Official Quotes Showing How Members Were Misled

by Dr. Ros Altmann

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How the Government knew people were not protected, yet still encouraged them to contribute to their employer scheme, without warning of the insolvency risk:

There are so many examples of how the Government encouraged people to believe that their employer pension was guaranteed and safe and also how the Government failed to warn them of the risk to their contributions. If any kind of Penrose-style inquiry was held into this situation, I am afraid that this Government (as well as past Governments) would be directly implicated in causing this problem.

The conclusion would be that this Government knowingly encouraged people to put their money into their employers’ schemes, when there was a risk that they could lose it all on insolvency, without warning of this risk and in full knowledge that people believed their pension was guaranteed. I think an Inquiry would be political dynamite and show this Government in a dreadful light. In particular, the Treasury and FSA are directly implicated here, along with the DWP, Pensions Service and OPRA. It is hard to see how an Inquiry could blame employers or even the trustees and actuaries. Penrose concluded that the problems of Equitable were caused primarily by the company itself, with the regulatory system being only a secondary factor. In this case, an Inquiry would be bound to find (in light of the increasing amounts of evidence I am finding) that the primary cause of these people being unaware of the possibility of losing their money, was that they believed official assurances that their pensions were safe and protected by law and that they were never warned of any risk to their money and future pension if their employer failed.

Here are some examples:

1. The FSA issued official guides to tell people about pensions and explain employer schemes. I have two of these in my files and have read them cover to cover. Neither of them mention one word about final salary employer schemes providing anything other than ‘guaranteed pension’ and no mention of possibly not getting this pension if the employer becomes insolvent. Indeed, the guide specifically contrasts the ‘guaranteed’ pension of a final salary scheme, with the ‘unpredictability’ of personal pensions. Tell that to ASW!

These are the three quotes I have chosen:

a. In the booklet entitled ‘FSA guide to the risks of opting out of your employer’s pension scheme’

Page 5: Section headed ‘Why you should beware of opting out’ (of your employer’s scheme)

‘Some types of employers’ schemes (the ones called ‘final salary’ or ‘defined benefit’ schemes) give you a guaranteed pension. The amount of pension you get from a personal pension is unpredictable.’

b. Booklet entitled ‘FSA guide to the risks of pension transfers’
Page 7 Defined benefit or final salary scheme’
‘You are guaranteed a certain level of pension when you retire’
c.Booklet entitled ‘FSA guide to penions’:

‘Reasons for joining an occupational pension scheme if you can’
‘In a final salary scheme you know broadly how much pension you’ll get. This makes it easier to plan for retirement’

The Treasury is directly implicated in this (which may persuade Gordon Brown and Ruth Kelly to change their minds and open the purse strings!)

I have been through my files and found some very interesting papers.

In September 2000 the Treasury (and DSS jointly) issued a consultation document entitled ‘Security for Occupational Pensions’. Preceding this, the Government had asked the Actuarial Profession to produce a report on security of occupational pensions. In this report, the Actuaries advised the Treasury that members were unaware that their pension rights were not protected in full on insolvency, even if there was 100% funding on the MFR test. The Treasury refers to this report, but chooses to ignore the recommendations made by the actuaries that members should be told this! I think this evidence is pretty damning! Some selected quotes from this consultation are as follows:

‘The MFR does not provide a guarantee that, in the event of an employer becoming insolvent, its pension scheme members’ rights will be honoured in full’ (page1)

‘The Government wants to help people understand their pension rights and appreciate the value of saving for pensions’ (page 3)

‘The amount of reassurance the MFR can deliver is commonly misunderstood to be a good deal greater than it really is.’ (page 6)

‘The Actuaries report discusses the extent to which the role of the MFR is understood by scheme members, trustees and employers. It notes wide misunderstanding of the effects it is designed to secure. The report then goes on to discuss the case for bringing home to scheme members the scale of the protection which the MFR can deliver, perhaps by disclosing to scheme members what benefits could be delivered should the scheme wind up.’ (page 8)

‘Before reaching a final view, the Government is therefore looking to explore a more diverse range of ways in which scheme members’ rights could be protected.’ ‘It considers that the concerns identified by the Actuaries all deserve informed and thorough discussion among the various interest groups concerned’. (page 11)

‘One of the key recommendations in the Actuaries’ report is for disclosure to members about the security of their benefits.’ ‘The report recommends that there should be disclosure to members of , broadly, the extent to which their benefits could be secured by means of annuity purchase if the scheme were to wind up’ (page 15).

