House of Commons - Public Administration

Select Committee on Public Administration Sixth Report

3 The Ombudsman's Report

13. The Parliamentary Ombudsman's report considered four issues relating to the pensions regime established by the 1995 Act:

· Was maladministration by the National Insurance Contributions Office (NICO) a factor in long delays in scheme wind ups?

Did the Government act with maladministration in setting the level of the MFR?
Was the Government guilty of maladministration by issuing misleading information about pensions?
Was the Government guilty of maladministration by failing to review that information?

14. The Ombudsman found that the delays in scheme wind up were not caused by NICO's maladministration. However, she made three findings of maladministration:

(i) that official information—about the security that members of final salary occupational pension schemes could expect from the MFR provided by the bodies under investigation—was sometimes inaccurate, often incomplete, largely inconsistent and therefore potentially misleading, and that this constituted maladministration;

(ii) that the response by DWP to the actuarial profession's recommendation that disclosure should be made to pension scheme members of the risks of windup—in the light of the fact that scheme members and member-nominated trustees did not know the risks to their accrued pension rights—constituted maladministration; and

(iii) that the decision in 2002 by DWP to approve a change to the MFR basis was taken with maladministration.[12]

15. Moreover, she found that the complainants had suffered injustice as a result of the Government's maladministration, since they had lost the opportunity to make alternative arrangements to provide for their retirements and had suffered considerable distress when they discovered that their pensions were not as safe as they supposed.

16. The Ombudsman's report makes it clear that, although the decision to change the MFR in 2002 was significant, the greatest cause of injustice was the inadequacy of Government information. This report accordingly concentrates on that aspect of our evidence, which raises important issues of public administration.

17. The essence of the Ombudsman's case is that official information about occupational pensions failed to set out the potential risks clearly and appropriately. It was not obligatory for the Government to provide general information about pension schemes, but, if it chose to do so, it was duty bound to ensure that information was complete and accurate. The Government has put forward a number of reasons for rejecting the Ombudsman's findings. We examine each in turn.

The nature and purpose of government information

18. The Government Response to the Parliamentary Ombudsman's report sets out its reasons for rejecting the finding of maladministration at some length. It asserts

Chapter 4 of the Ombudsman's report—"The documentary evidence"—refers to various statements made about occupational pension schemes during Parliamentary debates, and by Government bodies in leaflets and press releases etc. These are used as evidence to support the assertion that the Government did not provide full and accurate information. The Government does not accept this. The Government believes that the purpose of those statements needs to be set in a wider context, including the other information that would have been available to individuals.[13]

19. The Committee agrees that statements, press releases and leaflets need to be taken in context. For this reason, our examination (like the Ombudsman's report) will concentrate on the leaflets available to the public, where it is beyond doubt that Government intended to deliver a clear, considered message to the reader. Statements to Parliament and press releases are, by their nature, more context specific. All we would note about this sort of information was that, although the limitations of the MFR were sometimes made apparent, the overall tenor of Government remarks emphasised the security it brought, not its necessarily limited nature. The general impression given was that occupational pensions were now safe. Moreover, the impression given by the Government influenced wider press reporting on these matters, which in turn led to the perception that saving through occupational pensions was not merely financially advantageous, but was in effect risk-free.

20. In our view, the most significant factor in the alleged maladministration were the information leaflets issued by the DWP. The Government contends that it was clear they were limited, that it should have been apparent that those who were considering their pension options needed more information than provided by the leaflets alone, and that they were not aimed at those already in occupational schemes:

They [the leaflets examined by the Ombudsman] are explicitly not designed, however, to provide information tailored to the circumstances of particular individuals and people are expressly warned not to assume that the broad information given can be applied without question to their own situation. Their limited scope and nature is made clear by a general warning and the reader is told where more specific information can be obtained…

The Government does not believe that the reader of any or all of these leaflets should have been left in any doubt that they would have needed more information to get a full picture of their own individual circumstances. Each of the leaflets made clear that they were designed to offer only generic, high level information. For example:

22.1 The PEC3[14] said that it was intended to be "a brief summary of the changes" in the 1995 Pensions Act. In a wide-ranging leaflet of 21 pages it covered the MFR in just four sentences;

22.2 The PM1 leaflet said that it was (and is) an "introductory guide" to pensions. Inevitably with such a large and complex subject as pensions, it devoted only a page and a half to occupational pensions;

22.3 The PM3 leaflet which was (and is) a guide to occupational pensions said explicitly that the guide "looks at some questions you may need to think about and it tells you where you can find more information."

