Response to Consultation on Draft Regulation – The Financial Assistance Scheme (Miscellaneous Provisions) Regulations 2009

by Dr. Ros Altmann

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Summary:

The DWP’s ongoing work on the FAS is very much appreciated and the extensions that have been announced are mostly welcome. However, while many aspects are good, this Consultation Document also contains proposals that are manifestly unjust and unacceptable. There remain some substantial injustices in the FAS which are not remedied by these regulations. These relate to the FAS definition of Normal Retirement Age, treatment of tranches of pension, FAS calculation of actual scheme entitlements, loss of scheme inflation-linking and insistence on using 5 years from pension age, instead of using one common age for early pension or ill health payment. However, most of the problems seem to me to stem from the fact that the DWP is trying to minimise the costs. The DWP is perhaps in a difficult position because the Treasury has insisted that all the costs of the FAS have to be found within the DWP budget, while the assets of the FAS schemes will be taken by the Treasury and not given back to the DWP. Finally, having witnessed taxpayers guaranteeing failed private sector bank pension schemes in full, many FAS members believe their rights should be 100% restored!

Background:

This consultation is yet another series of changes to the Financial Assistance Scheme, to incorporate further extensions related to the Government’s welcome announcement of December 2007. However, it is, to say the least, disappointing and frustrating that the FAS still fails to reflect the promises made at that time and that the Government has taken so long to implement even the most urgent of the changes promised well over a year ago. The Serious Ill Health provisions are still not in place and some of those who were in most desperate need of their pension in December 2007 have sadly died before receiving any money.

Part of the reason for the complexity of the FAS implementation process relates to the fact that many of the schemes had already entered into agreements to buy annuities. If the DWP had agreed to my repeated requests, from 2003 onwards, to suspend the annuity purchases, these problems would not have arisen.

If the Government had taken its responsibilities seriously and promptly in relation to this matter, the FAS could have been set up properly many years ago and the huge problems that this consultation is trying to cope with would have been, at least partly, avoided.

In December 2007, with the intervention of then Secretary of State Peter Hain, and Pensions Minister Mike O’Brien, and following the publication of the Young Review, a more far-reaching announcement was proposed for the FAS, promising terms similar to the Pension Protection Fund for all members of FAS schemes – including those with solvent employers who had previously been totally excluded.

Yet, even now, that announcement has not been honoured. This is most disappointing, especially for those who have already suffered many years of injustice and uncertainty. Part of the reason that so many consultations and new regulations are required for the FAS is that the Government took so long to seriously engage in settling this injustice in the first place. Another reason is the complexity of our pension system. However, many of the problems possibly stem from the DWP trying to minimise the costs. The DWP is perhaps in a difficult position because the Treasury has insisted that money from the failed FAS pension schemes that had not yet committed to buying annuities for wind-up will be taken into Government but will not actually be used to pay the FAS benefits. Therefore, all the costs of the FAS have to be found within the DWP budget, while the assets of the schemes – some £2billion or so – will be taken by the Treasury and not given back to the DWP. This is putting apparent pressure on the DWP to keep the costs down, which has led to serious anomalies and continued unfairnesses, some of which remain unaddressed in this package of regulations.

The justifications given for some of the current proposals are inconsistent. On the one hand the Consultation Document states that, because scheme assets will be taken in, the Government can afford to be more generous to surviving unmarried partners, but on the other hand the Document insists that this is a pure ‘pay-as-you-go’ scheme, which means that it must carefully control near term costs and cannot pay actuarially reduced early pensions. In relation to receipt of tranches of pension from earlier ages, the Document states that it cannot follow PPF practice due to administrative complexity, yet elsewhere it proposes vastly more complex arrangements than PPF as a result of annuities having already been bought for some members and, in any event, administration is being handed over to the PPF under future proposals.

I have been inundated with complaints from members of FAS schemes w ho find it now impossible to accept that what the FAS offers is fair. They say there are several areas where the terms of the FAS are patently unfair and unacceptable, especially in light of the subsequent underwriting of bank final salary scheme pensions 100% at taxpayers’ expense.

They were told for many years that taxpayers could not afford to underwrite these pensions in full, that Government had to be so careful with taxpayers’ money and that taxpayers could not be expected to fund full pension replacement for FAS schemes as most taxpayers do not even have final salary pensions themselves. These reasons are impossible to accept, now that all members of the pension schemes of failed private sector banks such as Northern Rock or RBS have had their pensions – to amounts beyond the wildest dreams of most FAS members – 100% underwritten by taxpayers.

