Annex C - Further DWP submissions made during the investigation and my assessment of those submissions
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Introduction
1. This annex sets out certain submissions made to me by DWP during the course of the investigation - and my assessment of those submissions.
2. These relate, first, to initial concerns I had about the official information provided about the security afforded to scheme members by the MFR. Secondly, they relate to whether, had DWP provided clear, complete, consistent and accurate information - as complainants assert that it should have done – this would have prevented the injustice claimed by them.
DWP’s submissions
Official information
3. DWP’s representations in relation to my initial concerns - that official information about the degree of security provided by the MFR was not clear, complete, consistent and always accurate - can be classified as being in relation to four aspects of that information.
4. These were:
(i) about the context in which (principally early) statements about the MFR were made and what Ministers and others meant by those early statements;
(ii) about whether schemes of which complainants were members were in fact fully funded on the MFR basis at wind-up and thus whether official statements about the effects of being 100% funded on that basis were relevant to complainants’ positions;
(iii) about whether all of the statements about which I had concerns were known to complainants - and whether they were referred to in their original complaints; and
(iv) about whether trustees might reasonably have been entitled to have regard to official information.
5. DWP also made representations as to whether individuals would still have suffered loss even had they known about the risks to their pension rights following disclosure of those risks by Government. It also submitted actuarial advice, produced for it by the Government Actuary, to support those representations.
Early statements about MFR
6. In relation to the context and content of early statements about the MFR, DWP said that:
… It should be noted that before the 1995 Act – except for limited facilities in respect of contracted-out schemes – no general funding requirements existed for UK pension schemes, and the amount of protection depended on scheme rules and the actions or inaction of the trustees in each case.
With no minimum requirement for funding, all categories of member, even those in a priority position at wind-up, might suffer substantial reductions in pension entitlement.
7. DWP continued:
It is therefore understandable that Government statements at the time of the 1995 Act would tend to emphasise the fact that the MFR offered a mechanism for protecting pension entitlement.
However, these statements generally made a clear distinction between full protection for all members, regardless of age, and the concept of a ‘fair transfer value’ (or similar phrase) for younger members.
8. On the former point, DWP said that Ministers had made clear that the MFR did not offer total protection and gave as an example the following excerpt from a Ministerial speech made during parliamentary consideration of the Bill that became the 1995 Act:
Let me dispel some misconceptions about the minimum requirement. It will not provide that scheme members’ benefits can be absolutely secured in full, which would require the purchase of guaranteed insurance annuities. We accept… that that would be an unrealistic target giving rise to excessive costs for employers…
If the scheme is at least 100% funded on the statutory basis, pensioners can expect their pensions to continue to be met in full, while younger scheme members will be entitled to a fair actuarial value of their rights which they can then transfer to another scheme or to a personal pension.
9. DWP said that a ‘fair actuarial value’ was not the same as an expectation of full benefits for all scheme members. DWP said that the idea of ‘fair’ or ‘reasonable’ value related to an even chance that non-pensioners would secure at least the value of their accrued rights in the scheme at retirement.
10. Moreover, DWP said that the various other parliamentary statements at this time, which mentioned ‘fair value of accrued rights’, or ‘actuarial value of accrued rights’ needed to be seen in this context.
Funding position of complainants’ schemes
11. DWP said that schemes could comply with the MFR legislation notwithstanding that they were at any one time funded below MFR levels, as the relevant legislation had only required them in such circumstances to have a schedule of contributions that would bring the scheme funding up to at least the MFR level over a specified period.
12. DWP said that it was also worth noting that the MFR regime did not immediately apply to all schemes; under transitional arrangements, schemes had not been required to undertake their first MFR valuation until approximately three years after their last valuation on the pre-April 1997 basis.
13. In other words, individual schemes that wound up may not in any case have been funded to the level at which it is alleged that a ‘false sense of security’ existed.
