Continued injustice of Financial Assistance Scheme – even after extension

by Dr. Ros Altmann

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SUMMARY OF INADEQUACIES OF FAS EXTENSION TO MORE PEOPLE:

1. This announcement is some welcome movement on the part of the Government, but does not really come close to sorting out the problems which Government caused for these people.  There should be proper redress, not a bit of assistance.

2. It is disgraceful that the DWP full final response to the Ombudsman’s report, laid in Parliament last week, contains misleading and false statements about the FAS.  The DWP says that the FAS will pay a percentage of peoples’ ‘expected’ pension.  This is totally false.  The statement leads Parliament to think that members will have most of their pension back and that the problem is sorted.  That is far from the truth.  In reality, those on the 80% band, within 7 years of scheme pension age will be losing nearly half their ‘expected’ pension, those in the 65% band will be losing about 60% of their ‘expected’ pension and most of those on the 50% band will still be losing nearly three quarters of their pension, so the FAS comes nowhere close to an adequate remedy.  The misleading impression stem from the fact that the Government has invented a term called ‘core’ pension, which is designed to sound as if it is like their ‘expected’ pension, but it is nothing like it at all.

3. This ‘core’ pension is not anything like a final salary pension.  These people’s expected pension would be inflation-linked, would be paid from scheme pension age – not age 65 – would start payment as soon as pension age was reached – not once the scheme wind-up has finished, would not be capped at any level, would pay a tax-free lump sum, contained life cover, ill-health benefits and may have contained over 50% inherited spouse cover.  Anyone who qualifies for FAS assistance, will lose all of this and will also be taxed on the payments and have means-tested benefits reduced.  If these payments were anything like pensions, they should include provision for tax-free lump sums and ill-health benefits.  The reality is that this scheme is an exercise in ‘spin’ rather than providing a solution to the problem.

4. Only including those within 15 years of pension age will still exclude people in their 50’s who saved for over 25 years in their company scheme and have no means of redressing this loss.

5. The existence of the FAS has required significant amounts of trustee time to submit the paperwork and data which the FAS has demanded.  In sending this information, trustees have incurred expenses for each scheme, which are charged to the scheme, leaving even less assets for the members’ pensions.  Therefore, the FAS is taking even more money away from members whose pensions have already been decimated, in order to give a bit of assistance to those who do qualify for the FAS.

6. It is unreasonable to force members who were expecting to retire at scheme pension age to wait till age 65 and conclusion of wind up! 

7. Provision should be made immediately for those who are already over pension age, in very poor health, or terminally ill– even where there are assets available sitting in a bank somewhere, the Government has refused to allow trustees to pay even the equivalent of FAS payments straight away to those already past age 65 or terminally ill.

8. Members of schemes winding-up with solvent employers must be included

9. By not offering any inflation linking, the value of the payments from FAS will decline over time.  Within 10 years, the value would be cut by over 20% in real terms.

10. A £12,000 pension cap is unfair and the cap itself is not inflation-linked, so the real value of the cap will wither away and take away much more of people’s pension than currently appears to be the case in the headline figures.  By the time those 15 years from pension age get their payments from FAS, the value of the cap will be more like £8,000!

11. The assets of these schemes are being used to buy extremely expensive bulk annuities, rather than being left to run and earn investment returns and ultimately to deliver more payments.  The schemes eligible for the PPF will not be buying bulk annuities, nor should schemes in the FAS.

12. The FAS does not provide any explicit recognition for the losses of the ‘Guaranteed’ Minimum Pensions which should have come from the SERPS National Insurance system, which Government said would replace National Insurance contracted out rights with benefits at least as good as those given up in the state scheme.
    

RESPONSE TO CONSULTATION ON FAS REGULATIONS

My response to this consultation outlines the inadequacies of the current proposals and, although I welcome the Government’s offer to provide some help, there is a long way to go, to achieve justice for the victims of this pensions disaster and give them the peace of mind they deserve.  This Financial Assistance Scheme will not rectify the injustices suffered by tens of thousands of people whose pensions have been denied to them on scheme wind-up.  The £400million being offered (or £20million a year for 20 years), is woefully inadequate to fund a proper compensation or assistance scheme.  The DWP is thus able to help only a small proportion of those affected. 

