Introduction and background
Jump to
- Introduction
- My role and jurisdiction
- Pension provision in the UK
- Government and occupational pensions
- Background to the complaints
- The complaints received
- Assessing the complaints
- My decision to investigate
- Other observations
Introduction
1.1 This report sets out the results of my investigation into complaints about the security of final salary occupational pension schemes and alleged delays in the winding-up of certain such schemes.
1.2 My report has eight chapters. This chapter explains my role and jurisdiction and the background to my investigation. The second chapter sets out in detail the nature of the complaints that I have investigated and the Government’s initial response to those complaints, before explaining the approach I have adopted to determine whether the complaints are justified.
1.3 The third chapter sets out the results of the further enquiries I made as part of my investigation to help me to better understand the context of the complaints. The fourth chapter sets out the evidence that my investigation has disclosed through consideration of departmental files, official publications and other documentary sources. The fifth chapter contains my findings and the sixth chapter contains the recommendations arising from those findings. The seventh chapter sets out my assessment of the Government’s response to my report - and the eighth is my conclusion.
1.4 There are also five annexes to this report – the first of which sets out elements of the relevant statutory, regulatory and administrative frameworks within which final salary occupational pension provision operates. The second annex sets out the technical scope of the actuarial advice I have received to help me to investigate whether the complaints made to me disclose maladministration causing injustice. The third annex deals with certain submissions made by the Government during the investigation to support its case.
1.5 The fourth annex sets out the Government’s formal response to my report and the fifth sets out the response made to it on behalf of complainants.
My role and jurisdiction
1.6 My role is determined by the Parliamentary Commissioner Act 1967 (the 1967 Act), as subsequently amended. As provided for in the 1967 Act, I investigate complaints referred to me by a Member of the House of Commons that an individual has suffered an unremedied injustice in consequence of maladministration by a body in my jurisdiction.
1.7 The actions or inaction of bodies in my jurisdiction that I may investigate do not include action taken in relation to their judicial or legislative functions but are limited to the exercise of administrative functions by such a body which are not of a prescribed nature.
1.8 Schedule 2 and Schedule 4 to the 1967 Act list the bodies within my jurisdiction. Schedule 3 prescribes the types of administrative actions that I may not investigate.
1.9 Section 5(2) of the 1967 Act provides that I may not conduct an investigation of a complaint where the person aggrieved has or had a remedy before either a court of law or a statutory tribunal, unless I am satisfied that, in the circumstances of the case, it would not be reasonable to expect that person to exercise such a remedy. Where such a remedy has already been exercised, I no longer have discretion to investigate such a complaint.
1.10 Section 7(2) of the 1967 Act requires that any investigation I undertake must be conducted in private. The same section also provides that, except for this requirement, the procedure for conducting an investigation shall be such as I consider appropriate in the circumstances of the case. It also provides that I may obtain information from any source – whether from a body in my jurisdiction or not – that I consider appropriate, with the exception of Cabinet papers or material from bodies not in my jurisdiction which is covered by legal professional privilege.
1.11 Section 12(3) of the 1967 Act also provides that I may not question the merits of discretionary decisions taken by bodies in my jurisdiction where those decisions were taken without maladministration.
Pension provision in the UK
1.12 This investigation relates to certain aspects of pension provision. Annex A to this report sets out the context in which the subject matter of this investigation is placed and explains in more detail many of the more complex or technical aspects of this report.
1.13 There are five principal categories of pension provision in the UK:
(i) state retirement pensions – which have both a basic and additional component;
(ii) retirement annuity contracts – which have ceased to be entered into since July 1988;
(iii) personal pensions (from July 1988 to date) and stakeholder pensions (from April 2001 to date);
(iv) public sector occupational pension schemes, including those for current members (and veterans) of the armed forces; and
(v) private sector occupational pensions.
1.14 This report is concerned with pension provision obtained through membership of certain private sector final salary occupational pension schemes.
1.15 This is because the complaints that I have received relate to certain alleged actions (or inaction) by those responsible for the legislative framework governing private sector occupational schemes - and because the injustice claimed by those making these complaints stems from the failure by certain final salary schemes to pay the full pension rights and other benefits promised to their members.