14. DWP said that they could have been – and probably were – funded to less than that level; or (until 1999/2000) they might still have been funded on a pre-MFR basis and would never have operated on the basis of an MFR valuation.
15. Furthermore, DWP said that their official statements about which I had concerns were made in relation to the aim of the MFR policy in respect of schemes that were funded to MFR levels. However, DWP said that, in practice, it was their understanding that most, if not all, of the schemes whose wind-up had given rise to complaints to me were below (and possibly significantly below) the MFR funding level when they went into wind-up.
16. Thus, DWP did not consider that statements about the level of protection afforded to schemes in a position not similar to those of which complainants were members were relevant to the current position of those complainants.
Complainants’ knowledge of leaflets
17. In addition, DWP said that some of the early information about the 1995 Act was long out of print and, as far as it was aware, had been withdrawn from public use some years before the time of the events which gave rise to the complaints, let alone the time the complaints to me were made.
18. Moreover, DWP said that it was surprised that official statements which were alleged to have an important opinion-forming role and which apparently influenced trustees and scheme members to take or not to take significant financial decisions had not been emphasised in the original complaints.
The position of trustees
19. DWP told me that it did not accept that any statements made about the MFR could reasonably have given trustees a false sense of security.
20. DWP said that every certificate prepared by a scheme actuary when undertaking an MFR valuation had to include a statement to the effect that the valuation did not reflect the cost of securing full buy-out of liabilities in the event of wind-up. Furthermore, every certificate showing the adequacy of a schedule of contributions had had to include a similar statement and, from May 1999 onwards, the OPRA ‘Guide to the Minimum Funding Requirement’ had stated that achieving MFR funding levels did not necessarily ensure that all liabilities could be met on wind-up.
21. Given this, DWP said that trustees should have been aware that on winding-up, scheme members would not necessarily be entitled to the full buy-out value of their accrued rights even if the scheme was fully funded on the MFR basis.
Whether disclosure would have prevented injustice
22. DWP put it to me that individuals might still have suffered losses, even had the information provided to individuals by public bodies been clear, complete, consistent and accurate.
23. DWP submitted analysis done by the Government Actuary to support the proposition that anyone leaving a final salary scheme that did not wind-up would have suffered financial loss by doing so. This complements the submissions made to me earlier in the investigation by DWP that the actions which complainants typically claim they might have taken if they had been warned about the risks associated with employer insolvency were important actions with very significant personal financial risks and implications.
24. DWP said that, had their official information contained a warning about such risks, this would have been no use to individual scheme members. Worse, it might have had significantly adverse consequences for both individuals and occupational final salary schemes generally, because it could have given no clue as to which schemes might in practice be affected. In its most general sense it might potentially have applied to virtually every scheme, hardly any being in a position in 2002-3 to fund to full buy-out levels in the event of the sponsoring employer immediately becoming insolvent; and it might well therefore have intimidated individuals in a wide range of schemes into thinking that their pensions were at risk, with the result of encouraging them to leave these schemes.
25. However, DWP said that leaving an occupational scheme in such a way was – in any normal circumstances – a decision fraught with financial risk. Such a decision should certainly not have been taken without serious thought and only after seeking advice, as one would almost invariably lose their employer’s contributions going forward; one would be obliged to take out a personal pension and thus assume all the risks of transferring out of a defined benefit into a defined contribution scheme – principally investment risks, but also expense and mortality risks; and one would be required to take a transfer value which would reflect the overall funding level of the scheme at the time of the departure – which was unlikely to be robust if the reason for leaving was fear of impending insolvent wind-up.
26. DWP further said that I should consider the issue of relative loss and the limited choices available to individuals who might have left their occupational pension scheme in the light of full disclosure of risk. DWP said that the examples set out in GAD’s analysis suggested that, in the prevailing circumstances, reductions to the benefits available at wind-up would have had to be substantial for members to have incurred materially greater losses by staying in the scheme rather than leaving it early.
