Critique of John Hutton's response to Ros' open letter in Daily Telegraph
Critique of John Hutton’s response to Ros’ open letter in Daily Telegraph
by Dr. Ros Altmann
(All material on this page is subject to copyright and must not be reproduced without the author’s permission.)
Mr. Hutton’s letter does not give Telegraph readers the true picture. It is a distortion of reality. The DWP seems unable to face up what it has done to tens of thousands of decent British citizens who trusted their Government, tried to look after themselves and their families and were so badly misled. Mr. Hutton’s letter contains various assertions that must be challenged to explain to readers the truth, rather than the Government’s spin. Mr. Hutton says:
‘The Ombudsman found that there was maladministration primarily because of the way successive Governments worded a series of leaflets. This is not what the Ombudsman said. The Ombudsman found there was maladministration because official information – including trustee handbooks released by the Regulator, Opra, information released by DSS and DWP, public statements and White Papers were often incomplete, inaccurate and misled the public into believing that final salary pensions were safe. She also found that the decisions relating to the MFR regime were maladministrative. None of the official information alerted members to the risks that the Government had created after 1997, which related to the winding up of these pension schemes. The risks of wind-up were hidden from the public and people were denied any opportunity to protect themselves and their families from these losses.
‘I do not think it is reasonable to expect the taxpayer to foot a bill of £15billion’.
The Ombudsman did not say the taxpayer had to foot the whole bill – she said the Government must organise compensation, by whichever means. This could be partly from unclaimed assets, partly from taxpayers, partly from actions Government could take against former employers or trustees or other bodies which it may hold responsible – if it thinks they have some responsibility only the Government could enforce this. The figure of £15billion is also disingenuous, since the net present value is only around £3billion and, in any event, all the payments would be taxable and many of those receiving their pensions would not then be eligible for means tested benefits, so the actual costs would be lower still. This requires a commitment of £100-£150million a year.
‘These were not pension schemes that were provided by the State, they were provided by employers.’ The Government endorsed these employer schemes by assuring the public that, after 1997, the law would ensure such schemes had enough money in them to pay all accrued pension rights, whatever happened to the employer. The public genuinely believed this – if the Government tells you this, why would you doubt it? If the Government had not said these pensions were safe, people would have known they could not rely on them. However, official information failed to mention any risks – especially the risk that members could lose their pensions if the scheme were wound up. This is a risk that Government itself created.
‘The trustees who ran them were not the Government’s trustees’. The Government was responsible for introducing member-nominated trustees, who were misled by wrong information in the Opra Handbook. The trustees were not told that they may need to have more money in the scheme than would be required to meet 100% MFR funding levels and, indeed, they were unable to force employers to put in more than 100% of MFR. Furthermore, on wind-up, trustees have no discretion to divide scheme assets fairly. The Government dictates what has to happen to pensions on wind-up. If the employer is insolvent an independent trustee has to be appointed and has to divide the assets according to the legal priority order. This priority order takes contributions from long-serving older members and uses the money to buy pensions for those already drawing a pension from the scheme. So, in the case of ASW for example, the Government says that a 52 year old director must get his full index-linked £70,000 a year pension for life (because he took ‘early retirement’ from the scheme, even though he went on to a high-paying job elsewhere), but workers in their 60’s who have 40 years’ service in the scheme can be left with no pension at all. Trustees would not do this if they had discretion, but the Government has removed this discretion and is, therefore, directly responsible for such losses.
‘The contributions and benefits of the schemes were not the Government’s contributions and benefits’. Even this is not true. These final salary schemes were contracted out of the state pension and Government put some of the members’ national insurance contributions into their company scheme instead. The company scheme was then supposed to provide benefits to replace state pension rights (from the state earnings related pension). These pension rights would be replaced by what the Government called a ‘Guaranteed Minimum Pension’ – but this has turned out to be neither ‘guaranteed’ nor ‘minimum’. These are contributions and benefits that came from the Government and replaced Government spending.
‘Each leaflet made clear, in one form or another, that it was not a substitute for individuals taking proper advice about their own position’. This is not true either. None of the leaflets made clear that anyone needed to take proper advice at all. The leaflets contained unqualified reassurance that these pensions were safe. It was only in leaflets about personal pensions that Government exhorted readers to get financial advice. With final salary schemes, members and prospective members were simply told to get information from their scheme trustees or employer and to read other official materials (such as from the DSS/DWP or the FSA). None of this information contained any mention of the risks that Government had introduced after 1997, which actually removed security from long-serving older members and left them at the mercy of the legal priority order, inadequate funding standards, equity markets, annuity rates if their scheme wound up.