All of the leaflets contained explicit warnings that they were not complete explanations. Typically they said "This leaflet is for guidance only. It is not a complete statement of the law". The Government considers that, taken together, such warnings should have been sufficient to alert the reader that they were not being given the full detail of the issues covered by the leaflet and that the leaflet was not comprehensive.

The Government does not consider it would have been appropriate to cover the MFR in the PM leaflet series as the Ombudsman suggests. As stated above, the PM1 leaflet was an introductory guide in which occupational pensions were covered in a page and a half. The series was designed as part of a wider set of communications to encourage those who had not made provision for their retirement to consider doing so and gave people a starting point for this, as is made clear. The PM1 said on the first page "If you want to enjoy your retirement, you need to plan how you are going to save for it." and also "These guides can give you helpful information, but only you can make decisions about your pension." It said further on "If you are not sure what to do for the best, you can get advice from a financial advisor." [original emphasis throughout][15]

21. We have made our own investigations. We believe the Government is being, at best, naïve, and, at worst, misleading.

WOULD THE DOCUMENTS HAVE BEEN READ AS A COMPREHENSIVE GUIDE TO PENSIONS?

22. The Government contends that the leaflets were clearly introductory guides, and were shown to be such. This is true of PM1, A guide to your pension options which is an introductory overview of the pension system, but even this guide clearly states:

Most members of an occupational pension scheme will be better off when they retired than they would be if they did not join it.

and

If your employer runs an occupational pension scheme, you should think carefully before you decide not to join it. [original emphasis][16]

However, the Government's claim that those reading the information would realise that they could not rely on advice given by the leaflet is untenable. Although it is clear that PM1 is a general guide, the section on "where to get help and information" directed the reader to other government leaflets, and to material issued by organisations such as the Pensions Advisory Service, or the Financial Services Authority.

23. Those researching occupational pensions would have naturally turned to PM3, Occupational pensions—your guide. That guide also stressed the advantages of occupational pensions:

Generally if you work and your employer offers you an occupational pension scheme…you would be better off joining it… Occupational pensions are usually a very good deal, so if your employer runs an occupational pension scheme, check it out carefully when you're looking into your pension options.[17]

PM3 also states clearly

to be able to contract out of the additional state pension, it [a final salary related scheme] must pass a test of overall scheme quality. They must offer benefits that are broadly the same as, or better than, the State Second Pension. The scheme actuary …must issue a certificate to show that the scheme is meeting this standard.[18]

Not only would this in itself suggest that occupational pension schemes were safe (because there is no doubt that the additional state pension scheme is secure), the leaflet contained a separate section How do I know my money is safe? This section contained numerous reassurances. It told the reader that schemes were set up under trust law, that there were laws to ensure trustees were proper people, that "the assets of the pension scheme belong to the scheme, not to your employer", and that there were laws about, among other things, "the way occupational pension schemes must be run", and "the way funds should be invested". In addition, it drew attention to the existence of the Occupational Pensions Regulatory Authority which "can act quickly to protect your interests if the trustees who run your scheme, or your employers, do not meet their obligations".[19] An additional section, What if things go wrong? refers to dispute resolution procedures, and to the possibility that an insolvent employer might have removed a pension scheme's assets dishonestly. In this case, the leaflet pointed out that the Pensions Compensation Board could make payments to the scheme. Until the April 2004 edition the leaflet made no mention at all of the fact that the insolvency of an honest employer, or early scheme wind up, might put scheme members' pensions at risk.