27. DWP said that it believed that GAD’s analysis illustrated two very important points: first, that, as with decisions such as to contract out or contract in, the specific circumstances of individuals making decisions between different types of pension scheme needed to be examined carefully. It could not be assumed that individuals necessarily suffered a greater loss - by being members of a scheme which wound up under-funded - than they would have done if they had made some other choice in the months or years before the insolvency occurred.
28. Secondly, this showed that a general warning about insolvency risk in DWP literature could easily have intimidated members of those schemes (DWP said that this constituted at least 95% of the total throughout the period in question) which did not in the event wind-up, whether under-funded or not.
29. DWP said that, if such people had decided to leave their scheme, such a decision would almost inevitably have left them worse off.
My assessment of these submissions
30. I have carefully considered these submissions by DWP, but I am not persuaded by them.
Early statements about the MFR
31. I turn first to DWP’s submission that reference in some Ministerial statements and in some later official publications to the aim that, if their scheme were funded to the MFR level, a non-pensioner would receive a transfer value of a ‘fair value’ or ‘reasonable value’ of their accrued rights meant that this would only give them an even chance of replicating their lost benefits on retirement.
32. First, my actuarial advisers tell me that, in their professional opinion and from their experience of actuarial work, the term ‘fair actuarial value’ is not a technically defined term within the actuarial profession. In their view, an ‘actuarial value’ is no more than a reference to a value placed on an asset or liability, due to be paid in the future in certain circumstances, as calculated by an actuary. Without further explanation of the reasons for and the assumptions behind the calculation, there was no single generally accepted actuarial interpretation for what such a value might be.
33. In addition, I am aware that a ‘fair value’ in the financial markets is generally accepted to refer to the amount of money for which an asset or liability could be exchanged with a knowing and willing third party, in an arm’s length transaction. Whilst there may be some variations on this, I also understand that this is broadly the commonly accepted definition of that phrase within the accounting profession.
34. Secondly, I do not think that any commonsense reading of either term would lead to a clear understanding that non-pensioners would only have an even chance of replicating their pension benefits by investing the cash equivalent transfer values that they would receive were their scheme to wind-up funded to the MFR level. Even if the explanation proffered by DWP in its submission was the intended meaning behind those statements as to what non-pensioners would receive, this would be an unclear and potentially misleading formulation, which might in itself have constituted maladministration.
35. I therefore do not accept that the use of the words ‘fair actuarial value’ could have been unambiguously interpreted by actuaries or by others in the way that DWP now suggests.
The position of trustees
36. I now turn to DWP’s submission on whether trustees might have been misled by OPRA’s publications or by other official pronouncements on the issues relevant to this investigation.
37. On the one hand, I recognise that scheme trustees were in a different position to individual scheme members who were not trustees, in that they had access to professional advice and also to the funding and valuation certificates to which DWP has referred. I am advised that scheme funding and valuation certificates were rarely requested by scheme members but that trustees were indeed required to have regard to them.
38. On the other hand, I note that it was recognised in DSS research, published in September 2000, that trustees’ knowledge of their duties varied. Furthermore, the Myners report, commissioned by Government, showed that the majority of trustees had received less than three days’ training. It also recognised that more than three-quarters of trustees had no in-house professionals to assist them and were thus reliant on securing advice from external and often costly commercial advisers.
39. Moreover, I also note that OPRA had recognised in July 1999 that, while professional advice was often necessary, ‘trustees still need a grasp of the subject to be able to ask the right questions and understand fully the advice they are given’.
40. In addition, I consider that member-nominated trustees – who were usually scheme members and not pensions or business professionals – were in a substantively different position from those appointed by sponsoring employers. I also note that the actuarial profession had as early as March 1995 warned the Government that a signed minimum funding certificate might give a misleading impression to scheme members.
