Select Committee on Work and Pensions Minutes of Evidence


Memorandum submitted by Ronnie Sloan

INDEPENDENT CONSULTING ACTUARY, RONNIE SLOAN, WHO HAS BEEN ADVISING ROS ALTMANN AND THE PENSIONS ACTION GROUP, COMMENTS ON THE DWP'S RESPONSE TO THE REPORT BY THE PARLIAMENTARY OMBUDSMAN

"Trusting in the Pensions Promise" (SIC)

Having studied last week's DWP response in detail, my main observations are:

  1.  When rejecting the findings of the Parliamentary Ombudsman published on 15 March, the Government stated that the £15 billion cost of the full compensation recommended by the Ombudsman was unaffordable by the taxpayer. Despite this, many informed commentators, including Ros Altmann on behalf of the Pensions Action Group, immediately said that the cost could not realistically be more than about £5 billion, and challenged the Government to justify its figures.

  2.  Now the Government says that the Net Present Value of full compensation is only about £3.3 billion, which is just over 20%, or one-fifth, of the originally stated cost. Regardless of lame excuses such as that the £15 billion cost was "in cash terms", ie in inflated future money terms, the fact is that the Government deliberately exaggerated what it must have known to be the true cost of only £3.3 billion in order to frighten the public into acquiescing with its stance of rejecting the Ombudsman's recommended remedy of full compensation.

  3.  Given that the Government admits to having known the Ombudsman's findings since December, and that it had full access to the resources of the Government Actuary's Dept, there can surely be no excuse for the Government having perpetrated such a blatant attempt to mislead the public—and moreover Parliament. So much for "Trusting in the Pensions Promise", which was of course the very subject of the complaint on which the Parliamentary Ombudsman ruled on 15 March. QED

To back up these assertions, I set out below some more specific examples, taken from the DWP's Annex, of the general vagueness of the DWP response:

  4.  In paras 6 and 7 it is stated that a small number of schemes thought to be reasonably representative of the total number were taken as a sample. The specific data of the 1,300 members thereof was then used to calculate the pension benefits for each individual in the sample, which would then be scaled up to replicate the total position. However, this is then promptly contradicted in para 10 where it is stated that the average pension "is assumed to be around £3,300 per year."

  5.  Because the sample must result in some potential variation from the full actual data, the DWP has quite reasonably undertaken a sensitivity analysis, which was modelled on 4 alternative pension ages, 3 alternative deferred pension revaluation rates, and 3 alternative survivors' benefit levels. But how this resulted in the stated "thirteen scenarios", rather than 36 (viz 4x3x3), remains a complete mystery!

  6.  This confusing gobbledegook, of which these are but two examples, is perhaps best exemplified by the enlightening statement in para 9 that: "This process leads to a complex but robust model, based on actual data, rather than a number of generalisations and broad assumptions. It does, however, mean that any simplifications of the model may be misleading, if the sophistication of the model is not taken into account." Crystal clear—or what?

  7.  Despite the stated "robustness" of the model, in para 23 the Government excuses itself from bothering to reduce the disclosed cost of compensation by the increased tax revenue and saving in means-tested benefits, on the grounds that "it is difficult to estimate precisely . . . what the cost would be after taking these adjustments into account." But surely not as difficult as it is for these severely disadvantaged pensioners to survive on a fraction of their expected—and promised—pensions!

    As regards the mathematical difference between the original £15 billion cost "in cash terms" and the subsequent admission that the Net Present Value (ie cost today) is only £3.3 billion, I would explain as follows:

  8.  The nominal sum of the emerging future pension amounts, allowing for inflation, will evidently differ considerably from the discounted present value (ie cost today), with the period of discount, based on age, clearly being one of the most significant factors. By way of a few examples, for pensions payable from age 65, the multiples that the nominal sum (in cash terms) bears to the Net Present Value (NPV) are:

    Member currently aged 35 : cost in cash terms is nine times NPV (true cost today) At age 45 it is five times, at age 55 it is three times, and at age 65 it is 1.7 times NPV.

  So, it is little wonder that the overall differential is some 4.5 times NPV (15 billion ÷ 3.3 billion).

  9.  The methodology for discounting future pension amounts, allowing for inflation, has since 1984 been set out in Actuarial Tables published by the Government Actuary's Dept for use by lawyers in calculating compensation in court cases. As these tables are now in no less than their Fifth edition, last updated in November 2004, there can be little excuse for the Government's apparent lack of understanding of such basic financial matters.

Ronnie Sloan FFA

15 June 2006





 
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