Annex D - The Government’s response to my report
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Introduction
1. This annex sets out the response of DWP to my report. It includes a supplementary submission made by the Government Actuary to support DWP’s response.
2. The words used in this annex, insofar as they are italicised, are those of the authors. Inclusion in this report does not denote that I accept that all of what follows is an accurate reflection of the relevant facts.
Text of letter dated 27 January 2006 from the Permanent Secretary of DWP
3. I would like to say, at the very outset, that we greatly sympathise with those individuals whose schemes have been wound up and who have, as a consequence, lost a significant part of the occupational pension they had been led to expect by their scheme. However, as the Permanent Secretary, I must inevitably concentrate on the key issue of whether those losses were caused by any maladministration by my Department or resulted from other causes.
Findings
4. Having considered the report in considerable detail, I have to tell you that we are not able to accept your findings in respect of the actions taken by my Department for the reasons set out below.
5. There are a number of findings, to which I draw attention below, which the Department is unable to accept and considers to be flawed. But the most fundamental point is that, however great the sympathy one may feel for the individual complainants, the report, as drafted, provides no proper basis for concluding that the alleged maladministration, even if we were to accept that it had occurred which we do not, would have had any material impact on the outcomes for those individuals.
6. Let me now turn to the major issues and findings of the report.
Information
7. Your report, in relation to official information, concludes that the information about the level of security provided by the MFR was sometimes not consistent, accurate or complete and, as such, was potentially misleading. It also says that the failure of the Department to review existing leaflets after we were told that people did not know the risks to their accrued rights was maladministrative.
8. We do not consider that the report substantiates these findings. Nor does it demonstrate (even if we were to accept these findings, which we do not) that all of the individual complainants read any of the supposedly misleading information.
9. Even if they did so the report does not demonstrate, in our view, that any of the complainants would have acted differently as a result of having done so.
10. We believe that the report also fails to consider adequately whether individual scheme members received, or should have received, information from their scheme’s trustees (informed as this would have been by advice they received from actuaries or other professional advisers).
11. In other words, it appears to assume that they had read and were guided solely, and were entitled to be guided solely, by the supposedly misleading information about the MFR, notwithstanding the duty on trustees to exercise reasonable care in handling their scheme’s affairs.
12. In terms of the information itself, we believe that the report fails to recognise that:
(i) while individual statements can be questioned, Ministers and others repeatedly stressed that the MFR was intended to provide ‘greater’ protection rather than any absolute guarantee;
(ii) it was repeatedly stressed that the MFR was intended as a balance between the interests of scheme members and employers; by its nature that implies that neither was getting absolute protection;
(iii) all of the leaflets to which the report refers carried a general health warning making clear that they were not complete explanations of the law and were for general guidance only. As such they could not be absolutely relied upon; and
(iv) the advice in a number of the leaflets, that most members of an occupational pension scheme would be better off when they retire than they would be if they did not join it, was accurate.
13. In terms of whether any individual complainants read the disputed information, we note that less than half of the respondents to your survey said that they had seen the publications in question.
14. Even more importantly the report offers no substantial evidence that, even where they did so, they acted differently from how they would otherwise have acted because they read these publications. Given the wide range of sources of information available to the complainants, and the very general nature of the Departmental publications, it is unlikely in the extreme that these publications would have materially influenced their actions.
15. Furthermore the report appears to rest on the assumption that, even where an individual read the information and did act differently as a result, they were entitled to rely on it as a justification for doing so. In this respect it is quite clear that the primary responsibility for safeguarding the interests of scheme members, and communicating accurately with them, rests with the scheme trustees.
16. Indeed, since April 1997 it has been a legal requirement that all of the defined benefit schemes under consideration in the report must appoint an actuary. Even if individual scheme members might not have understood the limitations of the MFR, the actuarial profession most certainly did.
17. Moreover, each MFR valuation certificate carried a statement that meeting the MFR did not mean that, in the event of the scheme’s winding up, full benefits could be secured.
18. It seems to us to follow from this that no scheme member, properly guided by their scheme trustees, in turn properly advised by the scheme’s actuary, should have been in doubt about the actual level of protection offered by the MFR.
