2 The pensions promise
7. The death of Robert Maxwell in 1991 and the revelation
that the pension funds of his companies did not have the assets
to pay pensioners led the then Government to appoint a Pension
Law Review Committee to "review the framework of law and
regulation within which occupational pension schemes operate…".[4]
Following the report of that Committee, the Government introduced
legislation to seek to make such pensions more secure. The Pensions
Act 1995 did not just deal with misappropriation of assets. It
was an extremely wide ranging piece of legislation, which among
other things equalised the state pension age for men and women,
established an Occupational Pensions Regulatory Authority (OPRA),
provided for schemes to have member nominated trustees, provided
that pensions in payment had to be increased annually, made provision
about winding up, and introduced a Pensions Compensation Board.
The provisions of the Pensions Act 1995 are fundamental to the
Ombudsman's inquiry.
8. Since 1978 the state pension scheme has had two
components; a flat rate basic pension, and an earnings-related
element (the State Earnings Related Pension Scheme (SERPS), replaced
by the State Second Pension (S2P) in April 2002). Members of occupational
pension schemes have always been able to contract out of the payments
required to build up the earnings-related element of the state
pension. By doing so they forego all or part of their State Second
Pension entitlement and in return pay lower-rate National Insurance
contributions and/or receive payments into their pension schemes.
The legislation in force before the 1995 Act required that contracted
out final salary pension schemes should, at the very least, provide
members with a "Guaranteed Minimum Pension" (GMP), equivalent
to the pension they would have received had they stayed in SERPS.
Before 1995, where a scheme's trustees did not make any arrangements
to secure the contracted-out liabilities, individuals were fully
reinstated into the state system for the period covered by that
scheme by default (although the state system would not necessarily
pay the same amount as the GMP entitlement).[5]
However, there were no specific legal stipulations about the level
of funding a scheme had to have. Under trust law it was the duty
of the trustees to ensure pension schemes were properly run, but
no clear guidelines existed about how long term liabilities should
be met. The 1995 Act required schemes to comply with a "Minimum
Funding Requirement" (MFR), described during the passage
of the Bill as "a target which means that if at any stage
a scheme winds up, it will be able to keep its pensions in payment
and give the cash equivalent of accrued rights to non-pensioner
members."[6] Schemes
were given time to increase their assets to meet the MFR. The
previous arrangements, under which all members of the scheme would
be brought back into the state system if a scheme had insufficient
funds to secure its contracted out liabilities, were replaced
by a system of Deemed Buyback, under which individuals, not entire
schemes, could give up their occupational pension rights to be
brought back into the state system. Part of the injustice investigated
by the Ombudsman relates to the loss of part or all of the "Guaranteed
Minimum Pension" or equivalent.[7]
9. The MFR was not intended to provide a guarantee
that, if a scheme wound up, all its liabilities would be met.
Rather, it was intended to ensure schemes could purchase annuities
to cover their liabilities to existing pensioners, and to provide
a cash payment to non-pensioners which would "reasonably
be expected" to secure their accrued benefits by other means.
In advice to the actuarial profession, which was given the task
of setting the MFR and keeping it under review, the DWP defined
"reasonable expectation" as follows:
By reasonable expectation we mean there should be
at least an even chance.[8]
This definition was contained in a letter to the
actuarial profession. There was no general understanding that
the MFR was limited in this way.
10. The MFR proved to be an unsatisfactory instrument.
It remained in force between 1997 and 2004, but from March 2001
it was clear that a replacement measure would be introduced.[9]
The Pensions Act 2004 replaced the MFR with scheme specific funding
requirements and introduced a Pensions Protection Fund (PPF),
paid for by a levy on the industry, which would provide benefits
if a wound up pension fund was unable to pay its liabilities in
future. It also established a Financial Assistance Scheme (FAS)
to give some help to those whose schemes started wind up before
this. Both the PPF and FAS are discussed later in this report.[10]
11. During the time that the 1995 Act remained in
force, many defined benefit schemes closed. Most of these closures
were due to the insolvency of the employer, but some were caused
by a solvent company deciding to reduce its liability for pensions.
Once this occurred it became clear that some occupational pension
schemes were not as secure as their members had believed. In some
cases, the scheme was simply not funded to the MFR. In other cases
the MFR was not sufficient to pay the benefits or give the transfer
values expected. The 1995 Act had introduced a priority order
which, broadly speaking, gave pensions in payment first call on
a pension fund's resources. Such pensions are secured by buying
immediate annuities, which have become increasingly expensive.
Once pensioners' money has been protected by the purchase of annuities,
there is often little left to buy deferred annuities or provide
transfer payments for non-pensioners, some of whom may be only
a few months from retirement.
12. Moreover, schemes take a very long time to wind
up. Apart from the increasing costs of wind up itself, these delays
can reduce the money available for non-pensioners still further,
as market conditions change, and the cost of annuities rises.
It also leaves those affected by scheme liabilities in a state
of uncertainty for years. The Financial Assistance Scheme covers
schemes which commenced winding up between 1st January 1997 and
5 April 2005, yet in June this year the Annual Report on the Scheme
noted:
Activity in the first six months of operation has
necessarily focussed on making initial payments as most FAS qualifying
schemes have not yet completed winding up.[11]
It is now over nine years since the first of these
schemes began to close.
4 Pension Law Review Committee, Pension Law Reform,
September 1993 Back
5
Ev 83 Back
6
Ombudsman's report, para 4.57 Back
7
Ombudsman's report, para 1.19 Back
8
Ombudsman's report, para 4.64 Back
9
See Ombudsman's report, paras 4.347ff Back
10
See para 52 Back
11
Financial Assistance Scheme Annual Report, 1 September 2005 to
31 March 2006, p 4 Back
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