Why the £400m Financial Assistance Scheme is inadequate

by Dr. Ros Altmann

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The scale of the inadequacy of £400million Financial Assistance Scheme (FAS)

The Government has committed a sum of £400m over 20 years, for a ‘Financial Assistance Scheme’ but this money will not be enough to correct the dreadful injustice suffered by around 65,000 people. This paper demonstrates the sheer scale of the inadequacy of this amount, in the face of the pension losses suffered by tens of thousands of people who believed Government assurances that their contributions were protected by the law and safe. A prime requirement is to stop schemes in wind-up buying annuities, to allow the assets to be pooled and pay pensions on an ongoing basis. Without more money, the FAS cannot prevent annuity purchase. This is a huge waste of assets and makes it far more expensive to help those affected, because all the existing assets are gone.

A sum of £400m over 20 years, is not actually equivalent to £20m a year, because of the effects of inflation. But, even if we use the figure of £20m a year, what can this do? It can help 130 people a year get some of their pension back!! Buying annuities is so wasteful in this situation.

1. £20m could buy an indexed pension of £6,000 a year for 130 people

A lifetime annuity of just £6,000 a year, for a married man in his early 60’s, costs around £153,300. £20m could, therefore, help just 130 (yes, one hundred and thirty) people (£153,300 x 13o = £20m). So the whole Financial Assistance Scheme, if buying annuities, could only help 130 people each year. Alternatively, it could buy level annuities of £6,000 pension for 200 people, with no indexing.

Long-serving members worst affected have lost far more than £6,000 a year. £20m would probably not even replace half the lost pensions for these 130 people. And deferred annuities for members in their 50’s would cost far more. ASW has hundreds of members, Dexion, Motherwell Bridge, Perivan, UEF, Albert Fisher, BUSM, Samuel Jones, IFI� the list goes on. And these are just the larger schemes.

2. £20m could pay £6,000 to 3,333 people for one year 

If payments are made on an ongoing basis, £20m a year will pay 3,333 people, just £6000 each year. (£6,000 x 3333 = £20m). Of course, many members have lost far more than £6,000 a year pension. There are also many more than 3,333 people affected. And what happens after 20 years? Those in their 50’s now would only be in their 70’s by then.

Summary:

This is all that the Financial Assistance Scheme could do:
1. £20m could buy £6,000 indexed pension for 130 people (or 200 if not indexed)
2. £20m could make a £6,000 payment to 3,333 people in one year

This is what £400m will not do:
1. It will not allow trustees to stop buying annuities, so no scheme assets will be left
2. It will not allow the injustice to be rectified, as so many members will be excluded
3. It will not restore confidence in pensions
4. It will not give these people back their lives

What is wrong with the Financial Assistance Scheme?

It does not have enough money. It cannot really help most of those affected! It is not even new money at all. £20million a year is simply what it would cost to pay Pension Credit to 15,000 of those affected and 20 years takes those in their 50’s now, only into their 70’s. Some 65,000 people have lost their pensions, but £20million would buy a pension of just £6,000 a year for 130 people. The Government is likely to be accused of dishonesty. And raising false hope.

Surely we need to wait for definite figures?
Not really. Without more money, there is not much point in collecting the figures. This is merely an excuse to delay. It will take years to get final figures and the cost of collecting the data is reducing the pensions further. If £20m will only give £6000 pension to 130 people, what use will the data be anyway? Most people have lost far more than £6000, so £20m a year could just give a tiny number of people a fraction of their pensions. The injustice will remain. Yet all these members were assured by Government that their contributions were completely safe and protected by law and they believed this.

What is happening at the moment?
No-one knows who will be helped and how. Those coming up to retirement are often getting no pension at all and even some existing pensioners are having their pension reduced. Moreover, many members are not getting their full GMP, which is the ‘Guaranteed Minimum Pension’ promised to members who opted out of the State Earnings Related Pension Scheme(SERPS/S2P). But GMPs have turned out to be neither ‘guaranteed’ nor a ‘minimum’. The Government has also so far failed to buy people back into the State scheme in full, so these members are ending up worse off than if they had never been in their company scheme at all! £400m is so inadequate that it prevents the pooling of assets, which means trustees still have to buy annuities, which is a huge waste of money.

Why is annuity purchase so wasteful?
Insurance company reserving requirements mean annuity rates are based on yields of gilts and index-linked gilts, which leads to insufficient capacity in the annuity market, with only Legal and General now offering bulk annuities. Schemes in wind-up must also buy deferred annuities for younger members, which are for much longer durations and are therefore riskier to issue and even more expensive. If the PPF will not buy annuities, why should these scheme members be penalised by having to do so? If all assets were pooled and run centrally, this would mean members would receive much more pension for their money and also that it would cost taxpayers much less to restore these pensions.

