Appendix 3: Correspondence between the
Clerk and DWP
Letter from the Clerk of the Committee to the
Parliamentary Liaison, DWP
25 April 2007
The Public Administration Select Committee has asked
me to clarify the Government's intentions on extending the Financial
Assistance Scheme to cover cases in which solvent companies have
wound up their schemes, and trustees have compromised the depths,
in order to avoid insolvency. In the debate on 18th of April,
the Minister said assistance would be given:
"when a compromise agreement is in place
and when enforcing the debt against the employer would have forced
the employer into insolvency." (c 326)
In papers deposited in the House of Commons Library
the Government says one of the aims of its review will be to "determine
whether there are other pension schemes (in addition to those
with compromise agreements) where although the sponsoring employer
did not undergo an insolvency event, it would not be reasonable
to expect the employer to have a continuing responsibility for
supporting an under funded scheme".
The Committee's understanding is that the law relating
to the closure of pension schemes by solvent employers changed
several times during the period between the passage of the Pensions
Act 1995, and the establishment of the Pensions Protection Fund.
They have asked me to clarify the following points.
- Is it correct that until 11
June 2003 it was legal for employers to close a pensions scheme
funded to the MFR, even if the benefits promised by the scheme
could not be secured?
- If so, would trustees or members
have any legal means by which they might ensure full benefits
were paid?
- Does the DWP have any indication
of the number of schemes which wound up in such circumstances?
- Is it correct that, under the
criteria are currently proposed, members of schemes such as those
run by Daybrook Laundry, Rael Brook, LGG Charlesworth and Moores
Products would not qualify for assistance?
- What legal recourse might trustees
or scheme members have in respect of schemes run by solvent employers
which closed without the funding required to secure expected benefits
after 11th June 2003?
- Are you aware of any circumstances
in which pension scheme trustees compromised debt after 11th of
June 2003 in circumstances where enforcing the debt would not
have risked causing employer insolvency?
I would be very grateful for an answer to this letter
by close of play on Wednesday 3rd May. I am sorry for the short
deadline, but the Committee wishes to consider this matter urgently.
Response from the DWP
9 May 2007
FINANCIAL ASSISTANCE SCHEME - ADDITIONAL
EVIDENCE
FOR THE PUBLIC ADMINISTRATION SELECT COMMITTEE
Is it correct that until 11 June 2003 it was legal
for employers to close a pensions scheme funded to the MFR, even
if the benefits promised by the scheme could not be secured?
1. Yes, broadly speaking. From April 1997 until 18
March 2002, the debt payable by a relevant solvent employer on
the wind-up of their scheme was based on the Minimum Funding Requirement
(MFR) for all scheme members. From 19 March 2002 to 10 June 2003,
the debt calculation for pensioner members (only) was increased
to a 'full buy-out' level. Prior to April 1997, the debt was based
on a scheme specific calculation of transfer values.
2. The MFR was introduced to set a minimum target
level of funding for ongoing schemes, with a view to providing
a reasonable chance that the assets of the scheme would be sufficient
to secure the benefits accrued by scheme members in full if the
scheme were to wind up. The MFR was not, however, designed to
ensure (through the purchase of annuities and deferred
annuities) that those benefits would be secured in full if the
scheme wound up.
If so, would trustees or members have any legal
means by which they might ensure full benefits were paid?
3. No legal recourse would be available in relation
to the employer debt legislation for pre 11 June 2003 wind-ups,
if solvent employers had met their legal obligation to pay the
debt calculated in accordance with the legislation.
Does the DWP have any indication of the number
of schemes which wound up in such circumstances?
4. No. As your letter notes, the review of pension
scheme assets has been asked to determine whether there are other
pension schemes (in addition to those with compromise agreements)
where although the sponsoring employer did not undergo an insolvency
event, it would not be reasonable to expect the employer to have
a continuing responsibility for supporting an under funded scheme
Is it correct that, under the criteria currently
proposed, members of schemes such as those run by Daybrook Laundry,
Rael Brook, LGG Charlesworth and Moores Products would not qualify
for assistance?
5. If the schemes listed have not been subject to
compromise agreements in circumstances when enforcing the debt
against the employer would have forced the employer into insolvency,
then they are not included within the strict terms of the proposed
extension.
6. However, by means of the review, we are looking
into the circumstances of such schemes and invite representations
on behalf of any scheme members who fall outside of current FAS
rules and who are faced with significant pension losses. Submissions
can be made to the review via the following email address: adelphi.fas-review@dwp.gsi.gov.uk
What legal recourse might trustees or scheme members
have in respect of schemes run by solvent employers which closed
without the funding required to secure expected benefits after
11th June 2003?
7. After 11 June 2003, the debt payable by a solvent
employer on wind-up of their scheme was set at 'full buy out'.
This broadly equates to the full costs of winding up and the full
benefits that all scheme members (both pensioners and deferred)
have accrued and expect to receive.
8. However, trustees are able to reach a compromise
agreement with the principal employer to the scheme. But trustees
of schemes have a fiduciary duty to act in the interests' of all
the scheme members and beneficiaries at all times.
9. Trustees are responsible for running their pension
schemes and any compromise agreements made are scheme and employer
specific. Trustees should believe that they have taken the best
decision available to them, having taken account of the position
of their scheme. We would expect trustees and employers to discuss
all of their options open to them before taking the decision to
wind up their pension scheme
10. Before 6 April 2005, Opra could investigate compromise
agreements and were prepared to intervene where there was evidence
that the trustees may have agreed to an unnecessarily low settlement
or where they had not taken appropriate steps prior to reaching
an agreement with the employer.
11. Since 6 April 2005, any compromise of the debt
due to the pension scheme is a notifiable event and must be notified
to the Pensions Regulator. The Pensions Regulator is a risk based
regulator and based on the individual circumstances of the case,
may consider seeking to use its powers where there is evidence
that the trustees have not acted in the best interest of members
or where there is evidence that there has been a deliberate act
or failure to act to avoid pension scheme liabilities. A compromise
agreement is a 'type A' event, as described in the regulatory
guidance, for which it may be appropriate and advisable to seek
Clearance.
Are you aware of any circumstances in which pension
scheme trustees compromised debt after 11th of June 2003 in circumstances
where enforcing the debt would not have risked causing employer
insolvency?
12. We are not aware of any such cases. Any such
cases would fall outside of the strict terms of our proposed extension.
Representations on behalf of any members of any such schemes
could be made to the review.
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