PROFESSIONAL ADVICE

24. As the Government says, the leaflets did refer to the possibility that their readers might seek independent financial advice. They did not do so in any way which suggested this was necessary. The general guide, PM1, gave a list of factors: "you need to think about" which concluded:

If you are not sure what to do for the best, you can get advice from a financial adviser. But remember, if you see an adviser you may have to pay for their advice.[20]

The section What do I need to do now? concluded

You may [our emphasis] want to get expert financial advice, but you will usually have to pay for it. Find out how much you will be charged and how this could affect your investment.[21]

25. PM3, the leaflet which was specifically about occupational pensions, mentions financial advisers twice, once in the context of those who have changed jobs, and once in the section What if I get divorced? PM 7, Contracted-out pensions: your guide, suggests that "if you want more information about your employer's scheme...talk to the person at your workplace who deals with your scheme". It then suggests that further advice might be sought. It notes "Remember, if you see an adviser you may have to pay for their advice".[22]

26. In contrast, the guides concluded with sections on Where to get help and information which directed the reader to official bodies, and official publications. Indeed in the section What do I need to think about?, contained in PM3, the inquirer is told to

Think about your position now…
Ask your employer if they run a scheme and whether you are eligible to join it.
Read any pension information your employer gives you.
Think about your future career and retirement plans.
Ask us for any of our guides in this series… [our emphasis].[23]

27. Official leaflets gave the impression that the reader could rely on government advice. The references they made to independent financial advice did not suggest that this was desirable, let alone necessary, and were cast in a way which would discourage rather than encourage the reader to seek it.

THE DISCLAIMER

28. The disclaimer the Government relies on appeared in small letters on the back cover of each leaflet. It was nothing more than a note saying "This leaflet is for guidance only. It is not a complete statement of the law". It appeared on the back cover, after other notes about how more copies of the leaflet could be obtained, and where the leaflet could be accessed on the internet, in exactly the same font and format as those routine pieces of information. Even if these warnings had been far more explicit, and far more prominently placed, it would not be enough to say that a leaflet does not give a full statement of the law. Given the complexity of pension law, this would not be expected. But it is not unreasonable to have expected the leaflets to mention major risks, such as the fact that although saving through a pension scheme had many advantages, and successive governments had tried to improve schemes' security, nevertheless there could be losses if a scheme wound up.

THE AUDIENCE

29. The Government contends that the leaflets were not maladministrative since they were not aimed at members of pension schemes. In fact, the leaflets were sent to those in occupational schemes, and they relied upon them. Mr Andrew Parr told us that when his colleagues had concerns about the security of their company pension:

I went and got as much material as I could about pensions. I went to the FSA website and got a list of what they had. I downloaded a lot of PDF files from them. I was in touch with the DWP department that you can get booklets from, and I had those sent to me; I did research on material from the NAPF [National Association of Pension Funds]; and I generally went through everything I could find about pensions to find out what the legal position was. In all of that there was nothing that suggested there was any risk.[24]

Mr Bob Duncan was equally clear:

I was a union man. I did recommend to people that the company pension scheme was a good scheme to be in because all the Government material I had read said it was a safe scheme. After the Maxwell report and everybody seeing the MFR, the minimum funding level, if that was all right we believed our scheme was all right. We just believed that. It has worked out that it is not and I feel like I have been really, really misled. The Government have put all these papers out, and, if I could not believe what the Government said, who do I believe?[25]

Our written evidence contains samples of the many letters we received from others in similar positions to Mr Parr and Mr Duncan.

30. The Government's contention that "The series was designed as part of a wider set of communications to encourage those who had not made provision for their retirement to consider doing so and gave people a starting point for this, as is made clear" is simply untenable.[26] We believe Mr Duncan and Mr Parr reacted to official material in a natural and reasonable way. There is nothing to indicate that those who were already scheme members should not rely on the information the leaflets contained. It is not enough for the Government itself to have a clear idea of the audience it intends to reach. If the leaflets were not intended for those already in company schemes, this should have been spelt out.

31. Moreover, there was no Government information available which might have alerted scheme members to the limited nature of the MFR. We asked the Secretary of State directly where this was spelt out; he responded:

It was never the purpose of any of these leaflets to provide that level of specific and detailed advice.[27]

32. In our view, the nature of the Minimum Funding Requirement is not a matter of specific and detailed advice: it goes to the heart of the legal framework intended to protect pensions at that time. We fully accept that the 1995 Act had been intended to improve safety for occupational pensions, and may indeed have done so, but the explanatory material issued should have made clear the limitations of any protection.