In December 2007, FAS members were asked to accept terms similar to the PPF, on the grounds of fairness and policy consistency. However, if members of failed bank pension schemes are being offered terms substantially better than PPF – in fact their full pension payments – at taxpayers’ expense, it is no longer tenable to treat FAS victims so much worse. Government has been directly implicated in the problems causing FAS members to lose their pensions without any warning, therefore Government must take responsibility for what has happened more seriously. If it can use taxpayers’ money to underwrite private sector pension schemes in full after all, then the rationale it originally used for limiting FAS payments is no longer valid. Such inconsistencies are not compatible with fairness or social justice.

Detailed Comments

Section 1
This Section states that the FAS will pay 90% of the members accrued pension (points 6 and 9) and that the assistance will be paid from the member’s normal retirement age (point 9). Both these statements are misleading. Government should not persist in describing FAS as paying 90% of members’ pensions from their NRA, unless it actually does so! The FAS does not pay 90% of each members accrued pension, because of the different revaluation factors used by the FAS – for many members the FAS pays 90% of much less than their actual pension. Also, for many people, the FAS does not pay from the member’s normal retirement age.

Section 2
Point 10 states that ‘Assistance is payable from either the qualifying member’s Normal Retirement AGE (NRA) or from 14 May 2004, whichever is the later. I have two comments on this:

1. The Assistance is not payable from the member’s NRA – FAS often refuses to start payments until much later than the member’s actual NRA
2. The FAS has given no justification for refusing payments to those who should have retired before May 2004. Their pension would have been paid before this date, the Government is responsible for the maladministration that led to their losses and no reasons have been offered to explain or justify refusing to recognise pre-2004 pension losses

Point 19 indicates that the Government has decided it will not recognise the member’s normal retirement age. It refers to ‘unofficial agreements’ which would be ‘difficult to establish’. This is grossly unfair. Members who can prove that their pensions would have been paid at a particular age should be paid from that age. To refuse to recognise their rights in this way is unacceptable. If members can prove their normal pension age, they should be paid from that age. Trust Deeds were not always updated due to cost issues, or delays in obtaining legal documentation, but many members can clearly establish their own pension age with written evidence and this must be recognised.

Early access to pensions should also be from a standard age, regardless of the member’s NRA. If actuarial reductions are applied, then payment for all from age 55 would be cost-neutral to the Government but would also ensure that those who desperately need access to their pensions – perhaps due to losing their job and being unable to find new employment, or even due to ill health – would all be able to receive their pensions from a standard age of 55.

Response to Question 4: The Government’s approach to deciding when entitlement should begin is unfair and unacceptable. The FAS must recognise members’ normal pension age if they can prove this. The FAS should allow early access to pensions – with actuarial reduction – from a standard age of 55

Points 25 – 28 The consultation document has confusing logic when trying to justify refusing to pay pension entitlements in tranches, as per members’ scheme rules. The PPF pays compensation based on each tranche at the time the scheme would have paid out. The FAS must do the same. The reason given for not doing so is that this would ‘bring costs forward’. That is not a relevant consideration, especially as the Government will be taking in substantial sums of money from the assets of failed FAS pension schemes, far higher than are required to pay FAS benefits in the early years. The problem of ‘disproportionate administrative costs’ is also not a valid reason for refusing to treat these entitlements as would happen in the PPF, because the PPF is going to take over running the FAS scheme payments! Therefore, if it can handle this administration for its own schemes, it should be well able to do so for FAS schemes too.

Response to Question 5: The Government’s proposals for failing to pay tranches of pensions when they fall due are unfair. The reasons are not valid – the FAS should not be a ‘pay as you go’ scheme, as it is taking in substantial amounts of assets from failed FAS schemes to cover early years costs and PPF pays each tranche as it falls due, so the administrative problems can obviously be overcome

Response to Question 6: I agree with the proposed treatment of pension step-ups and step-downs

Points 34 – 40 relate to FAS proposals for establishing a member’s actual pension when they have either had annuities purchased, assets transferred or commuted or reinstated into the state pension scheme. The huge complexities of our pension system leave these proposals at risk of operating against members’ interests. There is no clear indication of what ‘notional annuity’ will be calculated, nor how it will be assessed. I believe the Government must ensure it does not penalise FAS members by using erroneous assumptions in its annuity calculations. Members were previously assured by the DWP that deciding to take transfer values would not penalise their future FAS benefits. These assurances must be honoured.

Point 38 states that ‘the core of the FAS structure is a comparison of the expected pension and the actual pension the qualifying member will get’. It is vital that Government ensures it calculates the expected pension correctly, as well as considering the actual pension the member is receiving.

