Initial reaction to Government's final response to Parliamentary Ombudsman report
Initial reaction to Government’s final response to Parliamentary Ombudsman report
by Dr. Ros Altmann
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- Rejection of maladministration verdict on official information
None of the Governments’ reasons for rejecting the findings that its official information and leaflets misled members about the safety of their pensions stands up to scrutiny.
The Government says that all its leaflets were appropriate ‘in the circumstances’, were for different purposes and contained different information – but the fact is that none of them mentioned the risk of wind-up, inadequacy of MFR or the impact of the priority order – risks that Government itself created.
It says that the leaflets contained ‘broad information for the majority of members’ – but they did not cover the problems of wind-up at all, which could affect every non-pensioner member. Indeed, they even mentioned employer insolvency, in two places, saying members would be compensated if there was fraud (which almost never happens) but failed to mention the lack of security for members’ accrued pensions when the insolvent employer scheme has to wind-up.
The Government says that the leaflets ‘made clear they were limited in scope and that the reader needed to refer to other information’ – the other information they were referred to was employer or scheme information or other official leaflets, which also failed to mention the risks of wind-up. Members had already read their scheme booklets, but were seeking confirmation of the messages of safety that the employer information contained. The Government was told and should have known that employer and scheme documents would only stress the benefits and safety of the schemes, but it was the official information that should have mentioned the risks faced in the case of employer insolvency or solvent scheme wind-up.
Government says that all the leaflets had disclaimers to say they were for general guidance – that is why people were, indeed, guided by them – and that they were not a complete statement of the law – no-one would expect them to be a complete statement of the law, but they would be expected to cover the most important factors, yet they left out the most vital one of all!
Government says that it is wrong for the Parliamentary Ombudsman to find it guilty of maladministration for not changing its official leaflets after the Institute of Actuaries warned that both employers and trustees (as well as members) did not understand the lack of protection which was provided by the MFR on wind-up and that members’ accrued pensions could be severely reduced if the scheme wound up. It gives three main reasons for its claim that this warning did not imply a need to review the official leaflets (even after Alistair Darling committed the Department, in 2000, to ensuring that all leaflets would be thoroughly checked in future and would be complete, accurate and comprehensive and also that people who were misled by them should be compensated.)
Firstly, it says that the leaflets were not targeted at existing members – however the DWP actually sent these leaflets to members and they specifically state that they are designed for scheme members! Furthermore, even non-members, before they joined, should surely have been alerted to the risk that their scheme might wind-up and they could lose their pension. Secondly, it claims the trustees should have informed members about the MFR – but the Actuaries report said the trustees misunderstood MFR and, of course, it was the Government who introduced and oversaw the MFR and created the original 50% risk. In addition, it was Government’s own regulations which prescribed what trustees were required to tell members, so why did it not change those regulations to require them to mention the risks of wind-up? Thirdly, the Government says that no-one suggested its leaflets needed to be revised! Surely, the Department should have realised the need to mention the risks to readers, without having to be told to do so, especially after Alistair Darling’s commitment to ensuring leaflets were comprehensive and accurate and the DWPs own revised guidelines.
2. Rejection of maladministration verdict on MFR changes
The Government says its decisions about the MFR were taken appropriately, without maladministration. It says that it considered plenty of information before making the decisions. However, as the Ombudsman points out, there is no evidence that it properly considered member security on wind-up. It did not consider the risk of pension losses implied by the legal priority order, did not check what was happening to annuity rates, nor the position of solvent employer wind-ups, where the employer was only legally obliged to pay in enough to meet 100% MFR. Indeed, there are examples of solvent scheme wind-ups where schemes were over 100% funded and the employers were allowed to take money out of the scheme, to pay to shareholders, yet members were left with huge pension losses! This is a direct result of the MFR. The Government failed to take wind-up risks seriously, so it did not consider all the relevant factors when making its decisions. This is definitely maladministration.
The Government’s response betrays clear evidence that it failed to bear in mind the true original intention of the MFR, when overseeing funding changes. In its full response, the Government describes the policy intention of the MFR (see point 11) as follows: ‘it was intended to ensure that a scheme which was fully (i.e. 100%) funded on the basis of the MFR should have sufficient assets, in the event of it winding up, to protect fully pensions already in payment (by buying annuities) and to give younger members a cash amount which, if placed in a personal pension, would allow them a reasonable expectation – but not a guarantee – of achieving, at retirement, benefits equivalent to those lost.’ If this was the original intention, how can the Government justify not considering the costs of annuities and effect of wind-up priority order on particular groups of members, when deciding about the MFR? It could not have known whether the MFR would deliver benefit protection on wind-up without checking these factors.