19. Finally, in this regard, we are advised that statements made by Ministers to Parliament during the passage of a Bill are not statements made in exercise of an administrative function. Ministers, in explaining and debating the 1995 Pensions Bill, were participating in the legislative process and so exercising a legislative function.
20. Consequently we do not think you have the powers to investigate such statements, and so, to the extent that any findings of maladministration are based on such statements, we believe that they should be disregarded.
21. Similarly, since it is… outside of your jurisdiction, we do not think you should include, or rely upon, any information given by the Financial Services Authority in reaching your conclusions in this respect.
The 2002 decision to amend the MFR
22. Turning now to your third finding of maladministration in respect of the 2002 decision to amend the MFR, we similarly do not consider that the report substantiates a finding of maladministration.
23. [The annex] to this letter [which is below] sets out a number of detailed considerations which we have taken into account in reaching that conclusion.
24. More generally, however, as the report acknowledges, it is clear that the MFR is a subject of very considerable complexity. Accordingly, the technical detail for calculating the actuarial basis of the MFR was set out in a guidance note (GN27) prepared and issued by the actuarial profession after approval by the Secretary of State.
25. The actuarial profession also then kept the actuarial basis of the MFR under continual review and recommended to the Government such changes as they considered appropriate to keep the strength of the MFR in line with the level of the original policy intention.
26. It is clear that the recommendations given to the Department in respect of the 2002 decision represented the considered view of the profession as a whole at that time; the recommendations were informed by extensive analysis by the Technical Support and Research Committee of the Pensions Board of the actuarial profession which, at that time, contained a number of the leading technical actuaries from all of the major firms of actuaries.
27. The formal approval of the recommendation was the responsibility of the Pensions Board, whose membership also encompassed the major actuarial firms. The Department was also guided… by the advice of its own professional advisers in the Government Actuary’s Department.
28. Against this background, we simply do not understand how a finding of maladministration can be justified. The Department acted on the advice of the actuarial profession, which had been confirmed by the Government Actuary’s Department. Even if, which we very much doubt, a different decision, going against the professional advice, might properly have been taken in those circumstances, we cannot see how a decision to follow such professional advice (from two independent sources) can possibly be considered to amount to maladministration.
29. Indeed we consider that it would have left the Department open to very substantial criticism and risk of challenge not to have accepted the profession’s recommendation in these circumstances without good reason.
Issues of scope and timing
30. You have decided that the coverage of your recommendations should begin with members of schemes that wound up after 6 April 1997… But this decision ignores the issue of relating the alleged maladministrative documents to the individuals who have lost financially.
31. Even if we accepted that individuals were misled by Departmental publications, which for the reasons set out above we do not, they cannot by definition have been misled by a leaflet that was produced after their scheme had begun to wind-up.
32. The only allegedly maladministrative document in circulation in April 1997 was the PEC3 – the [OPRA] guide to the MFR was issued in May 1999 and the PM series of leaflets were not issued until December 2000.
33. It surely follows, therefore, that where a scheme began winding-up on a given date only those complainants who had read the leaflets available at that date could conceivably be affected by your finding of maladministration. These considerations do not appear to have been taken into account.
34. A similar issue arises in respect of whether schemes were in fact funded to the MFR level. The report says that it was thought that, if a scheme was funded up to the MFR, any accrued rights were safe.
35. Even if we accepted this proposition, which for the reasons set out above we do not, it must follow that members of schemes which were not funded to the level of the MFR could not have had such an expectation and, therefore, that their losses cannot be attributed to any alleged maladministration.
36. The report refers to only two of the four schemes of which the representative complainants were members as having been funded up to the MFR.
37. By definition, a scheme that was not funded up to the MFR could not have been thought by its members to have satisfied this requirement, whatever protection they may have thought this offered.
38. I am afraid we simply do not regard as remotely plausible the argument [set out in annex 3 to this report] that a member of a scheme underfunded against the MFR could have drawn the inference that, if the MFR offered full protection, those who were not funded up to the MFR could expect proportionate protection.