33. We agree with the Parliamentary Ombudsman that the Government itself prescribed the regulatory framework for occupational pension schemes and, as such, was not a bystander. Once the Government had chosen to give information about the pensions system, that information should have been complete and accurate. Any limitations should have been made clear. A reasonable reader would have expected the official leaflets on pensions to have covered all the important points about occupational pensions. In fact, they did not mention one of the greatest risks. This is clearly maladministration.

Failure to review government information

34. The Government's failure to ensure that there was general understanding of the purpose and limitations of the MFR might have been excusable if it had no reason to believe that the MFR was misunderstood. In fact, it was repeatedly warned that not only scheme members, but even scheme trustees misunderstood the degree of security the MFR was designed to provide. As the Ombudsman's report notes, in November 1999 the Faculty and Institute of Actuaries published a working party report on the Communication of MFR and Solvency. We understand this was supplied to the Department.[28] Its findings were repeated in 2000, in a report from the Faculty and Institute of Actuaries, which warned:

It is therefore 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. In particular, it will be desirable to gain acceptance that an investment strategy that attempts to eliminate all risks is unlikely to be the most appropriate for long term savings. The uncertainties of the future need to be explained, together with the steps being taken to mitigate (but not eliminate entirely) those risks. The actuarial profession is keen to work with Government, employers and pensions organisations to promote a greater awareness and understanding of these issues among scheme members.[29]

35. The Government response to the Ombudsman's report claimed that there was no reason for the Government to take action, since the Faculty and Institute's report "was looking at how scheme trustees can communicate with their members."[30] The Secretary of State maintained this when he gave evidence to us:

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.[31]

36. This line appears to assume the Ombudsman's findings were based only on the report of the working party in November 1999. In fact, the Ombudsman is also concerned with the report of May 2000 which was, as its title makes clear, a report to the Secretary of State [our emphasis]. The passage we have quoted makes clear the recommendation was not simply about communication with trustees, or between scheme members and trustees, but about ensuring that there was a general understanding of the purpose of the MFR, and the degree of protection it gave. It said that the actuarial profession was "keen to work with Government, employers and pensions organisations to promote a greater awareness and understanding of these issues among scheme members".

37. The Government should have been aware that the Minimum Funding Requirement was not properly understood by scheme trustees, let alone scheme members. Official information on the MFR was limited, and the information directed at prospective scheme members contained nothing about the MFR at all. Government should have realised that more clarification was required.

Standards for government information

38. It is noteworthy that the Government failed to provide proper information about occupational pensions during a period in which it was itself not only involved in another Ombudsman case relating to inaccurate information, but was actively and repeatedly considering the standard of information it should provide.

39. In March 2000 the then Ombudsman investigated changes to the inheritance provisions for SERPS. He found that Department of Social Security leaflets had misled readers about the nature of changes to these schemes. As a result, those affected were denied the opportunity to make different arrangements. The then Secretary of State for Social Security accepted the finding, and noted that:

The public rely on government information. They are entitled to be reassured that leaflets are accurate and comprehensive.[32]

40. In April 2001 the DSS established a project on Accuracy in Information, prompted by criticisms from both the Ombudsman and the Comptroller and Auditor General. Work continued on the project until March 2002. One of the project's outcomes was a Departmental objective on accuracy, which was that "all information provided to customers by any part of the DSS, by any method, should be accurate and up-to-date, with no significant omissions" [original emphasis].[33] Other outcomes are described in the Ombudsman's report. They included a Public Information Policy Statement which warned "any information we provide must be, timely, complete and correct."[34] The Government response claims that the various warnings in its leaflets "should have been sufficient to alert the reader that they were not being given the full detail of the issues covered by the leaflet and that the leaflet was not comprehensive."[35] But the Department's own standards said there should be no significant omissions in the information it provided to customers. A proper level of accuracy in government information should be a basic principle of good administrative practice; for many years, the information provided on occupational pensions fell far short of this, and of the Government's own declared standard.

41. Speaking generally, Lord Turner, Chairman of the Pensions Commission, warned us:

It is clearly important that…the Government creates an environment in which it is making clear what is promised in the pension system and what is not promised…Except where people invest in real Government bonds, the return will not be guaranteed, and we should studiously avoid in the National Pension Savings Scheme and the language which surrounds it the use of words like "guaranteed" except where there is a guarantee.[36]

There will be risks and hard choices involved in all investment decisions, including those about pensions. The Government's role should be to educate people about those risks. It should be very careful that official publications do not imply that particular schemes are virtually risk free.