‘Statements by the Government could not be viewed as a substitute for tailored financial advice’. Why would the public think they needed ‘tailored financial advice’ if the Government assured them their pensions were safe? The Government itself, when putting out the information, acknowledged that people were unsure where to get information they could trust, because they had lost confidence after the Maxwell situation (which would imply they could not trust their employer, or employer trustees) and after the pensions mis-selling scandal (which would imply they could not trust financial advisers!) Indeed, financial advisers would not advise people to transfer out of final salary schemes, for fear of being prosecuted by the Regulator, because the FSA itself put out information stating that final salary pensions were ‘guaranteed’ whereas personal pensions were ‘risky’. As many of the members have said ‘if you can’t trust the Government, who can you trust?’ The Government, at the time, told the public that its information was being prepared so that the public could be educated about the ‘benefits and risks’ of pensions from a source they ‘could trust’ and that the information would be impartial. For the Government now to say people should not have relied on it is astonishing, when at the time people were told that the material was produced for them to rely on!
‘For detailed specific information about their own occupational pension scheme, people needed to look to their scheme’s trustees’. People did indeed look to their trustees – in particular members consulted their member-nominated trustees, who were often union shop stewards. As the Ombudsman report showed, these trustees were also misled by the official information. Bob Duncan of the BUSM scheme, Alan Marnes of Samuel Jones scheme, Andrew Parr of ASW have all been to the House of Commons to explain how they were misled by the official information and then misled other members. The 1997 Opra Handbook told trustees – wrongly – that if their scheme was fully funded on the MFR, it would have enough money to pay all accrued pensions even if the scheme wound up. The 1996 DSS leaflet describing the changes Government was making to pensions law also said that the MFR would ensure that all members’ pensions would be safe, whatever happened to the employer. Government is therefore directly responsible for misleading trustees and, in fact, the Ombudsman report recommends that the Government should apologise to the trustees.
‘We are in fact doing a very great deal to help many of those who have suffered the most.’ ‘ We have established the Financial Assistance Scheme …I recently announced in Parliament a major extension of the scheme committing over £2billion of taxpayers’ money over its lifetime’. This is political spin. In practice, only about 100 people have had any money at all, out of the many thousands who are already past their pension age. The £2billion figure is only a ‘cash cost’ and will be paid over many years. The net present value figure for the whole FAS over 40 or 50 years is just £540million and even this is more than it will really cost, because all FAS payments will be taxed and recipients will not receive means tested benefits that they would otherwise need. The fact is that this scheme is designed to sound generous when, in reality, it certainly is not. It has hardly paid any money to anyone, even after over 2 years. Even those few who have received some assistance are only getting interim payments. One widow, whose husband was due a £10,000 a year pension, is now getting just £20 a week from the Financial Assistance Scheme. Her husband died of cancer a year ago this week, after 38 years contributing to the Dexion scheme. His life insurance was in the scheme and he was not told that scheme wind-up would take this away. Therefore, he died without leaving any provision for his widow, even though he saved all his life, as Government told him he should do, in what he genuinely believed was a scheme that Government had endorsed and protected. Words of sympathy and claims of ‘generous assistance’ are not relieving the injustices which Government has caused. If the aim really was, as Government claims, to help those in most urgent need, then this scheme has failed. Meanwhile, members’ money is sitting in a bank waiting to buy annuities when wind-up finishes, but the trustees are not allowed to use that money to pay members who need them now. With a more imaginative, practical approach, these people could have had their money years ago, but the Government has consistently refused to listen to reason.
‘I would also like to set the record straight over what the Financial Assistance Scheme offers’. For someone within 7 years of their scheme retirement age, the Financial Assistance Scheme will pay ‘around 80% of peoples accrued rights, 65% for people 7 to 12 years from retirement age and 50% for those 12 or more years from retirement.’ This again is not true. The Government keeps pretending that the FAS is more generous than it really is. The Minister’s letter does not mention that these pensions are subject to a cap of £12,000 (which is not inflation linked over time, so in 15 years time the cap will effectively be worth about £8000 in today’s money). Many members have pensions over £12,000. Someone expecting a £20,000 pension will end up with only 60%, not 80%, and if the payments were due to start at age 60, not age 65, the FAS will not even pay 50% of their expected pension. This is before taking account of the fact that all of the payments are taxed, whereas the expected pension would have a tax free lump sum, thus reducing the pension further. Mr. Hutton does admit that these payments are not inflation linked (taking another huge chunk out of what would have been the ‘expected pension’) and that survivor benefits are far less generous than the scheme pension would have been. Those on the 50% band will only get about a quarter or a third of their pension and the Telegraph readers should have been told that those more than 15 years from retirement age and anyone whose employer is still solvent, or with a foreign insolvent employer is being excluded altogether from the scheme.
The only basis for asking the taxpayer to step in and make good the losses would be if it could be shown that it was the Government’s fault that these losses occurred.