39. Even if (which we very much doubt) any complainants did draw such an inference, they would have had no basis whatsoever for doing so. In addition, at least some of the schemes that wound up would not even have had an MFR valuation, as the MFR was phased in over three years in line with schemes’ normal valuation cycles.
40. Similarly in respect of your finding of alleged maladministration in respect of the 2002 decision to amend the MFR calculation, that, self-evidently, cannot have had any impact on schemes that wound up before March 2002, or that had the employer debt certified before that point. Indeed, unless an insolvent employer’s scheme had reached the end of its valuation cycle between 2002 and wind-up, the employer would still (prior to insolvency) have been required to pay contributions based on the previous “stronger” (in your terms) level of the MFR.
Causal link
41. We do not find that the necessary causal link has been demonstrated between the maladministration, which we do not in any event accept, alleged in this [report] and the losses incurred by the complainants.
42. The report does not show that, but for having been misled by the alleged maladministration, the complainants would have taken steps to protect their accrued rights and that this action would have been effective in preventing the losses.
43. The examples [you have] given of actions that could have been taken to avoid or reduce the losses are unconvincing. The report says that the alleged maladministration was a significant contributory factor in causing the financial losses. However, it offers no substantive reasoning to back up this statement. In summary, the report does not acknowledge the myriad uncertainties which attach to any consideration of how outcomes might have differed if the specific actions criticised had been undertaken differently.
44. Given the number of causal factors at work, the vast majority of which fall wholly outside the scope of the present jurisdiction (and indeed wholly outside the Government’s control), the Department would suggest that the only rational conclusion is that the matters criticised, even if (which we do not accept) such criticisms were justified, are unlikely to have made any difference to the outcomes for the individual complainants.
Recommendations
45. We would also wish to comment on the specific recommendations in the report. The well-established standard applied by Ombudsmen (endorsed by the Government and the Public Administration Select Committee) is that a person should be put back into the position he would have been in had the maladministration not taken place. Given that, as noted above, the report does not indicate what part, in your opinion, the alleged maladministration played in the losses incurred by the complainants or what could be done to correct it, we are unable to consider this issue.
46. You have also asked us to consider whether it is appropriate to use taxpayers' money to pay for losses which are not the responsibility of this Department and which arose from the actions of others. We would of course expect a strong evidence base to justify incurring such expenditure.
47. The report provides no such base. It would be especially difficult to justify such a decision insofar as the recommendations in your report take account of issues which, I am advised, go beyond the powers given to you under the Parliamentary Commissioner Act.
48. You have offered the Department a further two months… after publication to respond to your recommendations and we were grateful for your consideration in doing so.
49. However, given that, on the basis of the report as drafted, we are minded not to accept your findings of maladministration, we believe that any delay in responding to the recommendations could only serve to raise false hopes amongst the complainants concerned.
50. We therefore need to inform you now that… we are not minded to accept the first four recommendations in your report.
51. We are minded to accept your fifth recommendation - to review the time taken to wind-up final salary schemes - and indeed have already set some work in hand on this; although we need to recognise that the delays are largely outside the control of Government.
Other issues
52. You refer in the report to the Financial Assistance Scheme… We acknowledge your view that the FAS does not provide full compensation - nor was it intended to do so. Nevertheless, the FAS will provide, in our view, a significant measure of help to some of the worst affected individuals.
53. The Government has made it clear that it will review the FAS in the forthcoming Comprehensive Spending Review and, whilst it does not accept liability for individuals’ losses, it will take account of the issues raised and the individual experiences highlighted in your report when carrying out this review.
54. Finally, I would like to stress again the point made [at the beginning] of this letter.
55. No one reading the opening paragraphs of Chapter 2 of your report can fail to have enormous sympathy with the predicament of many of those individuals who have complained to you.
56. But that, I am afraid, can not absolve us of the responsibility to respond to your report and its recommendations on their merits, particularly in considering whether any liability for the events attaches to my Department.
57. Having done so, we are firmly of the conclusion that your report does not substantiate any maladministration on the part of my Department.
The 2002 reform of the Minimum Funding Requirement (MFR)
58. Your report makes frequent reference to “weakening” and “strengthening” the basis of the MFR.
59. Lest there be any misunderstanding on this point, it is worth saying again that the adjustments to the MFR were always on the principle of maintaining its April 1997 level.