I think this document is powerful evidence against this Government. The result of the consultation in 2000/2001 (before ASW and the worst cases of pension loss) was that members’ security was thought not to be of great enough concern to the members to consult them on it! The Treasury Consultation document says it should be discussed among the ‘various interest groups concerned’, but does not include the members!

This is actually where I originally got involved in the whole debate. I worked on the Myners Review for the Treasury, and we looked at the possible replacements for the MFR. I recommended solvency insurance as the best way to actually protect members’ benefits. This recommendation was rejected and the Treasury decided to reject insurance and adopt the ‘Scheme Specific Funding Standard’ recommended by Myners to replace the MFR. I honestly believe that this potentially reduces members’ security, rather than improving it and the Treasury seemed far more concerned with the investment issues of pension funds, rather than the question of providing pensions for scheme members.

WHO ELSE MISLED MEMBERS INTO BELIEVING THEIR PENSIONS WERE SAFE, GUARANTEED AND PROTECTED?

The Pensions Service (DWP) 2003 produced an official booklet called ‘Occupational pensions. Your guide’

‘How do I know my money is safe?’
‘you are protected by a number of laws’
‘OPRA can act quickly to protect your interests’
The 1995 Act ‘was intended to increase the security of members’ benefits’…The MFR refers to the minimum amount of funds that should be in the scheme at anyone time in order to meet the scheme’s liabilities if it were to be discontinued’

This is not correct (ASW was 100% funded on MFR) but trustees relied on this information and really believed that members’ pensions were safe because the assets were kept separate from the sponsoring employer.

3. Official Government document: Pensions Green Paper, December 2002
‘Accrued rights…are clearly protected under pensions legislation and this will remain the case’
4. The National Association of Pension Funds:
‘Your employer makes a promise of a guaranteed pension … so you have a simple way of working out the level of your pension’
‘The promised pension is not affected by the level of investment returns or interest rates’
‘If you are entitled to join your employer’s scheme, do so as soon as possible…to secure the future for yourself and your dependants’

HOW COULD ANY MEMBER HAVE KNOWN THAT THEIR CONTRIBUTIONS AND FUTURE PENSIONS WERE NOT SAFE AND GUARANTEED?

I do hope this will help in persuading the Prime Minister that we should just agree to provide redress to these people. The issue will not go away and the more one searches, the more evidence seems to emerge that the Treasury knew full well that people mistakenly believed they were protected by the law, and chose not to tell them. So members kept contributing to schemes and new members kept transferring money in from other employer’s schemes, when they should have perhaps left them there, or transferred into personal pensions. The official advice all led them to believe that employer final salary schemes offered ‘guaranteed’ pensions, which were protected by law and official funding standards, with no mention of what could happen if the employer failed.

One final point. The Treasury plans to proceed with its tax simplification programme for pensions and allow people to accumulate £1.4million, contributing up to £200,000 a year to their pensions and taking 25% tax free cash when they retire. This is more generous than current rules and the Inland Revenue has estimated that these changes (which only affect around 5,000 or 10,000 people) will cost about £200 million over the next three years, (£15million year 1, £50 million year 2 and £135 million year 3) and more in the years after that! How on earth can a Labour Government seriously contemplate spending hundreds of millions of pounds extra of taxpayers’ money on the very highest earners and refuse to spend £100 million a year on the people who have been stripped of their pensions with no warning, after a lifetime of service and contributions and after believing Government assurances that their pension was guaranteed and protected by the law!? Not even mentioning the £14 billion or more that we spend every year on tax relief for those who contribute to an occupational or personal pension – half of which goes to higher rate taxpayers!

I just don’t know what it takes to make this Government see that we have to agree to this. The longer the situation drags on, the worse it will end up being for both this government and for pensions – not to mention the effect it is having on these people’s lives!