Sadly, the announcements of FAS help have so far merely compounded the injustices suffered by these people who trusted the UK pension system.  The FAS announcements have been confusing, raising hopes which were then subsequently dashed.  Most of those affected are still not sure when – or even whether – they will get any help.  Their suffering goes on and it seems as if the Government has simply not understood the scale of human misery which this situation is causing, nor the urgency with which it needs to be righted.  The members were misled by Government into believing their pensions were safe.  They deserve to be compensated.  The FAS, as described in these regulations, is not a vehicle to deliver such compensation.  Indeed, it is not a vehicle to deliver much assistance either, because the Government has failed to make enough money available to address the problem.

So what are the issues still to be addressed and improved?

13. The funding is inadequate– £400million is nowhere near enough money.

14. The whole FAS covers only those less than 3 years from scheme pension age last May 2004.  It is unjust to exclude all the others who have suffered losses.

15. It is also unjust to announce that those within 3 years of scheme pension age will be helped, giving them some hope, but then to dash those hopes by later announcing that they have to wait till age 65 and conclusion of wind up! 

16. Provision should be made immediately for those who are already over pension age, in very poor health, or terminally ill– why not allow trustees to pay straight away where assets are available?

17. Members of schemes winding-up with solvent employers must also be included.

18. It is unfair to offer no indexation.

19. There should be provision for a tax free lump sum.

20. A £12,000 pension cap is grossly unfair

21. The assets of these schemes should not be wasted on buying annuities.

22. What about the ‘Guaranteed’ Minimum Pensions that Government said would replace National Insurance pensions by contracting out?  How can Government tell people a part of their pension is guaranteed and then not ensure that this amount is paid?

1. £400million funding of the FAS is totally inadequate

The Government has, so far, only committed £400million – £20million a year for 20 years – to address this issue.  The FAS payments already included in these regulations are likely to cost more than £400million anyway, so there will be nothing left for anyone else!  If 15,000 members only receive an average of £2,000 a year pension from the FAS, this would already cost £30million a year!  If just one person in each scheme were to receive the maximum £12,000 a year cap, this alone would use up £4.5 million a year, before any of the other members receive anything.  The FAS is clearly using up more than the £400million. It is vital that the Treasury agrees to fund this scheme properly and fully.  It does not require a large sum to be found immediately and can be spread over a period of 40 years or more, with perhaps £75million each year, as long as assets are pooled and the FAS is run along the lines of the PPF, paying out pensions on an ongoing basis, rather than using up scheme assets to buy expensive annuities. 

2. It is unjust to exclude those over 3 years away from pension age

It is grossly inequitable to leave out those who were just a few days or weeks beyond 3 years away from pension age, giving them no certainty at all for their future incomes.  Many of these people are already in their 60’s and feel dreadfully disappointed that they are left in limbo.  This cliff-edge seems grossly unjust, especially as scheme pension ages vary.  Some 58-year-olds are included, while other 63-year olds are excluded.  Without a commitment of more money, all other members will find that there will be nothing in the FAS for them at all, so the unfair cliff-edge will persist.

3. The gross injustice of making people wait till age 65 or wind-up completion must be revisited

Members who are within 3 years of scheme pension age have been dealt a very cruel blow.  At first, it seemed as if they may at least get 80% of their pension soon, but then a couple of weeks after the announcement, it emerged that they would need to wait until age 65 AND until their scheme wind-up is finished.  This means potentially further years of waiting and distress.  Someone who was expecting to receive their company pension and retire at age 60, and is now over 60, would have thought – after the FAS announcement – that they would get their pension soon, but this is not so.  They suddenly find that they have to wait till 65 and also until wind-up has ended, with no idea how long that will be.  These people have been treated appallingly.  I cannot understand the rationale for announcing that those within 3 years of scheme pension age will be helped, but then later saying that scheme pension age is irrelevant to the FAS and that payments can’t start before age 65.  Why raise people’s hopes so unfeelingly, if they will not be helped for years anyway? 