1.16 The subject matter of this report primarily relates to the statutory arrangements for the funding of such schemes, to the process of winding-up those schemes where that happens, and to the actions of public bodies in relation to both.
1.17 The key aspects of the statutory arrangements for scheme funding that are relevant to this report relate, first, to the purpose, design and operation of the Minimum Funding Requirement (MFR), which prescribed the level of contributions that a scheme had to hold. Secondly, it is concerned with the way in which the law required that the assets of schemes should be realised and the liabilities of schemes should be discharged when they wind up.
1.18 However, this report also touches on the interaction – through the contracting-out process - between pension provision through final salary occupational pension schemes and state retirement pension provision.
1.19 This is because the injustice claimed by those who have complained to me does not relate only to the loss of the pension and other benefits derived from the contributions made by them and their employer to their scheme. It also relates to the loss of part or all of the ‘Guaranteed Minimum Pension’ (GMP) or equivalent, which was to be provided in respect of national insurance contributions made by both the employer and employee and paid to the scheme if the relevant employment was contracted out of the State additional pension scheme.
Government and occupational pensions
1.20 Occupational pension provision is currently a topic of considerable public interest. It is also an area in which complaints are often made.
1.21 However, as outlined above, I may only investigate certain complaints within the framework provided by the 1967 Act. I thus turn to consider which public bodies have a role to play in the subject matter of this report.
DWP/DSS
1.22 Responsibility in Government for occupational pensions policy and for the framework of law and regulation that relates to final salary schemes has, at all times relevant to the subject matter of this investigation, lain with the Department for Work and Pensions (DWP) or its predecessor, the Department of Social Security (DSS). Both published general information leaflets and other material related to occupational pensions.
1.23 DWP has developed internal guidance, which is supplemented by a departmental Public Information Strategy and by policy frameworks to support the strategy within each of DWP’s business units and executive agencies.
1.24 DWP and its predecessor have, since January 1997, published a guide, entitled ‘Financial Redress for Maladministration’, which sets out the approach it takes when considering remedies for justified complaints. This guide describes the special payments scheme operated by DWP and provides advice on the consideration of financial redress in respect of maladministration. It also provides examples of what, in DWP’s view, constitutes maladministration and sets a context in which to consider official error, the circumstances when financial redress should be considered, and the redress that DWP considers is appropriate for each type of case. A revision of this guide in April 2003 contained new definitions of information and advice.
1.25 DWP has also defined the categories of information and advice that it might be asked to provide. Its internal guidance, agreed in March 2002, specifies that officials:
…should ensure that customers are given:
- full and accurate information (that is, general factual data which is not customer specific);
- general advice (for example, the promotion of Government policy - work is the best form of welfare; people should save for their retirement) to enable them to make their own decisions;
- specific advice where it is appropriate to do so (for example, information tailored to a customer's individual circumstances and requirements, which may identify a number of options but does not indicate the official's view of the best course of action). The specific advice provided should be full and accurate to enable the customer to make his or her own decisions; and
- recommendations where specific business areas of the Department have specified that it is appropriate to do so (for example, a statement to a customer suggesting his or her best course of action). Under such specific circumstances, the member of staff may provide his or her view (as an official of the Department) of the best option for the customer. Care must be taken when providing specific advice or (where appropriate) a recommendation, to ensure that the customer's personal circumstances are fully taken into account.
1.26 Since April 2000, the Social Security Advisory Committee, an advisory non-departmental public body appointed by the Secretary of State, has scrutinised a selection of DWP’s information leaflets aimed at the public, with a view to ensuring their accuracy and completeness. The Committee’s remit, however, does not extend to information provided by DWP about occupational or personal pensions.
Her Majesty’s Revenue and Customs
1.27 The Inland Revenue was - and its successor, Her Majesty’s Revenue and Customs, is - responsible for the authorisation of pension schemes and for ensuring that they satisfy the conditions to make them eligible for tax relief and to be able to contract out of the state additional pension scheme.