60. This was the principle on which the actuarial profession kept the basis of the MFR under review and made recommendations to the Department. It was also the basis on which the Government Actuary’s Department (GAD) advised the Department.
61. [D]uring the second half of 2001, the Department had regular meetings with the representatives of the Pensions Board of the actuarial profession on a range of matters of mutual interest, the most significant being the abolition of the MFR and the package of interim changes pending abolition then being developed.
62. At a meeting between DWP and the profession on 9 July 2001, the profession indicated that it expected to write to DWP about the MFR basis, recommending a 0.25 percentage point reduction in the benchmark dividend yield used in calculating the equity market value adjustment (MVA).
63. A further meeting took place on 4 September 2001, the day before the profession wrote to the Department, at which the Pensions Board confirmed that it would be writing to DWP in the next few days to recommend a reduction in the dividend yield from 3.25 per cent to 3 per cent.
64. This demonstrates that the 5 September 2001 letter was expected; both the Department and its advisors from GAD were aware that there was support for the change to the dividend yield in the MVA and the reasons why it was being proposed.
65. This was borne out by subsequent responses to the DWP consultation initiated in September 2001, the profession having informed all actuaries of the proposal that it had made to my Department (as indicated in their letter of 5 September 2001).
66. The Department was conscious that any change would need to be considered in the context of the detailed interim changes proposed by the profession in May 2000.
67. The net effect of the changes proposed in May 2000 had been small… [p]aragraph 5 of Annex C to the September 2000 consultation document “Security for Occupational Pensions” sets out the overall effect.
68. Consultation on those changes revealed little support for them, particularly if the MFR was to be replaced in the near future. Implementing all three proposed changes would have required schemes and their advisors to have made complex adjustments to their systems.
69. In their letter of 5 September 2001, the profession made clear that they considered that changes in the economic circumstances since their recommendation of May 2000 did now warrant making a change and that they were recommending a single change to the dividend yield in the equity MVA to keep the change as simple as possible in the light of the Government’s announced intention to abolish the MFR.
70. Nonetheless, the profession made clear that their proposed change from 3.25% to 3% in the dividend yield in the MVA was to take account of two factors – further reductions in dividend yields since the May 2000 recommendations had been made, together with a change to the mortality assumption.
71. Although not quantified in the letter from the profession, the change to the mortality assumption would have been in the region of an increase of some 9% for non-pensioner members more than 10 years away from scheme pension age.
72. The profession said in their letter that, if a separate change had been made for mortality, they would have proposed a greater reduction in the benchmark dividend yield from 3.25% to 2.75%. The change to 3% was to take account of both factors whilst keeping the change simple for schemes to administer until the MFR was replaced.
73. Thus, the recommendation made in September 2001 was not inconsistent with the recommendation made in May 2000, as you say in… [your] report.
74. The recommendation was still based on improved longevity and falling dividend yields. But, whereas in May 2000 the overall effect of these two factors was to cause the MFR to be operating at a lower level than when it was introduced, by September 2001 the overall effect was to cause the MFR to be operating at a higher level because dividend yields had fallen further since May 2000.
75. The Department believes that inferences are being drawn from the precise wording of the GAD advice… that are not warranted by the context.
76. The Department does not read the reference in that advice to events since 11 September 2001 - which is understandable in all the then circumstances - as limiting the scope of that advice.
77. The advice given in the email of 25 September 2001 was in confirmation of earlier discussions and so not the only component of the advice given to the Department on a recommendation which had been anticipated. That advice would have been informed by the access which GAD had, through its involvement in professional affairs, to the detailed work carried out by the Technical Support and Research Committee of the Pensions Board of the actuarial profession. In addition it was certainly open to GAD to raise any further issues that they thought were relevant.
78. The Department received no representations to the effect that this recommendation - made public by the profession after it was submitted to the Government - was unreasonable. Indeed, the representations received were in support of the change.
79. In the light of these facts, the Department cannot agree that it did not give proper consideration to the issue.
Official Information
Maladministration
80. There is, of course, always room for improvement in the presentation and management of official information. The Department takes its role of producing leaflets and information for the public very seriously.