41. Having considered these matters carefully, I do not accept that a requirement on trustees to seek professional advice or to have regard to various certificates can mean that information issued by a regulatory body or by other official bodies can reasonably be incomplete, misleading or inaccurate – and that this requirement might absolve those providing any such information from a finding of maladministration.
42. This is reinforced by the – in my view quite proper – recognition by the regulatory body that trustees would need to know what questions to ask before such advice or certificates could properly be understood.
43. It also seems to me that official publications issued by those responsible for the legal and regulatory regimes in which pension schemes operated were a reasonable source of information about the issues that affected pension scheme trustees and that trustees might therefore be expected to rely on them.
Scheme funding levels
44. I now turn to DWP’s submission that the schemes of which complainants are (or were) members were all funded to a level below – or considerably below - the MFR level. I also consider whether, if that were the case, statements concerning the security offered by being funded to the MFR level were relevant to their complaints.
45. First, where a scheme was funded below the MFR level, it is not the case that scheme members would necessarily have had no regard to official information about what was denoted by being funded to that level.
46. If a scheme was, for example, 95% funded on the MFR level, it seems to me reasonable to assume that a scheme member might consider that any shortfall that would occur on scheme closure might be minimal (that is, approximately 5%), if they believed that any scheme could meet all of its liabilities on wind-up if it were funded at the MFR level.
47. It seems to me also reasonable to assume that a scheme member would make other assumptions about the security of their pension rights. They might have done this by, for example, a direct comparison of the position of their scheme against the 100% MFR level that official information told them was a benchmark that would enable their scheme to have sufficient assets to meet its full liabilities.
48. Therefore, for those members of schemes which wound up below 100% on the MFR basis, I do not consider that official information about the degree of security that being funded to the MFR level provided was irrelevant to their position or is now unrelated to their complaint.
49. Secondly, and more importantly, it is not the case that those who have complained to me are or were all members of schemes that were funded to well below the MFR level on wind-up.
50. In relation to the four schemes of which the representative complainants were members, I have only been able to ascertain to my satisfaction the position as regards two of those schemes – those of which Mr G and Mr B were members.
51. In relation to Mr G’s scheme, it was finally valued at 101% on the MFR basis. Mr B’s scheme was finally valued at just over 100%. As can be seen from chapter 2, Mr G may only receive 24% of his expected pension and Mr B – without ‘assistance’ from the FAS – may only receive approximately 10%.
52. In relation to Mr J’s scheme, I am aware that his scheme was not fully funded on the MFR basis and that a substantial shortfall existed on wind-up. However, I am not aware of the current position or the exact funding level in either that scheme or in that of which Mr D was a member.
53. In addition, the schemes of which other complainants were members were by no means all funded below 100% on the MFR basis. For example, in relation to those among the random sample of schemes whose records I scrutinised (see chapter 3) and where information is available, it appears that the majority of those schemes were valued as being near to, at, or above the MFR level.
54. In another scheme funded above the MFR level, at least seven of whose members have complained to me, non-pensioner members are likely to receive approximately 80% of the ‘Guaranteed Minimum Pension’ in respect of national insurance contributions and nothing at all for their other contributions. I have also seen at least ten similar cases of schemes that were funded at or above the MFR level but where non-pensioners are likely to receive a significant shortfall in their expected pension.
55. Furthermore, perhaps one of the best known examples is the ASW Sheerness scheme, which was 104% funded on the MFR basis but where non-pensioners are likely to receive only a minimal proportion of their expected pensions.
56. This position – that schemes funded to the MFR level would not necessarily be able to pay to non-pensioners the value of their accrued rights – was something recognised in private by Government at the time and was, my actuarial advisers tell me, inherent in the design of the MFR.