What should Government do?
If the Government will commit to pay a sum of £75million a year, index-linked, for 40 years, into a central fund, and pool all the assets of the schemes which have not yet bought annuities, we could sort out this problem. We could pay at least 90% of promised pensions to all non-retired members and possibly more. If necessary we could exclude members with, say, less than 5 years’ service, or we could cap the amount of benefit. But most members would get their pension and the issue could be settled.

Won’t this set a dangerous precedent, with other groups demanding compensation too?
No. This case is unique. Government promoted and encouraged membership without warning of any risks, so members were lulled into believing they were safe. No other group was told (wrongly) by the Government that their pension contributions would deliver a ‘guaranteed’ pension.

Why should taxpayers pay for compensation for these members of occupational pension schemes, when not all taxpayers have occupational pensions?
Ensuring a healthy pension system will benefit all taxpayers and to society as a whole. That is why all taxpayers pay for the £10billion a year tax relief, yet which goes only to those contributing to a pension.

What if these people do not receive any assistance?
Confidence in pensions won’t be restored. These people will not vanish. All other political parties have committed to compensating these people. It is less than 10 years since the 1995 Pensions Act promised pension security. Will anyone trust the 2004 proposals, if those who believed such assurances last time are left without the pensions they contributed to for decades? The Parliamentary Ombudsman is to investigate Government’s failure to administer occupational pensions satisfactorily and trade unions are challenging the legal framework itself. If either of these routes succeeds, compensation will cost much more than settling now. Why should these people have to wait any longer? Their health is suffering, they are having to sell their homes, some have died, often in despair at leaving no provision for their widows. The Government is responsible and must act to right this injustice.

How to organise compensation effectively

The Government needs to commit £75million a year for 40 years. This is a modest sum compared to the £10billion a year spent on tax relief and also compared to the cost of giving more tax-free cash to top earners’ pensions after the forthcoming 2006 simplification changes. This overall proposal would allow scheme assets to be used over time, rather than buying annuities and would enable much more pension to be restored to a far larger number of people.

What should happen to the scheme assets? – Pool assets into a Pension Replacement Fund (PRF).
Do not buy annuities, but retain the assets and use them to continue to pay pensions as now.

When the necessary structure has been established, all the assets of all the schemes that are winding up can be pooled into one fund, perhaps called the ‘Pension Replacement Fund’ (PRF) , which can run alongside the proposed Pension Protection Fund. This new PRF would then also receive the £75million a year payments from Government.

How will the Government ensure that the fund will have enough money to pay future pensions?
The Government should commit to pay a sum of£75million a year (index-linked) for the next 40 years into this fund, to ensure that there will be enough assets in future to pay the pensions. We will not be able to predict the exact cost of compensation until people’s claims on the fund are registered. But the PRF should enable replacement of at least 90% of pensions for long-serving members, or within, say, 5 years of normal retirement age, such amounts being paid immediately.

What happens before this Pension Replacement Fund has been properly set up?
Independent trustees who are winding up the funds would continue to run these assets as now, until administration of the Pension Replacement Fund is in place. All pensions already in payment would, therefore, continue to be paid as now, but without buying annuities.

Any members who come up to retirement age will then start to receive their entitlements from their existing scheme (to be calculated by the independent trustees) which will then be taken over by the Pension Replacement Fund once it is established.

Independent trustees will continue to administer the winding up schemes as before, except they will not need to purchase annuities. Once the Pension Replacement Fund Board is ready to take over, there will be a transfer of assets and scheme records to this new Fund

How would the independent trustees transfer the assets and records to the PRF?
Independent trustees would write to all scheme members and inform them that the assets and administration will be transferred to this new Fund. At the same time they can also notify members of the amounts of their claim being submitted to the Pension Replacement Fund on their behalf. All the records can then be transferred over to the Board of the Pension Replacement Fund, together with the names, addresses and entitlements of all scheme members.

The independent trustees would then have finished their involvement and all future responsibility would pass to the Board of the Pension Replacement Fund.

How do the members receive their pensions from the PRF?
Those already receiving pensions will carry on receiving them as before. Those who have not yet reached retirement age, would be contacted by the PRF perhaps 6 months before retirement date, as is currently done for state pensions. Once the Board of the PFR has verified the entitlements, based on the details provided by the independent trustees, the PRF will then start paying their pensions from the retirement date.

What happens to members of schemes which have already bought out their annuities?
This situation will be more difficult, but such members are clearly entitled to the same help as others, since they have suffered the same loss of pension rights. Some members may have taken transfer values and the amount of their losses will be harder to calculate. The Board of the PRF will need to take actuarial advice to assess the amounts of lost pension to be restored to these members, which I would expect to be paid in the form of top-up pensions on an ongoing basis.