The role of trustees

42. The Government response maintains that trustees had the primary responsibility both for ensuring schemes were properly funded, and for communicating with their members:

It is clear that the only people who could give information about the specific circumstances of their scheme were the trustees and sponsoring employer of the scheme in question. As the leaflet PM1 said "If you are in any doubt, get as much information as you can (for example, by reading information from the scheme provider or by talking to a union representative or financial advisor) before you decide. [original emphasis]…[37]

These were not the Government's pension schemes. Their trustees were not the Government's trustees. The Government did ensure—through OPRA guides and actuarial certificates—that trustees were guided towards the information they needed. The other more general information which the Government provided in its leaflets was intended only to provide basic information and its limitations were made clear. The Government does not accept the finding that this information was potentially misleading and, thus, maladministrative.[38]

43. This line of argument is unsustainable. The response repeatedly implies that the Ombudsman's finding of maladministration would be invalid if others also failed in their responsibilities. But the fact that others have responsibilities does not mean that the Government need not take its own role seriously. Moreover, as the Ombudsman's subsequent memorandum to us makes clear, the trustees were limited in what they could do by the legal framework in which they operated:

trustees had to act in the way prescribed by the laws developed by Government. Trustees had no powers in law to insist on additional funding above the MFR level from sponsoring employers. The Government had laid down what trustees had to tell scheme members about their pensions and, when a scheme began to wind-up, the law took away any discretion trustees had to act fairly in the interests of all their members.[39]

In these circumstances, it was imperative that official information about the law relating to pensions was full and accurate. In fact the Faculty and Institute of Actuaries Working Party on Communication of MFR & Solvency noted that the OPRA Guide for Pension Scheme Trustees stated:

"The MFR refers to the minimum amount of funds that should be in the scheme at any one time, in order to meet the scheme's liabilities if it were to be discontinued."

The working group warned "although this statement is factually correct, it is misleading".[40] One of our witnesses was indeed misled: Mr Duncan told us he had relied on an early edition of the OPRA guide: "I kept reading that OPRA book and page 28 told us that the pension was safe and guaranteed."[41]

The wider system

44. In fact, the Ombudsman accepts that the Government was not solely responsible for misunderstandings, and that the losses faced by scheme members were caused by the winding up of funds, not by government actions. As Christine Farnish, Chief Executive of the National Association of Pension Funds, said:

I think the system has let down those people who now find themselves in the very difficult and distressing circumstances that the ombudsman's report covered. Yes, the system has let them down. I think it is very difficult to lay the blame at any one party's door, because no-one was then talking about the risks in the system. However, the Government did pass legislation in the 1990s and then regulated increasingly the private pension system but gave the impression, generally, that pensions were safe, pensions were secure, pensions were protected, that pensions were funded to a minimum standard. That was the general sense out there which ordinary people would have taken and it would not have been reasonable to expect them to take any other sense...[42]

The Government's failure to provide clear information was one of the chief reasons why there was a "general sense out there" that defined benefit occupational pensions were absolutely rather than relatively safe.

MFR basis

45. We will deal very briefly with the Government's decision to change the MFR basis in 2002. There were other recommendations for change in May 1998, which were implemented, and in May 2000 and February 2003, which were not implemented on the grounds that the MFR was to be replaced. We appreciate that it might have been reasonable to have left the MFR unchanged, given that it was soon to be replaced by other funding standards. We do not understand why this was not done consistently. The Government maintains:

The Department had more than sufficient information on which to make its decision on the MFR in March 2002.[43]

In its view, the fact that this change could be implemented relatively easily meant that it would have been wrong not to accept the advice it had been offered. But the Ombudsman's report finds little to suggest the Government scrutinised the advice adequately. The Government response maintains that the Government was justified in rejecting earlier advice which would have strengthened the MFR, given in May 2000, because:

Even if a change to the MFR did require employers to fund the scheme at a higher level, the effect of that change would not have produced any immediate improvement in the level of security. The point made by the Government Actuary to the Ombudsman, in relation to the May 2000 change, has a wider application. He said: "Changes to the MFR were intended to provide incentives to schemes to improve their funding levels, although these changes could not achieve this immediately. Thus if the profession's May 2000 recommendations had been implemented, this would simply have led to schemes, in the short run, showing a lower percentage of coverage against the MFR." [original emphasis][44]

In fact, the change would have given increased protection to those in schemes which were wound up by solvent employers. The disregard of this factor suggests the Government was not taking into account all the implications of its decisions, and its decision making was accordingly flawed.