81. However a balance inevitably needs to be struck between the information needs of the range of readers.
82. A recent report by the National Audit Office has provided a useful basis for the Department to make improvements in a number of places.
83. Areas the Department is treating as a priority for improvement are:
- the consistent application of standards for all the Department’s information products, which we plan to take forward by centrally monitoring our information output for consistency and accuracy;
- an increase in staff awareness of their obligation to provide accurate and up to date information to the public (be that verbally or in writing); [and]
- better management of the risks associated with our information output by examining leaflets individually as well as collectively.
84. But, notwithstanding the need for continuous improvement, publications cannot be regarded as maladministrative simply because they fall below the standards set down in internal guidance.
85. Indeed, such a judgement could of course be counter-productive, deterring Departments from issuing such guidance in the first place lest they should ever fall short of their own standards.
86. It is not clear that a judgement has been made as to whether or not the alleged failings identified fell so far short of acceptable standards and were of sufficient seriousness as to warrant being considered maladministrative.
87. In particular, it cannot be maladministrative simply for the Department to have taken a decision, with regard to what should be covered in a leaflet, that was different from the assessment which the Ombudsman would have made: two reasonable people can make different decisions based on the same evidence.
Outrage and distress
88. No one would wish to minimise the feelings of the complainants which are extremely understandable.
89. However, the report fails to examine whether these quite natural feelings are properly directed towards the Government, or whether they are a consequence of the alleged maladministration. The amount of funds left in the scheme at the point of wind-up (which is the cause of the losses) was the outcome of investment decisions made by trustees, the level of contribution from both the employer and the employee set by either the employer or the trustees and the sharp fall in the stock market.
90. None of these involved the Department. While the DWP did decide to issue information on occupational pensions generally, it did not assume any responsibility for advising individual complainants on their pension options.
Offsetting action
91. Suggestions that different official information on scheme security in general could, for instance, have led sponsoring employers “...to make additional arrangements - perhaps through merger with other businesses or by attracting new capital - to enable them to increase the contributions to their schemes.” are wholly speculative.
92. The report considers that, had the members of schemes been warned about the possible consequences to accrued rights, should their scheme wind-up, that “many of their financial decisions would unquestionably have been different” (with emphasis added).
93. However there appears to be nothing in this report to support that contention. Those changing employers might have decided to leave their accrued rights where they were. But this does not mean they would have done so, nor that this would have offered them greater protection. What if their old scheme wound-up but their new one did not? There appears to be no evidence for saying, as the report does, that those who had money to make additional pension provision “would most probably (emphasis added) have chosen not to make additional voluntary contributions”.
94. Furthermore, … a person might have taken other actions, such as putting the value of their accrued rights into a badly performing personal pension, which could have left them in a worse position than they currently find themselves in. This possibility does not appear to have been considered.
Supplementary submission by the Government Actuary
95. I also received a letter from the Government Actuary, the text of which follows.
96. My comments on the report… relate to the section dealing with the 2002 changes to the MFR, which is the only part of the draft report which refers substantively to the role of the Government Actuary’s Department (GAD).
97. Our response has been co-ordinated with that from the Permanent Secretary of the Department for Work and Pensions (DWP).
98. Accordingly, we have not duplicated points made in that response, although we have sought to amplify certain points where we considered that would be helpful to you.
99. There is considerable discussion in the report as to whether security was made less or more for scheme members as a result of changes to the Minimum Funding Requirement (MFR).
100. However, it has not been demonstrated that the change in the level of security afforded was material.
101. Changes to the MFR were intended to provide incentives to schemes to improve their funding levels, although these changes could not achieve this immediately.
102. Thus, if the profession’s May 2000 recommendations had been implemented, this would simply have led to schemes, in the short run, showing a lower percentage of coverage against the MFR.
103. Under the MFR process, schemes were required to bring their funding up to the revised level, but this would only happen gradually. In the short term there would be no material improvement in the security afforded to members unless the employer chose to wind up the scheme and the funding of the scheme, on wind-up, fell short of the strengthened MFR level, triggering a debt payment from a solvent employer to the scheme. Where wind-up was triggered by employer insolvency, it is unlikely that any strengthening of the MFR would have had a material impact, given that any employer debt payments due to the pension scheme did not have preferential creditor status.