Response to Question 7: I recognise the complexity of this situation, but it is vital that the Government calculates ‘notional annuity factors’ fairly. Using the member’s actual annuity payment, where one is being received, is sensible.

Response to Question 8: I welcome the increases in the FAS cap as outlined

Response to Question 9: I would support a fixed cap increased by rpi

Points 45 – 51: The question of inflation linking for FAS schemes is contentious. Although the PPF only pays limited inflation linking for post 1997 benefits, this does unfairly penalise FAS schemes, since their members will have far fewer years of pension entitlement relating to post 1997 accruals. I also recognise that it will be difficult to justify paying every single FAS member better than PPF benefits, since some schemes had no pre-1997 inflation linking at all anyway. However, many schemes did have inflation protection or escalation on all members’ entitlements and I suggest that the FAS needs to take a scheme by scheme approach to indexation, because it is such a potentially significant part of the pension entitlement. I also believe that the Government’s recent handling of the economic crisis has meant that policy is engineering a period of high inflation, from which FAS members will particularly suffer in future. I would suggest that the DWP consider separate arrangements for indexation of payments to members whose schemes contained much higher indexation provisions than the legal minimum. This could perhaps be paid out separately under the DWP maladministration scheme framework.

Response to Question 10: I do not support penalising those who took an inflation linked annuity, if their scheme provided full inflation linking. I believe the FAS needs to take a scheme by scheme approach to indexation, because it is such a potentially significant part of the pension entitlement and removing all pre-1997 indexation will otherwise result in FAS payments being substantially less than – in some cases less than half – the members’ actual pensions.

Point 53: I welcome the proposal to extend FAS survivor benefits to surviving unmarried partners and dependent children.

Point 63: I do not believe it is right or fair to try to recover erroneous payments made to surviving spouses or civil partners who received money in error. This is likely to cause unnecessary distress to a surviving spouse who perhaps discovers that their deceased former loved one had not nominated them as a beneficiary. As the document rightly points out, it is up to the FAS to ensure that nominations are made as soon as possible

Response to Question 12: I welcome the extension of FAS payment cover to surviving partners who have been nominated by the deceased member. I do not support reclaiming overpayments from spouses or civil partners who have been paid in error.

Points 71 – 74: I welcome the transitional protection proposals, so that people already receiving FAS payments do not suddenly find their payments being reduced. It is important to bear in mind that FAS payments are still substantially less than the actual pensions these members were expecting and promised – which they were told were protected by law. So, reducing these already reduced payments again would be unacceptable. The transitional protection must also apply to intial payments, not just annual payments. Indeed, those who received initial payments would have normally expected that these amounts would go up, when the final assessments were made, not down. The original initial payments were supposed to be set at just 60% of the expected pension, rather than 80% as were the FAS terms at that time. Therefore, all members, whether receiving initial or annual payments, would have had legitimate expectations that their final amounts would increase. The Government’s proposals on tranching are unacceptable, as already described, and the idea of reducing initial payments is also unfair.

Response to Question 15: Transitional protection is welcome, but must apply to initial payments as well as Annual Payments

Point 89: When calculating entitlement to lump sums, it is vital that the Government ensures the ‘actuarially neutral’ basis referred to here is indeed fair. We have experienced several occasions in connection with the FAS, where the actuarial assumptions used are biased against member entitlements and in favour of the Government.

Point 92: This point suggests that arrangements relating to taxation of backpayments may not yet be in place. I was promised, in 2008, that any members who received backpayments relating to earlier years would not be taxed on these as if the income related to the tax year in which it was received, but would be spread over the previous years to which it actually relates. I am concerned to know whether this is already in place, or whether there has been some delay in implementing this agreement made between HMRC and DWP.

Section 3

Response to Question 16: I welcome the proposals to extend payment for a full month, allow payments to relate to periods longer than one month if they are very small and to allow alignment of payment dates with annuity payment dates

Response to Question 21: I welcome this proposal. It seems sensible as it may help avoid unnecessary dilution of scheme assets in advance of transfer to the Government

Section 4

There is insufficient information for an informed comment here

Section 5

I welcome the proposals to transfer administration of the FAS to the PPF. This was the proposal that I made in 2004, as soon as the PPF was being established.

I do recognise that the FAS operation has improved significantly since the early days, when it was heavily criticised and failed to get money to even the small number of victims who actually qualified. The improvements are noticeable and welcome.

However, it is a waste of taxpayers’ money to have two operations carrying out very similar activities but run separately. The PPF has proved itself efficient and effective and I have confidence that it would run FAS schemes well over the longer term.