Remedies

46. The Government has consistently presented the Ombudsman's report as recommending that the taxpayer make up scheme members' losses in full. In fact, the recommendation is far more measured than this. It is:

6.15 I recommend that the Government should consider whether it should make arrangements for the restoration of the core pension and non-core benefits promised to all those whom I have identified above are fully covered by my recommendations—by whichever means is most appropriate, including if necessary by payment from public funds, to replace the full amount lost by those individuals.

6.16 I recognise that this would be a significant commitment, although it seems to me that it would be a commitment that could be discharged over a number of years if the right means were identified and that this would be a commitment that would decline over the years.

6.17 I recognise that it may be felt by the Government that it is possible to mitigate the cost to the taxpayer of pension replacement from monies due from other bodies—particularly any that they consider played a significant role in the relevant events. If that is so, I consider that the Government should reflect on whether it would be more appropriate for it to take action itself—rather than to expect individual scheme members or trustees to do so—to recoup such sums using the considerable collection and enforcement powers that Government has.

6.18 I am aware, in addition, that the relevant pension schemes have assets that could assist pension replacement and that alternatives to securing pension liabilities for members of the affected schemes through the purchase of annuities have been suggested. These alternatives, as I understand matters, would still require Government action.

6.19 I recognise that asking the taxpayer to meet part or all of the cost of this recommendation raises significant public policy questions. However, I believe that the Government should consider whether its response to my recommendations should have regard to what might be considered by many—and certainly by some of the people who have complained to me—to be a precedent.

47. The Government resists the Ombudsman's recommendations because:

For the reasons set out earlier in this response, the Government does not believe that the information issued by the Government can be regarded as having caused the losses described in the report.[45]

48. The information provided by the Government did not directly cause the losses—indeed, the Ombudsman's report makes this clear. But we agree with the Ombudsman that the false sense of security it produced meant that scheme members did not take steps to spread their risks. As she put it, "I said very clearly, I thought, in the report that I was not saying that the Government had sole responsibility here. I could not see how the Government could say it had no responsibility here."[46]

49. If official information had been adequate, members might have been able to reduce their losses. Our witnesses from failed schemes gave graphic examples of what schemes' failure had meant for them. Mr Duncan told us:

I paid in for nearly 30 years. When I got made redundant and the firm went into receivership, my pension fund, the day I finished, stood at £8,000 for the year, plus my AVCs which were about £25,000. I have been told now that I have completely lost the AVCs at the moment. They have gone. The State Pension, we have been contracted out and paying into a company pension scheme, and at the moment I do not believe I am going to get the full State Pension. I have been told by the independent trustees at the moment that we will be lucky to get 7% of the £8,000. …It was October 2000 when the company went bust and we are in 2006 now and we still have not wound the scheme up.[47]

As he went on to tell us:

If the Government leaflets I had read had said there was a massive, big risk that if the company did go bust then I would lose my pension, then of course I would have been away to see somebody else—as a private pension, or even just putting money in the bank—and certainly not putting anything into an AVC … I might as well just have put it in the building society.[48]

Mr Parr had been a member of a scheme apparently so well funded that:

When ASW bought Sheerness, the Sheerness pension fund was in considerable surplus. The management had not made any payments into it because it was over-funded, and even in two years in the 1990s the workforce got their contributions back. The retirement age had come down from 65 to 63 and then to 62, and the personnel director had said that the aim of the company was to get the retirement age down to 60 in the very near future.[49]

Even on wind up the scheme was funded at 104% of the MFR. Nonetheless we were told his scheme "is only managing to produce a pension of around about 40%, and we are one of the better ones."[50] Others who submitted evidence have lost over 85% or even 90% of their pension entitlements.[51] We were told scheme members were often worse off than if they had stayed in the state scheme.[52]