104. There certainly were reasons at the time of the May 2000 recommendations to strengthen the MFR basis, notably because of the need to recognise improving mortality. However, there were also reasons to adjust the equity MVA calculation to avoid the unintended strengthening of the MFR that had taken place as a result of changing market conditions.
105. Overall the increase in MFR liabilities required was not large… the changes proposed at that time were expected to worsen the funding level of typical schemes against the MFR by up to 5%. This was not a big increase, and, bearing in mind that changing the MFR would not automatically make schemes better funded, and that longer term changes to the MFR were then being discussed, it was entirely reasonable for DWP to decide not to make any short-term change at that time and their decision-making process to arrive at this conclusion could not be considered to have been in any sense maladministrative.
106. [A]s the impact of the changes to the economic and investment factors in the MFR formula grew, they began to overwhelm the effect of the mortality changes needed. So, what was now needed was an aggregate weakening of the basis, if the original strength of the MFR was to be maintained in absolute terms relative to the position when the MFR was first put in place in 1997. As we understand the position, it was not the intention, either of DWP or of the actuarial profession, to seek to maintain the strength of the MFR relative to an insurance company buy-out basis.
107. The profession then combined their advice into a lesser reduction in the equity MVA factor (3.25% down to 3.0%, instead of the 2.75% that they considered justifiable, had an appropriate change been made to the mortality assumption at the same time). The September 2001 recommendation from the profession brought together mortality and economic developments into one adjustment to the equity MV A, so the necessary strengthening as a result of mortality was included, even though the aggregate change was to reduce MFR liabilities.
108. The statement made [in paragraph 5.129] fails to recognise that GAD had been aware of, and closely involved in, the development of the profession’s thinking on the MFR over many months and so GAD was fully aware of the context and scope of the profession’s work when the Department’s request for advice was put to us in September 2001. Furthermore our e-mail of 25 September 2001 was in confirmation of earlier discussions with DWP and so not the only component of our advice. Nor was our advice limited in any way, and particularly not in the way suggested [in paragraph 5.130]. The context of that advice was the overall question of how the strength of the MFR basis might have changed since it was last reviewed.
109. We do not agree that our advice was limited in the way suggested [in your report]. Neither do we agree that we failed to answer the question that DWP had put to us. This is a completely distorted interpretation of the GAD advice, exemplified by the unacceptable description of one paragraph of that advice as being the “full advice”.
110. The statement made [in paragraph 5.138] does not recognise that, through its involvement in professional affairs, GAD had had access to the detailed work carried out by the Technical Support and Research Committee of the Pensions Board of the actuarial profession, the committee that undertook the analysis leading to the profession’s 5 September 2001 recommendation.
111. Once again, [paragraph 5.142] does not recognise the context of continuing discussions on the replacement of the MFR, involving GAD, the Department and the actuarial profession, over the period between September 2001 and January 2002.
112. [Your] report asserts that DWP was aware that the change would have the effect of significantly weakening the protection being offered. However, we understand that the DWP (and the actuarial profession) did not believe at the time that it was weakening the protection compared to that which the Pensions Act 1995 had intended to provide, merely restoring it to the original, 1997, level.
113. Furthermore, it was not a “significant” change; as the parliamentary question [you have referred to…] notes, the immediate effect of the change was to increase aggregate funding when measured on the MFR basis by around 3 per cent.
114. As explained… above, changes to the MFR did not have an immediate effect on levels of funding except in the limited circumstances where a scheme wound up and the employer was in a position to make up any funding shortfall to the level of the MFR.
115. Moreover… the evidence base [for DWP’s decision] was not insufficient since it was based on strong advice from the actuarial profession, which had been developed by a committee containing leading technical experts from most of the major firms of actuaries, and supplemented by GAD as a further independent source of advice. The evidence base for this decision was in fact extremely strong and much stronger than for many (probably most) of the decisions that have to be taken by Government.