4. Immediate provision is urgently needed for those who are already over pension age or in very poor health, or terminally ill

There are some people who are terminally ill or have become severely ill, cannot work and desperately need their pensions on which to survive.  There are also members who are already over pension age, but not getting their pensions, despite decades of contributions made in good faith.  In many cases, these people are suffering a severe reduction of state pensions too, since the state earnings related pension should be coming as GMP from their company scheme (which was contracted out), but there is no money to pay it.  If their company scheme were ongoing, they would have a pension by now and members who are ill would at least have an ill-health or early retirement pension as per the terms of their scheme.  However, just when they most need the money, they find their lifetime’s worth of savings in a ‘safe’ pension scheme have been taken from them, despite Government reassurances of protection and no risk warnings.  If the FAS is to truly offer help to those who need it most, then it should authorise trustees to use existing scheme assets to pay out such pensions immediately, with money reclaimed from FAS later.  Only around 10% of schemes have finished winding up, so most schemes still have assets left, which are largely held in cash and bonds.  It seems so wrong that the members who so desperately need their pensions are not allowed access to the assets they contributed to.  Trustees could start paying pensions now, direct from each scheme’s assets, to those seriously ill or already past retirement age, instead of forcing them wait even longer.  This would, at last, deliver some meaningful help to those who are desperately in need of the pensions, so that they can have some of their lives back.

5. Eligibility criteria should include schemes winding-up with solvent employers

The DWP has said that it will not include members of schemes whose employers were and still are solvent.  The Government’s rationale here is that such employers ‘have a duty to support their schemes’.  This rationale is deeply flawed.  The employers have complied fully with the law and members have no real hope of forcing them to put in extra money.  Inadequate oversight of the MFR (the Government’s Minimum Funding Requirement, which was all that employers needed to meet when winding up a pension scheme) has meant this funding measure is totally inadequate for delivering members’ promised pensions.  Even if employers could easily afford to pay the pensions in full, scheme members are totally powerless to force them to do so.  If Government wants to try to make the employers pay up, then it has far more power than the members.  I suggest that these scheme members should be included in the FAS and then Government itself could try to recover the costs from the employers, if they can!  Also, in some cases, trustees agreed a compromise deal, in order to save the company from insolvency, and now the pension scheme members are being penalised for this.  Yet members were always told their pensions were safe.  Members of solvent employer schemes have suffered the same injustice as others and should be included.

6. It is unfair to offer no inflation linking.

There will be no indexation of FAS pensions, unlike the PPF, which will at least pay inflation-linked increases for the period after 1997.  With inflation at 3%, the value of a level pension will halve in about 20 years.

7. There should be provision for tax free lump sum in FAS rules

These people were promised a tax free lump sum, under their occupational scheme rules, but the FAS regulations do not permit this.  Many of them were relying on this lump sum to pay off their mortgages and are now in desperate financial difficulties.  The FAS should allow part commutation of pensions to provide a lump sum.

8. A £12,000 cap is grossly unfair

A cap of £12,000 seems unfairly low.  The Pension Protection Fund will cap benefits at £25,000 a year and pay out 90%, with some inflation-linking, which is far higher than FAS payments.  However, in future, scheme members will have been warned what will happen to their pensions if their employer fails, whereas these wind-up victims were never warned that there was any risk to their promised pensions!  The Government told them they were completely safe.  The DWP claims that the £12,000 cap is designed to ‘prevent higher pensions being paid to executives of failed companies that might have led to the companies failing in the first place’.  This justification is unwarranted.  Firstly, top executives of these failed companies usually ensured that their own pensions were safe, either by taking early retirement, or transferring their money out.  Secondly, the cap would affect relatively junior management.  Someone earning £30,000 a year with 40 years’ service would be entitled to a pension of £20,000 a year, yet would be capped at £12,000, thus still losing 40% of their pension and all their indexing too.  Those who earned around £30,000 a year are hardly likely to have been responsible for the failure of the company.  They should not be further penalised by a cap.  Often, in fact, the top executives who these managers reported to, decided to split the company, using financial engineering or corporate ‘restructuring’ to offload a subsidiary, containing the pension scheme, then letting that subsidiary fail.  Meanwhile the executives carried on running the other parts of the business, continuing to make money, after having jettisoned the pension fund and ruined these members’ lives.  To take away a significant portion of many people’s pension via a £12,000 cap is unjust .

9. Members’ assets should not be wasted on buying annuities

The Government says it does not want to buy annuities to provide the FAS pensions, nor will the PPF be buying annuities, because buying annuities entails paying a profit and risk margin to the insurers who provide them.  Why then is the DWP insisting that trustees proceed with buying annuities with the assets of winding up schemes?  It would be much better for members, and ultimately potentially cheaper for the taxpayer to fund a proper compensation scheme, if the members’ money was not wasted on buying annuities.  Bulk annuities have become extremely expensive and only Legal & General, or sometimes Prudential, will sell them.  Instead, the money could be used to fund ongoing pension payments year by year, as will be the case with the PPF.  If annuity purchase is stopped, then all members should receive higher pension payments from the same pool of assets (since no risk and profit margins will be taken out of the funds) and the Government would also have many years over which to set aside money to pay FAS compensation, rather than having to commit large sums now.  The Government could pool all the assets and run the FAS alongside the PPF, with additional Government funding coming in to provide ongoing pensions over time.