50. The Government contends that even if they had been fully aware of the limitations of the MFR, scheme members would have been unlikely to have been able to take any action which would have protected a greater part of their accrued rights, and that such actions might have exposed them to greater risks.[53] We accept that losses of this sort are inherently unquantifiable, but they are no less serious for that. Denied information, scheme members continued to make Additional Voluntary Contributions which proved worthless. Indeed, they were encouraged to do so by official leaflets which noted that "The charges for FSAVC are often higher than paying AVCs through your own occupational scheme",[54] without any suggestion that scheme members might also consider whether it was desirable to spread their exposure to risk. They were denied the opportunity to judge what risks they might want to take—for example, in cases where their parent companies were clearly in trouble, members might have transferred out of the scheme altogether—and were unprepared for the shock of finding their pensions were not, after all, secure.

51. As Christine Farnish told us:

My personal view is that it is most unusual for a group of people to have suffered this sort of loss in these sorts of circumstances and not to have any recourse to redress. I think general feelings of fairness would suggest that something needs to be done. It is difficult for me to see who might be able to put that wrong right other than the Government. I think there is an issue as to the level of redress that might be appropriate. I note that other compensation systems elsewhere in the financial services landscape…never compensate to 100 per cent; it is always a proportion of the loss that is compensated. It is a fine judgment and it is regulated, but it is generally a reasonably fair proportion.[55]

The Government has claimed that the cost of the restoration of scheme benefits could be as high as £15 billion.[56] The extent to which such a cash cost is appropriate has been questioned.[57] The Government's response to the Ombudsman indicates the net present value of such payments would be between £2.9 billion and £3.7 billion. We note that Dr Altmann told us " Every year we spend £20 billion on tax relief for pensions—£20 billion every year—of which over half goes to top-rate taxpayers".[58] Over the next 60 years toal pension spending will amount to some £22,500 billion.

52. The Government has provided some help in the form of the Financial Assistance scheme. The Scheme has been improved as a response to the Ombudsman's report, as the final Government response made clear:

68. The Government had intended to review the scheme as part of its 2007 Spending Review. In the light of the Ombudsman's report the review was expedited. In the White Paper, "Security in retirement: towards a new pension system" (Cm 6841), published on 25th May, the Government announced that the scheme would be extended.

69. Eligibility has now been extended to people within fifteen years of their scheme pension age. This involves tapers from 80 per cent of expected pension for those within 7 years of their scheme pension age, 65 per cent if between 7 and 11 years, and 50 per cent for those between 12 and 15 years.

This is a real improvement on the previous scheme, which supported only those within three years of retirement, but it remains inadequate. Dr Ros Altmann explained why:

FAS payments are not inflation-linked at all—the "expected pension" would be;
FAS only starts at age 65—"expected pensions" start from scheme pension age (often below 65);
FAS only starts full payment when wind-up has actually finished—"expected pensions" are paid as soon as pension age is reached;
FAS payments are capped at £12,000 and this cap itself is not inflation-linked, so it declines in value over the years—"expected pensions" are not subject to any cap ;
FAS does not have any tax free element and the entire FAS payments are subject to tax—"expected pensions" include a tax-free lump sum;
FAS only pays 50% of the FAS benefit to a surviving spouse—if the scheme had not wound up, spouses would normally receive at least 50% of the full "expected pension";
FAS payouts halve immediately if a member dies soon after retirement—ongoing schemes usually continue paying full pension to surviving spouses for a few years;
If members die young, FAS pays nothing and survivors are left without any insurance—"expected pension" benefits include life assurance cover;
FAS pays no ill health benefits—most schemes would offer ill-health cover.[59]

These objections are similar to those given by the Ombudsman when she reported the FAS would not remedy the injustice caused to the complainants.[60] Even under the revised rules, it would be possible for someone to have made thirty years of contributions, and still not be eligible for any assistance. We note that the Pension Protection Fund provides 100% of expected benefits to pensioners, including a level of indexation, and 90% of expected benefit for the majority of non pensioners, which is also indexed, although capped at £26,050 at age 65. The Financial Assistance Scheme, which is capped at £12,000, without indexation, looks niggardly by comparison.

