is not on offer today. Of course it is open for future governments and other ministers at any time to review those decisions, but we have made a decision on how much further we think we can go in providing more financial assistance and we do not believe we can go any further.

Q257 Chairman: Thank you for that. We shall obviously in turn make a report to the House on what has happened and it will be for the House to decide whether it would like to exert some pressure on you. We have had a long session this afternoon, but I think justified by the events that we are talking about and we are grateful to you for coming along and for your time.

Mr Hutton: Thank you.



[1] The net present value of accepting the Ombudsman's recommendations is estimated to be between £2.9 billion and £3.7 billion.

[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.

[3] Ev