The Government’s response also admits that it could have decided not to follow the actuarial advice to weaken the MFR. ‘The Government would have needed strong grounds to justify not acting on the recommendation. No such grounds were apparent at the time.’ The strong grounds should have been member security and the risk of pension losses on wind-up, but as the Government did not properly consider this issue, it failed to realise that there were, indeed, strong grounds for not weakening. The Government also failed to consider the MFRs implications for factors such as protection of contracted-out rights (members could lose some or all of the GMP) and for solvent employer schemes, which could wind-up with only 100% MFR, even though this was nowhere near enough to pay full pensions. As the Government response points out, falling stock markets, falling interest rates and rising annuity costs were important factors in determining member security on wind-up, but it did not consider these properly at all, when overseeing MFR or issuing its official leaflets.
In fact, what seems to have happened is that concerns for Treasury and employer costs over-rode the issues of member security. The Ombudsman’s report shows evidence that Government was worried about potential public spending implications of strengthening the MFR on the assumptions used for calculating contracting out rebates and was also worried about increasing the costs to employers of running final salary schemes. These concerns seem to have driven the decisions on the MFR, whereas the lack of security for members’ pensions was not taken serious account of.
The Government also claims strengthening the MFR would not have affected member security anyway. For solvent employer schemes that is certainly not true, and it also does not excuse the Government’s failure to warn members about the risks they faced. If the MFR was so weak, why didn’t Government put in proper protection for members – no other country left members pensions so much at risk. Government says people should not have expected a scheme that was less than 100% funded on the MFR to pay full pensions. That is rather beside the point. Firstly, many schemes were over 100% funded (ASW at 104% but members still lost their pensions) and secondly, no-one could possibly have been expected to recognise that a scheme which was 90% funded might only pay 10% pension. Government created this risk and should have told people about it, but kept saying the schemes were safe.
3. Denial of any responsibility – and members could not have prevented losses anyway
The response says ‘Nothing the Government did created the losses incurred’ This is just not true. The wind-up rules, coupled with MFR inadequacy – both Government responsibility – led to the losses. The Government bowed to employer pressure to keep company contributions low, because generous final salary pensions allowed the Treasury to keep state pension costs low. Government also says it does not believe maladministration led to the losses suffered. Yet, its assurances of safety denied members an informed choice, leaving them at the mercy of the priority order, annuity rates and MFR. Official information also caused all the other injustices (shock, outrage, sense of betrayal, effect on health, being forced to sell home etc). These are not even acknowledged at all in the Government’s response.
The Government claims it cannot be expected to compensate for losses because these were private schemes. It also says that the losses suffered were a result of stock market falls and rising annuity rates. These claims are not valid. Firstly, these were not just private schemes. They contained national insurance contributions which would otherwise have generated a state pension. Government approved the schemes and all members had to be contracted out, so individuals could not go back into SERPS if they stayed in the scheme. Government said the ‘Guaranteed Minimum Pensions’ from these schemes would be at least as good as SERPS, yet failed to check this was true if schemes wound-up.
Secondly, the losses were suffered as a result of the effect of the priority order and wind-up rules which the Government itself imposed. Once in wind-up, these were no longer private schemes at all. Trustees had no discretion to divide the assets fairly, the law took over completely.
Thirdly, the fact that the Government failed to notice that annuity rates were falling and that this meant non-pensioner members faced much larger losses on wind-up than was originally intended by the MFR legislation is surely serious maladministration. It failed to mention the risks at all.
The Government also tries to blame the trustees, saying they were responsible for member security. This is not true, they were responsible for looking after the assets and ensuring the scheme was funded in line with MFR legislation, but they were powerless to force employers to contribute above 100% MFR, the Government did not tell them they needed to inform members about wind-up and trustees were misled by the incorrect information given by OPRA and official leaflets too. On wind-up, of course, trustees are powerless to protect members’ pensions anyway.
Government claims that any action members could have taken, either individually or collectively, would have been unlikely to protect part of their accrued rights, much less protect all of them. This is just not true. It is impossible to prove exactly what each member would have done, because they were denied the chance to do anything, but it is obvious there are ways in which they could have avoided the huge losses and protected their retirement income. For example, some could certainly have retired and secured their pensions as a pensioner member under the priority order, thus protecting their full pension. Anyone with 20, 30 or 40 years’ contributions would want to protect this rather than potentially losing everything and could have transferred out if they wanted. Some would not have transferred in from money purchase schemes, others would not have put Additional Voluntary Contributions (AVCs) into their scheme. The money contributed to AVCs would have been far safer in an ISA. Some could have taken other jobs, even in the public sector, if they had known the risks. Those who wanted to be sure of having enough retirement income could have saved more, cutting down on spending elsewhere, but it is too late now. Furthermore, some groups of members might have decided it would be better to transfer back into SERPS, to at least protect their GMP rights. Trustees or unions could have pressured for bigger contributions. Many would have taken out life insurance, to protect their families if they died, but it is too late now. These are similar to the issues with inherited SERPS, but in that case this Government agreed to compensate in full, for people who ‘might have’ been able to make other arrangements.