53. A further difficulty is that members of schemes which were wound up by a solvent employer get no help from the FAS. This was one of the reasons why the Ombudsman found it was an inadequate remedy. The Secretary of State defended this decision:

we feel that employers who are still solvent have ongoing responsibilities to their scheme members.[61]

We have some sympathy with this, but it was the Government which allowed employers to wind up schemes which were funded to the MFR and it was the Government which set the MFR at a rate which did not, in fact, ensure that schemes met their liabilities. In evidence to us, the Secretary of State indicated that:

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.[62]

We asked the DWP to tell us more about what was being done to ensure employers met their obligations, and what legal recourse scheme members might have in such a case. We were told:

16. The Government has made it clear that it expects employers to take their pension obligations seriously. They made the promise to their employees and should make this promise good, when they can. The Government sets the minimum amount that employers should pay into schemes that are in wind up. This does not mean that employers cannot pay more than that minimum.

What legal recourse, if any, do former scheme members have in such circumstances?

17. Where an employer has met their statutory requirements under pensions legislation, a member has a legal recourse only against the trustees and on the basis that they had failed to discharge their duties under trust law. For instance, if the trustees had entered into a compromise agreement with the employer and accepted a lower amount than they could legally demand, the scheme member could challenge this action through the courts or raise their concerns with the Pensions Regulator.

18. There may be other remedies that trustees could pursue in respect of any deficiency in the scheme. For example, it might be that the scheme rules specify a higher debt on wind-up than the employer debt legislation, or the trustees might negotiate with the employer to meet a higher level of debt, even where there is no legal requirement to do so. These, and other potential remedies, would depend on the specific circumstances of each individual scheme.[63]

54. The Government's response to our questions suggests there is little chance of recompense for those who lost significant pension entitlements when their scheme was wound up by a solvent employer. The Government cannot simply abandon such people; if it is impossible to make employers take responsibility, then it should do so itself.

THE GOVERNMENT'S RESPONSIBILITY

55. The Ombudsman told us

I did not say, "Write a blank cheque", but to organise a remedy. … I was looking, maybe naïvely, 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 these 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 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.[64]

56. Successive governments have been clear about the Ombudsman's value and standing. In 1993 the Rt Hon William Waldegrave MP, then Chancellor of the Duchy of Lancaster, told the select committee on the Parliamentary Commissioner for Administration that the Government "invariably in the end accepted the Commissioner's say-so".[65] In the Barlow Clowes case, the Government ultimately agreed to pay compensation to investors "out of respect for the Office of the Parliamentary Commissioner".[66] Similarly, the Government agreed to pay compensation to those who had suffered extreme hardship as a result of blight caused by the Channel Tunnel Rail Link "out of respect for the PCA select committee and the office of the Parliamentary Commissioner".[67]

57. We believe the Government should look again at what can be done. Like the Ombudsman, we "want a response which is not about defensiveness and denial, it is about constructive engagement and putting things right … not into defending what has gone wrong."[68] Like the Ombudsman, we will not tell the Government what it should do, or attempt to prescribe a precise level of compensation. We expect the Government to work with others to put together a significant package of support. The main elements of such a package should include compensation for scheme members, regardless of their age, measures to ensure payments begin at the age of 65, regardless of whether a scheme's wind up has been completed, indexation for pensions, and security for dependents' benefits.

58. We will look closely at any future proposals to lessen the losses suffered by those whose schemes closed during the period covered by the Ombudsman's report. We very much hope that our colleagues on the Work and Pensions Committee, who have already been examining the Financial Assistance Scheme, will also maintain an interest in this matter, since their expertise would be invaluable.

12 Ombudsman's report, para 5.164 Back

13 Government response, para 18 Back

14 DSS Leaflet PEC 3, January 1996, The 1995 Pensions Act Back

15 Government Response, paras 20ff Back

16 PM1, July 2001, p 15 Back

17 PM3, May 2002, p 6 Back

18 PM3, May 2002, p 12 Back

19 Ibid., pp 15-16 Back

20 PM1, July 2001, p 7 Back

21 Ibid., p 28 Back

22 PM 7, April 2003, p 20 Back

23 PM 3, May 2002, p 8 Back