Mineworkers’ Pension Scheme Contents

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2Mineworkers’ Pension Scheme

History of the Scheme

5.The Mineworkers’ Pension Scheme (‘MPS’, and ‘the Scheme’) was first set up in 1952, as the larger of two main pension schemes established under British Coal - the other being the British Coal Staff Superannuation Scheme (‘BCSSS’).8 As of September 2020, the MPS had 124,796 pensioner members, and 11,104 deferred members.9 The Scheme is managed by a committee of ten Trustees (‘the Trustees’).

6.At the point of privatisation in 1994, the Scheme was closed to further contributions, and arrangements were put in place to address employee liabilities arising out of the former British Coal Corporation. As part of these arrangements, the Government provided the Scheme with a guarantee that pension members would always receive the benefits they had earned to that date and that, in future, those benefits would rise in line with inflation.10

7.In return for providing this guarantee, the Government initially proposed that any surplus in the Scheme’s value at future valuations would be split between the Government and the Scheme’s members “on an equitable basis”.11 The ‘equitable’ division of surpluses was later agreed by the Government and Trustees as a 50:50 split. The Government thus became entitled to 50% of any surpluses in the Scheme at future valuations. The remaining 50% is distributed to pensioners through bonus augmentations, which are paid in addition to guaranteed benefits.12 Since this arrangement was agreed in 1994, the Government has received £3.1bn as its share of surpluses, and £1.3bn from the Investment Reserve.13 The Government has not contributed financially to the Scheme since it became the guarantor in 1994.14 The agreement did not include a mechanism to review the arrangements at any point in the future.15

8.Chris Cheetham, Chair of Trustees, explained that such an arrangement is now “highly unusual”, if not “unique”: “There is no current situation where sponsors take money out of the scheme that they are responsible for; indeed, they cannot. Regulations do not enable it”.16

What preceded the 1994 arrangements?

9.Prior to privatisation, no standing formal arrangements were in place to decide how surpluses should be shared between employer and pension members.17 Instead, the division of surpluses was decided on an ad hoc basis, with British Coal requesting a certain agreed amount of the surplus to cover an employer contributions holiday starting in 1989.18

10.At both the 1987 and 1990 valuations, the Scheme was in surplus.19 On both occasions a 70:30 split (in favour of members) was agreed.20 The 30% surplus taken by British Coal equated to the cost of its contributions holiday.21 The 50:50 split of surpluses agreed in 1994 was also applied to the £813m surplus determined in the 1993 valuation.22

11.The 70:30 split agreed in 1987 and 1990 has subsequently prompted questions about why members’ entitlement was reduced to a 50:50 split from the 1993 valuation onwards.23 In response, the Government has highlighted that the 70:30 splits in 1987 and 1990 were agreed on the basis of the Scheme’s performance at those specific valuation points, and therefore did not constitute “a fixed arrangement”.24

How the 1994 agreement was reached

12.Allen Young, Pensioner Elected Trustee, and Chris Cheetham, Chair of Trustees, told us that the Trustees took actuarial and legal advice when arrangements were being agreed.25 Mr Young and Mr Cheetham said that advice stressed that the Government’s proposed guarantee was “essential”, and clearly advised that the proposal should be accepted on that basis.26 The Trustees reiterated in writing that, “given the importance attached to the Guarantee, and in the absence of any credible alternative, the Trustees had no reasonable option but to accept this offer”.27

13.Mr Young and Mr Cheetham were critical of the nature of the discussions which took place in 1993–4, arguing that “there was no negotiation. Basically, the Trustees were given an option of a guarantee with a 50:50 split, take it or leave it”.28 The Minister confirmed that the choice faced by the Trustees was a binary one “between the current arrangements [a 50:50 surplus sharing arrangement] and the scheme retaining all surpluses but no guarantee”.29 The Trustees explained that the Trustees at the time “were pushing for a 70:30 split”, but they ultimately accepted the Government’s proposal because they understood the importance of the guarantee, even though they “were never happy” with the “totally unfair” 50:50 split attached to it as a condition.30 Mr Cheetham reiterated that the Trustees were ultimately “faced with no choice but to accept the 50:50 [split], whether or not they agreed with it and whether or not it was consistent with precedent”.31 Rt Hon Anne-Marie Trevelyan, Minister of State for Business, Energy and Clean Growth (‘the Minister’) told us that due to the passage of time it is difficult to respond with certainty to these points, but that she has “seen nothing that either confirms or contradicts this version of events, and I have no reason to doubt it”.32