Response to Questions 24 – 27: I fully support all these proposals and hope they can be introduced as quickly as possible. The Board of the PPF should take over as FAS scheme manager and run the FAS payments alongside the PPF schemes (of course with clearly separated funding!)

Section 6:

I have called for the Government to take over the assets of failed FAS schemes since 2003 and welcome proposals that will enable that to happen. I would also still support trying to unwind some of the annuity contracts that have already been entered into. The Government has decided against this, even where the assets have not yet been transferred to the insurance company, but I still believe it could be beneficial to try this.

I am very disappointed that it seems only half the schemes will transfer some assets, since this will result in much higher costs than necessary to taxpayers. What is even more disconcerting, however, is that the assets taken in are not being earmarked to pay out FAS benefits. The Consultation Document states that the FAS is being funded on a ‘pay as you go’ basis, and this means that there is too much concern about controlling short-term costs. As assets will be coming in to the Treasury, these could and should be used to ensure much fairer payments are made by FAS, without unfair concerns about minimising near term costs. These concerns have resulted in proposals to delay tranching benefits from being paid at their due date, preventing members accessing their pensions early even with actuarial reductions and limiting the size of lump sum payments.

The mention of ‘pay as you go’ payments is also inconsistent with the points made in Section 6, point 63, where the Government says ‘the assets will be used to help meet the cost of providing enhanced FAS payments across the FAS membership’. I do support taking in these assets, but it seems to me that they are not going to actually be used to pay FAS members at all, so this comment is irrelevant.

Response to Question 33: I welcome taking in unused ‘orphan’ scheme assets, but would hope they will indeed help fund improved FAS benefits, rather than just disappearing into general Treasury spending and leaving the DWP to fund FAS on a pay as you go basis.

One final comment: I hope the FAS is considering what actions it needs to take now in order to ensure that any records held in connection with schemes that have already annuitised are transferred over to the FAS. Trustees should be asked to do this urgently.

Summary of responses:

Question 4: The Government’s approach to deciding when entitlement should begin is unfair and unacceptable. The FAS must recognise members’ normal pension age if they can prove this. The FAS should allow early access to pensions – with actuarial reduction – from a standard age of 55

Question 5: The Government’s proposals for failing to pay tranches of pensions when they fall due are unfair. The reasons are not valid – the FAS should not be a ‘pay as you go’ scheme, as it is taking in substantial amounts of assets from failed FAS schemes to cover early years costs and PPF pays each tranche as it falls due, so the administrative problems can obviously be overcome

Question 6: I agree with the proposed treatment of pension step-ups and step-downs

Question 7: I recognise the complexity of this situation, but it is vital that the Government calculates ‘notional annuity factors’ fairly. Using the member’s actual annuity payment, where one is being received, is sensible.

Question 8: I welcome the increases in the FAS cap as outlined

Question 9: I would support a fixed cap increased by rpi

Question 10: I do not support penalising those who took an inflation linked annuity, if their scheme provided full inflation linking. I believe the FAS needs to take a scheme by scheme approach to indexation, because it is such a potentially significant part of the pension entitlement and removing all pre-1997 indexation will otherwise result in FAS payments being substantially less than – in some cases less than half – the members’ actual pensions.

Question 12: I welcome the extension of FAS payment cover to surviving partners who have been nominated by the deceased member. I do not support reclaiming overpayments from spouses or civil partners who have been paid in error.

Question 15: Transitional protection is welcome, but must apply to initial payments as well as Annual Payments

Question 16: I welcome the proposals to extend payment for a full month, allow payments to relate to periods longer than one month if they are very small and to allow alignment of payment dates with annuity payment dates

Question 21: I welcome this proposal. It seems sensible as it may help avoid unnecessary dilution of scheme assets in advance of transfer to the Government

Questions 24 – 27: I fully support all these proposals and hope they can be introduced as quickly as possible. The Board of the PPF should take over as FAS scheme manager and run the FAS payments alongside the PPF schemes (of course with clearly separated funding!)

Question 33: I welcome this approach of taking in unused ‘orphan’ scheme assets, but would hope that they will indeed help fund improved FAS benefits, rather than just disappearing into general Treasury spending and leaving the DWP to fund FAS on a pay as you go basis.

Finally: I would like to ensure that the arrangements relating to taxation of back payments are in place. I was promised, in 2008, that any members who received backpayments relating to earlier years would not be taxed on these as if the income related to the tax year in which it was received, but would be spread over the previous years to which it actually relates. I am concerned to know whether this is already in place, or whether there has been some delay in implementing this agreement made between HMRC and DWP.