1.28 The Savings, Pensions and Share Schemes section of what is now Her Majesty’s Revenue and Customs considers elections from employers who wish to contract out of the additional state pension and it issues relevant contracting-out and tax certificates if an election is approved. When a scheme ceases to contract out and begins wind-up, it will cancel the appropriate certificates on behalf of Her Majesty’s Revenue and Customs and notify the National Insurance Contributions Office (NICO), which triggers cessation action.
1.29 NICO’s National Insurance Services to Pensions Industry group (as it is now known) was formed in 1978 and its role is to ensure that the rights of people contracted-out of the additional state pension through an occupational or personal pension scheme are accurately recorded, maintained and secured. In order to do this, it liaises with other public bodies on contracted-out related issues, it approves a scheme’s arrangements, it manages individuals’ national insurance records, and it deals with Notices of Termination of contracted-out employment - and other correspondence and telephone enquiries on related matters.
The Financial Services Authority (FSA)
1.30 The FSA and its predecessor have been since 1988, among other matters, responsible for the regulation of the sale and marketing of personal pensions. The FSA is not in my jurisdiction for the purposes of this investigation (see paragraph 1.50 below).
The Occupational Pensions Regulatory Authority (OPRA)
1.31 From April 1997 for eight years, OPRA was responsible for the regulation of occupational pensions. It also had responsibility for collecting the levies from schemes to fund its activities and to finance a compensation scheme for situations where fraud or other unlawful activity had occurred. It was also responsible for the Pension Schemes Registry, which kept records related to occupational schemes. OPRA was replaced in April 2005 by a new Pensions Regulator, which, while being an entirely separate body, has residual responsibility for OPRA’s affairs. The Pensions Regulator is also responsible for the Pension Schemes Registry.
The Government Actuary
1.32 The Government Actuary and his Department (GAD) provide actuarial advice to a range of clients. These include managers of pension schemes throughout the public sector; trustees of funded pension schemes in both the public and private sectors; various Government departments and sponsoring employers; and the Treasury in relation to general pensions policy in situations where Government is either the employer or has a financial interest. GAD is not in my jurisdiction for the purposes of this investigation (see paragraph 1.51 below).
Background to the complaints
1.33 According to statistics produced by OPRA’s Pension Schemes Registry, in March 2004 there were 94,535 ‘live’ occupational schemes – of which 9,834 were private sector final salary schemes. The latter figure reflected a sustained downward trend in the number of such schemes.
1.34 Earlier, in December 2002, the Government had recognised, in the Green Paper setting out its proposals for pension reform that were to become the Pensions Act 2004, that there were growing political, social and economic concerns about the effectiveness and sustainability of the system of pension provision in the UK.
1.35 In relation to the private sector, these concerns included the effects of increased longevity and other demographic trends, signs of a decline in work-based pension provision, the complexity of pension products, the cost of financial advice, the legacy of personal pensions mis-selling, and a trend towards earlier retirement.
1.36 The Green Paper also referred to the fact that ‘employee confidence has also suffered due to the action of a few companies, who have let their employees down when they have become insolvent with an under-funded pension scheme’.
1.37 The Government’s proposals to remedy this position included the replacement of OPRA by a new regulatory body and the establishment of a Pension Protection Fund (PPF) to protect members of private sector final salary schemes.
1.38 On 6 April 2005, the PPF became operational as a result of the commencement of the relevant provisions of the Pensions Act 2004. The PPF will pay compensation to members of eligible occupational pension schemes, when there is a qualifying insolvency event in relation to the employer which sponsors a scheme and where there are insufficient assets available to the scheme to provide to its members the level of compensation set out in the legislation governing the PPF.
1.39 The pension schemes whose members may be eligible for compensation from the PPF are limited to those which began winding-up on or after 6 April 2005 and the PPF does not extend to those schemes where a sponsoring employer remains solvent.
1.40 The Government also established a Financial Assistance Scheme (FAS) to provide ‘assistance’ to those whose schemes would not be covered by the PPF because their scheme had begun winding-up prior to 6 April 2005. Like the PPF, the FAS will not cover those who were members of a final salary occupational pension scheme where the sponsoring employer is not insolvent.
