Government criticised over occupational pension schemes

In March 2006, a report from the parliamentary Ombudsman concluded that the government had unfairly misled people into feeling reassured that their company pension was secure. At the same time, the government adopted legislation to relax the minimum requirements under which final salary occupational pension schemes had to be funded by companies.

On 15 March 2006, the Parliamentary and Health Service Ombudsman, Ann Abraham, published a 260-page report, Trusting in the pensions promise (PDF 990Kb), which looks into the government’s role in the winding-up of company pension schemes and the subsequent loss of pension benefits of more than 85,000 people. The report concluded that, in certain areas, the government had been guilty of ‘maladministration’.

Legislative developments

A key issue in the report concerned changes to the ‘minimum funding requirement’ (MFR) for pension schemes. The MFR was first introduced in 1995, when ministers vowed to make pensions ‘safe’ and introduced legislation on how occupational pension schemes were to be run and governed. The legislation included rules that determined the amount of funds that employers were obliged to hold, to ensure that all pension benefits could be paid in full (the MFR). Following a change in the tax law in 1997, employers were obliged to pay more money into their occupational pension schemes (UK0301109F). As a result, pressure from employers led to a change in the method of calculating the MFR, so that new pension contribution rates were no more onerous than they had been before the tax change. These new rules required employers to hold only enough money to give employees a 50% chance of receiving their full pension benefits. In 2002, the rules were weakened even further, allowing employers more time to address any pension scheme deficits. In the 2004 Pensions Act, the MFR was abolished and from now on, pension trustees must determine how much money should be in each scheme.

Report findings

According to Ms Abraham’s findings, there is an inconsistency between the level of pension security that final salary occupational scheme members could expect and the information that they publicly receive about such protection. The report concludes that the Department of Work and Pensions (DWP) was guilty of three instances of maladministration:

• neglecting to inform people of the risks of saving in company pension schemes;

• failing to act on actuarial advice and inform scheme trustees of the increased risks under newly introduced funding rules;

• relaxing the MFR in 2002, without properly considering the consequences and all the evidence at its disposal.

The report suggests that the government should now:

• restore pension benefits, if necessary from public funds;

• apologise for its failures;

• offer compensation to the victims for their distress;

• consider topping up pensions for those whose schemes began winding up between April 2004 and March 2005.

No figures are offered in the report, but the government has suggested that the cost of addressing the issue could amount to as much as GBP 15 billion (approximately €21.5 billion).

Government reaction to report

The government has rejected the report’s findings. It does not accept that maladministration occurred or that taxpayers should cover the costs of pension promises made by employers. On 15 March 2006, the DWP’s Minister for Pension Reform, Stephen Timms, stated in a press release that: ‘The report fails to take account of the fact that our leaflets are intended to be simple and introductory. They did not claim to offer comprehensive financial advice. For that, people needed to look elsewhere – as the leaflets themselves make clear.’ He also remarked that the decision to change the level of the MFR in 2002 was based ‘on the clear recommendation of the actuarial profession endorsed by the Government Actuary’s Department’. Although the Ombudsman’s findings are not binding, it is unusual for a government to entirely dismiss those findings – this has happened on only three previous occasions.

Union seeks answers

Amicus welcomed the report and is leading the campaign for compensation. Deputy General Secretary, Ed Sweeney, stated that the report had ‘vindicated Amicus’ in its position that successive governments have failed to ensure the promised value of occupational pensions. Consequently, he insists, the government needs to act and failure to do so is an insult to all those hard-working people who did what the government told them to do and saved for their pensions. It will also contribute to the growing pension crisis if people do not believe they can trust pensions to pay out.

Amicus is pursuing legal action against the government in the European Court of Justice (ECJ), alleging that it failed to fully implement the Council Directive 80/987/EEC that would have protected employees and their pensions in cases of employer insolvency. The case will be heard by the ECJ later this year.

Helen Newell, Industrial Relations Research Unit (IRRU), Warwick Business School