57. This was reflected, for example, in a letter from GAD to DSS in June 1999, in the actuarial report seen by OPRA in draft that was produced in November 1999, in the September 2000 MFR consultation issued by DWP and the Treasury, and in the actuarial profession’s briefing paper for DWP provided in March 2002. It was also recognised in the NAO report on OPRA published in November 2002, by an OPRA spokesperson in December 2002 and in OPRA publications issued in 2003. A GAD official also recognised this in a meeting in March 2000.
58. However, I note that in public – in, for example, parliamentary debates in March 1995 right through to as late as a December 2001 statement by OPRA - official sources sometimes appeared to suggest that shortfalls in non-pensioners’ rights would only occur – where a scheme was funded to the MFR level – if fraud had occurred.
59. Thus, on the one hand, it is clearly the case that public bodies knew at the time that financial loss on scheme wind-up would not be restricted to those in schemes which were either ‘under-funded’ on the MFR basis or which had been the subject of fraud or other unlawful activity.
60. On the other hand, the public assurances given by Government were that the MFR was designed to ensure that a scheme, if funded to that level, would have enough assets to meet its liabilities in full. Such assurances were given during parliamentary consideration of what became the Pensions Act 1995, in parliamentary answers to questions given in June 2000 and February 2001, and in a Westminster Hall debate in July 2001. In the former debates, assurances went further. It was stated that, even where a sponsoring employer became insolvent and was unable to make further contributions, funding to the MFR level would enable a scheme to meet all of its liabilities.
61. What, in the light of all of the above, could non-pensioners reasonably have expected from reading or hearing official sources of information about positions where their scheme was funded to 100% on the MFR basis? I consider that they would have expected in such circumstances to receive a cash transfer value calculated by an actuary that would reflect their full accrued pension rights.
Did complainants have regard to official information?
62. In relation to DWP’s submission that some of the leaflets about which I have concerns are long out-of-print and thus were irrelevant to the complaints I received in 2004, that seems to me to be a submission wholly without merit.
63. Complainants have told me that they took decisions – or refrained from action – some time before the winding-up of their scheme. Their complaints were directed at assurances in official publications that were provided some time before either the complainants’ schemes wound up or the injustices that they claim to have suffered had crystallised. Thus the official statements that they claim lulled them into a sense of ‘false security’ were precisely those which were available many months before their scheme wound up, and many of those publications may indeed be no longer in print.
64. As for why some of the official statements about which I had concerns did not feature in the original individual complaints or in Dr Altmann’s submissions in support of those complaints, it should be remembered that the description of the alleged deficiencies in official information that were set out in the statement of complaint for this investigation only gave examples and was not intended to be exhaustive.
65. Many of the complainants have sent me copies of old leaflets from their records and others have pointed me to contemporaneous press cuttings or original excerpts from Hansard. Indeed, in the case of some of those publications that are now out of print, it has largely been through the material sent to me by complainants that I have been able to establish what was in them.
66. I am satisfied that many complainants had regard either to the specific statements made by public bodies or had read scheme and other documentation which, I have seen, often replicated excerpts from official information.
Would disclosure of risk have prevented injustice?
67. Turning now to whether disclosure of risk would not have led to a similar - or greater – injustice, it seems to me that the Government’s submissions appear to assume that, had all members known the true risks, the only options open to them were to stay in or to leave their scheme.
68. However, I am not persuaded that this was necessarily the case. For example, had trustees had more and better information available to them, and assuming such information was absorbed and fully understood, it would have enabled greater understanding of the strength of the security offered by the MFR and of the background to and effect of the changes made to the MFR in 1998 and 2002.