10. What about ‘Guaranteed’ Minimum Pensions that Government told people they would receive from their contracted out benefits?

Members’ occupational pension entitlements generally consist of two main parts. 

1. Their National Insurance pension replacement – mostly GMP (Guaranteed Minimum Pension).
2. Their occupational pension

a). Most schemes were contracted out of the state earnings related pension system (SERPS/S2P), whereby national insurance rebates were paid to company schemes, to provide a replacement for the pension rights that members would have received if they had stayed in SERPS/S2P.  These rebates were supposed to give what the Government called a ‘Guaranteed Minimum Pension’ or ‘GMP’ for pre-1997 service. 

b). The other element of members’ occupational pensions comes from their own contributions into the scheme and the contributions made on their behalf by their employers.  This is their actual company occupational pension. 

It has turned out that neither the Guaranteed Minimum Pension, nor the company pension element were truly protected, despite repeated Government assurances that these pensions were safe!

The proposed FAS regulations make no distinction between the part of the occupational pensions which came from contracted out rebates (as a replacement for state scheme rights) and that part of the pension which comes from members’ and employers’ own contributions.  The Government led these people to believe that this element of their pension was ‘guaranteed’.  They were not told this by their employers, nor by financial advisers, nor by their trustees, it was actually Government that called this a ‘Guaranteed Minimum Pension’ which would seem to make it impossible to justify such a pension being neither ‘guaranteed’ nor a ‘minimum’.  I believe that the DWP must take responsibility for this.  It would be best if this part of the occupational pensions of the winding-up scheme members were taken back into the state system and then the FAS could provide an additional amount on top, to compensate for the loss of the pension they saved for with their own contributions and those of the employer.  Taking responsibility for GMPs back into the state system would also make the winding up of all these schemes much quicker and simpler and ensure that compensation could be delivered more efficiently. 

This course of action is not only fair, but might also encourage people to trust Government assurances on pensions in future.  If Government can tell people that they will get a guaranteed amount of pension and then refuse to make up any shortfall if this ‘guarantee’ does not materialise due to inadequate protections by Government, the future for trust and confidence in pensions seems shaky indeed.

CONCLUSION

The FAS is nowhere near sufficient to rectify the injustices suffered by victims of occupational scheme wind-ups.  These members are entitled to compensation, not just assistance, and deserve far more than is being offered here.  More money must be committed.  The Government has not accepted its responsibility for what happened to these people and is offering tiny comfort for a huge problem.

Members of failed schemes should all be properly compensated.  The idea of excluding those who are over 3 years from scheme pension age is totally unjust.  Further serious omissions are exclusion of members of solvent employer schemes and failure to make provision for immediate payments to all those over scheme pension age and all those in serious ill-health.  If trustees are permitted to pay out the pensions from existing scheme assets, then the members could receive payments immediately in up to 90% of the cases.  By forcing people to wait until they are 65 and until the scheme has finished winding up, people are being made to suffer far too long.  After all, justice delayed, is justice denied! 

If all scheme assets are pooled, the FAS could be run as a subsidiary of the PPF, with Government injections of cash into a separate arm of the PPF, to ensure pension payments will be paid, rather than wasting the money on buying annuities now. 

Finally, the issue of loss of ‘Guaranteed Minimum Pensions’ has not been addressed in these regulations.  If members were promised a ‘guaranteed’ amount – by government – how is it acceptable that they are not receiving it?  These GMP entitlements should be taken back into the state scheme and included in the National Insurance pension at pension age, as would have been the case if the members had never been contracted out of the state scheme.  The FAS should then pay compensation for the loss of the members’ actual occupational pension on top of these restored GMP rights. 

THE BOTTOM LINE

The Treasury must accept that it is Government’s responsibility to offer these people compensation, not just assistance.  It must make more money available to ensure that this dreadful social injustice is remedied immediately.  Restoring contracted out rights back into the National Insurance scheme in full and then paying compensation for lost occupational pensions on top, would be a fair method of dealing with this issue.  The half-hearted attempts to help some members, somewhat, have served merely to prolong these people’s agony.