Select Committee on Work and Pensions Minutes of Evidence

Memorandum submitted by National Association of Pension Funds


  1.  NAPF welcomes this opportunity to present our views to the Committee.

  2.  NAPF has consistently supported the principle that members of occupational pension schemes who have suffered substantial losses through no fault of their own should receive some form of recompense. Who is responsible for the pension losses is less important than putting it right. However, it is clear that only the Government can mobilise the resources needed.

  3.  Committing public funds to compensate for losses in the private sector should not be done lightly. However the nature of pensions is very different from any other type of investment because:

    —  there was no compensation or protection scheme for members of occupational pension schemes over the period in question; and

    —  scheme members had no opportunity or means of managing the risks which they were exposed to.

  4.  We support the principle of redress because, among other reasons, unless these unfortunate cases are resolved, it will continue to undermine trust and confidence in all forms of retirement saving for years to come. A key plank in the pension reform programme is the principle of auto-enrolment into a suitable pension scheme. However, it is essential that auto-enrolment commands wide popular trust and confidence. Restoring trust in long term savings is a vital part of the Government's reform programme.

  5.  We welcomed the introduction of the FAS in the 2004 Pensions Act, albeit with the reservation that the £400 million originally budgeted was always going to be inadequate as the figure had been determined before the full extent of the problem was known. We also provided technical advice with the design and set up through our participation in the DWP's Industry Working Group. NAPF members in the York area also hosted site visits to help the FAS operational team's research and preparation.

  6.  The original assistance levels and eligibility criteria were the worst of all worlds in creating the appearance of a worthwhile assistance programme without the substance. To the extent that the Government has acted positively in broadening coverage, we welcome the announcement in the White Paper. However, we still have reservations about the overall effectiveness of the Scheme even with the wider coverage:

    —  In spite of the fact that an estimated 15,000 people qualified under the original criteria, by May 2006 only 39 had received any assistance since the scheme formally came into operation in September 2005. With total set up and administration costs of £5 million, the scheme is costing far more than the £24,000 it has paid out in benefits thus far. It is not absolutely clear why it is taking so long to process cases or why so few payments have been made.

    —  Two years after the Act, it is disappointing that we still do not know how many people are affected or how much has been lost. Policy is still relying on estimates. The reasons may be a function of the winding up process and outside the DWP's control but whatever the reasons, a way must be found to speed up the data processing.

    —  The review of the scheme did not include participation or input from stakeholders. We think that this has weakened the final outcome.

    —  The review has operated within the parameters of the original design which has had the effect of simply broadening coverage without addressing the weaknesses of the original design which were driven by the tiny budget. Some of these are outlined below:

    —  The small number—less than 20—of underfunded schemes which were wound up with solvent employers continues to be excluded even though the position of members of those schemes is exactly the same as those whose employers collapsed.

    —  The cap on assistance is set at £12,000 compared with an initial £25,000 for Pension Protection Fund compensation and is fixed. This is not consistent with the revaluation provisions that apply to benefits before they come into payment at 65 and affects younger members disproportionately.

    —  Setting the payment date at 65 independently of the scheme pension age arbitrarily favours members of schemes which have a lower pension age in terms of coverage. On the other hand, those who had made plans to retire at their scheme pension age will have to wait longer.

  7.  There has been a missed opportunity to put the FAS on a more secure and credible basis and that while more members will benefit from assistance, there are still anomalies and problems. Not least is the slow progress so far. We understand from the FAS website that the Pensions Minister has announced a review of the operation of the Scheme in a letter to MPs. We have not seen that letter and so do not know the terms of reference. However, we would urge the Minister to include stakeholder bodies such as ourselves in that process. Moreover, the timescale of reporting by July is far too short. The effectiveness of the FAS is bound up with the scheme wind up process which we understand the Government intends to review.

  8.  We would recommend that:

    —  The operational review be integrated with the review into scheme wind ups and be given a more realistic timetable with the opportunity for stakeholders to make a contribution.

    —  That options such as pooling scheme assets and/or operating the FAS as a ring-fenced sub-set of the Pension Protection Fund be considered as ways of both speeding up the process and achieving economies of scale.

    —  The Government establishes a commitment to an ongoing review of the Scheme perhaps every two or three years.

June 2006

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