69. In that context, trustees might have:
- attempted to seek higher levels of funding from sponsoring employers, in recognition that the MFR represented a funding benchmark that fell short of the monies that would be needed on discontinuance;
- attempted to seek even higher funding, as the costs of buying out benefits on discontinuance rose over time;
- disclosed the security issues to their members if they were unable to secure such extra funding;
- opted for a ‘gilts-matching’ investment strategy, to move to a stronger MFR calculation basis and hence maximise the MFR minimum employer contributions;
- opposed early retirements unless the employer provided sufficient additional funds to cover the annuity buy-out cost of the resulting pensioner liabilities, to avoid the ‘priority drift’ effect; or
- taken other steps to reduce security risks - such as minimising the financial strain from other sources such as generous or out-of-date benefit options, refusing to accept transfers into the scheme, following less risky investment strategies, cutting back transfer values sooner, reining in discretionary benefits, containing future costs by supporting reductions in benefits for future accrual and, ultimately, where permitted, winding up schemes sooner rather than later.
70. If members had also had more information and absorbed and fully understood the level of security provided to their benefits by the MFR, they might have:
- pressured employers to raise contributions (in some cases employees arguably had a stronger negotiating hand than trustees in this respect, especially where strong and organised trades unions existed);
- elected not to transfer benefits from other pension arrangements into the scheme (if applicable);
- opted not to make additional voluntary contributions or otherwise spread their investments;
- retired from schemes sooner in order to secure their place higher up the winding-up priority order; or
- sought to take transfer values from schemes in financial distress (before reductions for under-funding were applied to transfer values).
71. Furthermore, there were also options available to sponsoring employers of pension funds that subsequently went into wind-up, had they understood more fully the level of security afforded by the MFR or had their employees put pressure on them to act. For example:
- some employers would have contributed more if the MFR had not been weakened, meaning less of a shortfall for the schemes where the sponsoring employer subsequently folded;
- for others in greater trouble, a stronger MFR would have hastened the pension fund wind-up (and in some cases the corporate insolvency), and limited the benefits that were exposed to being reduced;
- some employers would have taken remedial action sooner, which could have prevented pension fund wind ups - such as closing the scheme to new entrants, reducing future benefits, raising retirement ages, ceasing future accruals or cutting other business costs to enable higher pension contributions; and
- others would not have done deals that weakened employer covenant strength (or, conversely, may not have passed up opportunities to do corporate deals that could have enhanced the security of the pension fund). Some corporate restructurings that weakened pension funding or employer covenant strength might not have happened if all the parties had had a better appreciation of the true extent of the pension funding problems. Conversely, other companies might not have turned down opportunities to sell a business to a ‘white knight’ that could have prevented the company failing because they thought that the pension scheme funding position was better than it really was.
72. It seems to me that the absence of clear, consistent, accurate and complete information from those who were responsible for the statutory basis for pension scheme funding led to ill-informed corporate decision-making by sponsors of pension funds that subsequently went into wind-up and equally ill-informed decisions taken by scheme trustees and members.
73. I recognise that it would not have been a straightforward decision for active members to leave their scheme and take a transfer value when, in many cases, such action might have resulted in them losing valuable death-in-service and ill-health retirement cover.
74. I also accept that the analysis done by GAD for DWP may well reflect a true position for certain people who chose to leave their scheme but found later that their scheme did not wind up with insufficient funds.
75. In my view, however, it is not enough to suggest that, had an individual known that their pension was at risk, they would still have suffered a financial loss because they necessarily would have transferred out of their scheme.
76. I consider that there were clear alternatives to such an action and, as a result of the maladministration I have identified, the individuals who have complained to me have been prevented from taking such action through having been misled as to the need to do so.
77. My general approach to resolving complaints that maladministration has caused injustice to individuals is, where maladministration has been identified, to seek to put those individuals back into the position they would have been in had that maladministration not occurred.
78. In this case, it seems to me that it is impossible to put those who have complained to me back into a position in which they had been properly informed as to the potential effects of the limitations of the relevant legislative provisions that aimed to protect their accrued pension rights.
79. As their scheme no longer exists, I also consider that it is far too late to seek to provide those individuals with an informed choice about their membership of it or about what else they could do to protect their position.
80. Those individuals have been prevented from being able to make those choices for themselves at the appropriate time. That is an injustice.
