Appendix 1: Letter from Department of
Work and Pensions
10 April 2007
Financial Assistance Scheme - additional evidence
Thank you for your letter dated 29 March 2007[23]
in which you asked a number of questions relating to the Financial
Assistance Scheme. Please find a response to each of these questions
attached in the annex.
I hope you find this information helpful. If you
have any further questions please do not hesitate to contact me.
Annex
A. The estimated number of actual and potential
pensioners covered by the extended scheme as announced in Budget
2007.
1. An estimated additional 100,000 individuals
will benefit from the extended Financial Assistance Scheme (FAS)
over time. 85,000 will be eligible for the first time, and around
15,000 of the 40,000 people who stood to benefit from FAS under
the current scheme, will receive more assistance due to the latest
extension.
2. As a result it is expected that all the estimated
125,000 people who have suffered losses will now receive at least
80% of their core expected pension - around three times the number
who would have been helped under the current scheme.
B. A breakdown of how the Department reached
the estimated "total long-term expenditure of £8bn"
and details of the assumptions on which this was based. This should
include the level of expenditure for each year the Financial Assistance
Scheme (FAS) is assumed to be in existence into the future.
3. The table below shows the estimated annual
cash cost of the extended Financial Assistance Scheme as announced
in the Budget 2007.
| 2007/08 | 2008/09
| 2009/10 | 2010/11 | 2011/12
| 2012/13 | 2013/14 |
| Cash (£m)
| 24 | 40
| 53 | 60
| 64 | 68
| 78 |
| 2014/15 | 2015/16
| 2016/17 | 2017/18 | 2018/19
| 2019/20 | 2020/21 |
| Cash (£m)
| 89 | 102
| 113 | 122
| 130 | 135
| 145 |
| 2021/22 | 2022/23
| 2023/24 | 2024/25 | 2025/26
| 2026/27 | 2027/28 |
| Cash (£m)
| 159 | 168
| 176 | 185
| 195 | 203
| 214 |
| 2028/29 | 2029/30
| 2030/31 | 2031/32 | 2032/33
| 2033/34 | 2034/35 |
| Cash (£m)
| 223 | 228
| 234 | 238
| 240 | 241
| 241 |
| 2035/36 | 2036/37
| 2037/38 | 2038/39 | 2039/40
| 2040/41 | 2041/42 |
| Cash (£m)
| 240 | 238
| 234 | 227
| 220 | 212
| 203 |
| 2042/43 | 2043/44
| 2044/45 | 2045/46 | 2046/47
| 2047/48 | 2048/49 |
| Cash (£m)
| 194 | 185
| 176 | 167
| 157 | 148
| 138 |
| 2049/50 | 2050/51
| 2051/52 | 2052/53 | 2053/54
| 2054/55 | 2055/56 |
| Cash (£m)
| 129 | 120
| 110 | 102
| 93 | 85
| 76 |
| 2056/57 | 2057/58
| 2058/59 | 2059/60 | 2060/61
| 2061/62 | 2062/63 |
| Cash (£m)
| 69 | 61
| 55 | 48
| 42 | 37
| 32 |
4. The costs presented in the table reflect the assistance
levels that will be provided in the extended FAS. The scheme will
ensure that the pensions of all eligible members of affected pension
schemes are topped up to a level broadly equivalent to 80 per
cent of the core pension rights accrued in their scheme. The cap
on maximum assistance is £26,000 and there is no de minimis
rule.
5. These cost estimates are based on the same model and data
which we have previously used to estimate the costs of the FAS.
Data were collected on the numbers and characteristics of 380
pension schemes and specific data were collected on some 1,300
members of a smaller number of schemes thought to be reasonably
representative of the total number. To estimate the cost of the
FAS, these data, together with scaling parameters, have then been
fed into an actuarial model to generate detailed time profiles
of costs.
6. The costs are based on the following key assumptions:
§ 125,000
eligible pensioner and non-pensioner members;
§ an
average funding level of schemes in respect of non-pensioner members
of 30-35%;
§ an
average accrued pension for non-pensioner members of £3,300
per year; and
§ longevity
estimates from standard tables from the UK actuarial profession's
Continuous Mortality Investigation, based on the longevity experienced
by pensioners whose pensions are secured with insurance companies.
C. The estimated cost in net present value
terms.
7. The estimated total cost of the extended FAS
in net present value terms is £1.9 billion. This is an additional
£1 billion on top of the current FAS scheme.
D. The estimated additional cost of applying
the same indexation rules to payments under the extended FAS as
apply to the Pension Protection Fund (PPF) and details of the
assumptions on which this estimate is based.
8. The PPF provides indexation on the part of
an individual's pension that derives from pensionable service
on or after 6 April 1997. This part will be increased each year
in line with the Retail Prices Index (RPI) capped at 2.5%.
9. In order to qualify for FAS, schemes must
have started winding up between January 1997 and April 2005. Data
on current qualifying schemes shows that around 60% of schemes
had started winding up by the end of 2002. Individuals in FAS
schemes are therefore unlikely to have accrued much of their pension
after 1997, and providing PPF indexation on those rights would
provide them with very little additional benefit.
10. We have instead estimated the costs of providing
indexation on individuals' full accrued pension. We have assumed
that the pension in payment would be increased each year in line
with RPI capped at 2.5%. The additional cash cost, on top of the
current FAS would be £3.5 billion (£530 million in NPV
terms).
11. These costs are based on the same assumptions
as in [B] above, but assuming that payments are increased at 2.5%
in each year.
E. The estimated additional cost of providing
people eligible for the extended FAS with the same compensation
that would be available to them were they eligible for the PPF,
and details of the assumptions on which this estimate is based.
12. The estimated additional cost of providing
people eligible for the extended FAS with the same compensation
that would be available to them were they eligible for the PPF
is £2.7 billion in cash terms (£640 million in net present
value terms).
13. These costs are based on the same assumptions
as in B above, but with different assumptions regarding the parameters
of the scheme:
§ Individuals
receive 90% of their core pension (100% if they were already pensioners
when their scheme started to wind up).
§ The
compensation cap is set at PPF levels.
§ Indexation
is provided on benefits accrued after 1997 only (RPI capped at
2.5%). As we do not hold data on when members accrued their rights,
we have assumed that only a small proportion of rights will have
been accrued after 1997 (as explained in the answer to D above).
We have therefore applied 1% indexation across the board as a
proxy for the PPF indexation rules. If anything, this overestimates
the amount of indexation individuals are likely to be paid.
F. The estimated cost of extending FAS
to people whose pension funds wound up before April 2005, where
the sponsoring employer has not experienced an insolvency event
and details of the assumptions on which this is based.
14. We are unable to estimate the cost of including
all schemes that have wound up under-funded with a solvent employer,
as there is very limited data on the numbers and circumstances
of such schemes. The issue of schemes with solvent employers is
complex, as many members of such schemes will have suffered small
losses, if any loss at all (for example, where wind up is due
to a merger of schemes and members are transferred to a different
scheme providing the same benefits).
15. We do, however, have data on a specific group
of schemes with solvent employers - those where the employer has
compromised the debt on the pension scheme in order to avoid an
insolvency event. We have been made aware of around 15 such schemes
with around 8,000 members in total.
16. Assuming that these schemes are similar to
the average FAS scheme (i.e. using the same assumptions as in
[B] above), we estimate that the cost of including them in the
extended FAS would be around £460 million in cash terms (£110
million in net present value terms).
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