OK, then here is how it can be shown that the Government is responsible for the losses:
1. Government allowed solvent employers to wind-up schemes without paying full pensions
2. Removal of dividend tax relief took money out of pensions and liquidity out of markets
3. Government was responsible for an inadequate funding regime for UK schemes
4. Government allowed employers to reduce funding at the expense of member security on wind-up
5. People have lost Additional Voluntary Contributions which were supposed to be fully protected
6. People have lost the state rights they would have had from SERPS, because Government did not protect ‘Guaranteed Minimum Pensions’ (GMPs) after 1997
7. The legal priority order for dividing assets on wind-up has deprived long-serving and older members of their pensions
8. Government is responsible for all other injustices
1. Solvent employer schemes: Members of some solvent employer schemes have lost their entire occupational pension because of inadequate MFR funding standards which Government was directly responsible for. The law allowed employers to wind-up a pension scheme and only be obliged to pay in enough to meet 100% MFR. For example, an overseas employer wound up its scheme and there was more money than 100% MFR, so funds had to be paid back to the foreign owners, while members of the pension scheme have lost their whole pension and also half of their state GMP pension rights. If the law in the UK had been stronger, or if Government had overseen the security of wind-up and MFR properly, these losses would not have occurred.
2. Removal of dividend tax relief: The Government removed ACT relief from pension funds in 1997, taking billions of pounds out of pension schemes and also taking liquidity out of the stock market. This must be responsible for some of the losses. If the dividend tax relief had not been removed, pension funds would have had more money to pay pensions on wind-up.
3. Official funding regime (MFR) inadequate for wind-up: The Government put in a funding regime that was inadequate to cope with wind-up, although it told the public that the MFR would be sufficient. In truth, it decided behind the scenes that this MFR would only give workers a 50/50 chance of getting their full pensions if the scheme wound up, but never explained this publicly. Then it weakened the MFR further after 1997, providing even less security for members’ rights on wind-up. Other countries ensured far better protection. For example, the Irish Government put in requirements that schemes should be funded to ensure solvency on wind-up, so firms in Eire are able to pay members’ pensions if the scheme winds up. UK legislation was not kept to this standard ( although the original intention was said to be to ensure that the schemes would be able to pay full pensions on wind up). The Government did not check the adequacy of the MFR over time, and it became far too weak to provide security for members’ rights on wind-up. This is part of the maladministration identified by the Ombudsman, but the Government has failed to understand. For example, IFI Richardsons had factories in both Northern and Southern Ireland. Workers in the South got their pensions after the company failed, but all those in the North have lost their pensions because they were subject to UK legislation.
4. Government put employer demands above member security: The Government was anxious to keep employers offering final salary schemes, so it bowed to employer pressure to allow them not to have to contribute too much money in the short term, ignoring the consequences for member security on windup. Government wanted to keep final salary schemes open because this enabled the state to get away with paying very low levels of state pension. If company schemes did not offer the prospect of good additional pensions, the state pension would need to rise and that would add to Treasury costs of pension provision, which Governments had hoped to keep low.
5. Loss of Additional Voluntary Contributions: Government is responsible for many members losing the ‘Additional Voluntary Contributions’ (AVCs) which they were encouraged to put into their company scheme. For example, in the BUSM scheme, one of the member-nominated trustees, who was misled by the Regulator’s trustee handbook into believing the scheme was safe, whatever happened to the employer, will lose £25,000 that he put into the scheme as AVCs. If he had been warned that this could happen, he would never have put that money into the company scheme.
6. Loss of state pension rights – GMP: Members of contracted out schemes were assured, in the official information that was maladministrative, that their company pension scheme, if contracted out, would provide pensions at least as good as those given up in the state system. This has turned out to be untrue and many members have lost some or all their GMP, as well as their entire company pension. The Government removed protections for GMPs that existed before 1997, so such losses have occurred since 1997. Government never warned members about this.
7. Priority order on wind up: The Government failed to tell members about the effects of the legal priority order – introduced in 1997 – on older, long serving members’ accrued pension rights. If members had known, they too could have taken early retirement to protect their pensions, or transferred their money out. But they trusted Government assurances that their money was safe and, having checked the official information, they were lulled into a false sense of security. If the Government had not led them to believe the pensions were safe, they would not have believed so, especially with a weak employer.
8. Other injustices are all Government’s fault: Government is responsible for all the other injustices outlined in the Ombudsman’s report. The DWP has not even acknowledged these non-financial injustices at all. They include the sense of shock, outrage and betrayal, damage to health and families caused when people who had believed Government assurances that these pensions were safe and protected by law, discovered that this was simply not true. People who had been told that Government had introduced new laws to provide better protection for company final salary pensions after Maxwell, have now discovered that those laws have actually reduced protection for members closest to retirement or with long service in their scheme. They were not warned about this, nor were they told the truth about the risks they were facing – risks which the Government itself created. Government encouraged them to put their money into these schemes and now it is denying any responsibility for failing to tell them the true situation.