14.Mr Cheetham also argued that no analysis was conducted at the time by the Government to inform the specific division in the share of future surpluses:

There was no science behind the decision made by the guarantor, which was then imposed on the Trustees, that it should be 50:50. The trustees were, essentially, faced with a fait accompli… but there was no analysis done to support that [50:50] split at the time.33

Moreover, the Trustees explained that they could find “no evidence of any attempt” by the Government to subsequently demonstrate that the 50:50 split was “equitable”, as per the Government’s original proposal.34

15.The Government has confirmed that, unlike the Trustees, it did not seek actuarial advice when the arrangements were agreed in 1994.35 The Minister could not provide a reason as to why this was the case.36 Neither could the Minister provide reassurance that the 50:50 split proposed by the Government in 1994 was underpinned by any empirical evidence.37

16.The Scheme’s Trustees had little choice but to accept the Government’s proposal to divide future surpluses on a 50:50 basis, as a condition of securing the Government’s guarantee during the negotiations in 1994.

17.The Government failed to conduct due diligence during the 1994 negotiations and undertook no empirical analysis or evaluation to inform or support the 50:50 split it proposed. The Government was negligent not to take actuarial advice.

18.The 50:50 split was, and remains, arbitrary.

Has the Government received more than expected?

19.As discussed above, the Government did not undertake any analysis of how much it could expect to receive from the surplus sharing arrangements, at the time the arrangements were agreed.38 However, in 1996 the National Audit Office (NAO) produced a report on the sale of British Coal’s mining operations, which was informed by consultants Binder Hamlyn.39 Drawing on Binder Hamlyn’s advice, the report highlights that the Government could expect to receive around £2bn over 25 years (including the repayment of both investment reserves) equal to £8bn in adjusted cash terms - through the surplus sharing arrangements of both MPS and BCSSS.40 The BCSSS and MPS schemes were worth roughly equal amounts, meaning the Government could expect to receive approximately £1bn through the MPS arrangement alone.41 This £1bn in 1994 terms equates to approximately £4bn in today’s cash terms.42 The NAO’s report confirms that the Government Actuary’s Department had concluded that Binder Hamlyn’s estimates “do not appear unreasonable”.43

20.To date, the Government has received £4.4bn in cash payments from the Scheme (comprised of £3.1bn as the Government’s share of surpluses post-1994, and £1.3bn from the Investment Reserve).44 The Government is also currently due to receive at least £1.9bn (comprised of the £1.2bn Investment Reserve, and £0.7bn of post-1994 surpluses which have not yet been paid).45 This £1.9bn will be paid on top of 50% of any future surpluses. Thus, as of today, the Government is due to receive at least £6.3bn in total.46 Chris Cheetham confirmed that the Government will have received at least £2.3bn (in today’s adjusted cash terms) more than Binder Hamlyn’s estimated in 1994.47

21.The Government has accepted that Binder Hamlyn’s 1996 analysis underestimated the extent of future surpluses, commenting that “nobody predicted that the Scheme would produce returns as high as it has”.48 In that respect, the Government accepts that the 1994 agreement was “flawed”.49

22.To date, the Government has received £4.4bn from the Mineworkers’ Pension Scheme. This is already more than the 1994 expectations of what the Government would receive. The Government is also due to receive at least another £1.9bn, on top of 50% off any future surpluses.

23.The Government has not paid any funds into the Scheme since the surplus sharing arrangement was put in place in 1994.