1.41 This fact – and early indications that ‘assistance’ from the FAS was to be limited in a number of significant ways and would not cover the whole of the losses that had been or would be incurred by scheme members – led to a campaign to persuade the Government to accept liability for (and to pay compensation to remedy) the whole of the losses incurred due to scheme failure, which it was alleged was caused by maladministration on the part of public bodies.
1.42 In addition, legal action in relation to the alleged incompatibility of the domestic legal regime for the protection of pension rights with European law was initiated by trades unions representing some of the affected workers. I understand that this legal action is continuing.
1.43 I now turn to summarise the complaints I received about these matters.
The complaints received
1.44 I have received more than 200 complaints referred to me by Members of Parliament of all political parties and from all parts of the UK - and I have also received more than 500 further direct representations about the same matters.
1.45 The complaints which formed the basis of this investigation had four elements:
(i) first, it was alleged that the legislative framework during the relevant period (that is, from commencement of the Pensions Act 1995 to commencement of the Pensions Act 2004) had afforded inadequate protection of the pension rights of members of final salary occupational pension schemes;
(ii) secondly, it was alleged that, on a number of occasions, Ministers and officials had ignored relevant evidence when taking policy and other decisions related to the protection of pension rights accrued in such schemes;
(iii) thirdly, it was alleged that the information and advice provided by a number of Government departments and other public bodies about the degree of protection that the law provided to accrued pension rights had been inaccurate to the extent that it had amounted to the misdirection of the members and trustees of such schemes; and
(iv) fourthly, it was alleged that public bodies were responsible for unreasonable delays in the process of winding-up schemes.
Assessing the complaints
1.46 There are four aspects of my jurisdiction that I have outlined above that were relevant to my consideration of the complaints I received from members and trustees of occupational pension schemes and to my decision to conduct an investigation into some of those complaints.
1.47 First, it is not for me to question the adequacy of legislation enacted by Parliament or of European law. While, in any investigation, I will have regard to the relevant legislative framework and - at its end - may draw Parliament’s attention to situations where I consider that the relevant legislation has had a direct bearing on the injustice claimed by complainants, I do not have the power to investigate complaints that legislation itself is inadequate, unfair or has caused injustice to an individual.
1.48 Thus I was not able to investigate the first element of the complaints I had received – namely, that the law related to occupational pension schemes was, in the relevant period, inadequate to protect the pension rights of members of schemes that wound-up with insufficient assets to cover the scheme’s liabilities.
1.49 Secondly, I am only able to investigate the administrative actions of bodies in my jurisdiction. The complaints I had received were primarily directed at DWP and its predecessor, DSS, at Her Majesty’s Treasury (the Treasury), at OPRA, and at NICO. Those are all bodies within my jurisdiction and I was able to investigate their relevant actions.
1.50 However, the complaints also related to the actions of the FSA, which is a body that is not in my jurisdiction, except to the extent that it acts or acted on behalf of a body in my jurisdiction. Having determined that the actions of the FSA about which complaints were made related to the FSA’s own functions, I was thus not able to consider complaints about those actions. In the rest of this report, therefore, the information and advice provided to pension scheme members by the FSA under section 206 of the Financial Services Act 1986 is referred to only to help place my investigation in context. The FSA has developed its own standard for the production of promotional material issued by firms that it regulates. This standard, to which the FSA subscribes for its own consumer publications, requires that such material should be ‘clear, fair and not misleading’.
1.51 Similarly, this report sometimes makes reference to GAD. GAD is only in my jurisdiction in relation to complaints about its actions in providing advice to the prudential regulator of life insurance companies in the period prior to 26 April 2001 - and so reference to the actions or advice of GAD in relation to the subject matter of this report is also only made to place the events recounted in context.
1.52 In addition, the actions, advice or publications of the professional bodies of the actuarial profession, which, in England and Wales, is the Institute of Actuaries and, in Scotland, the Faculty of Actuaries - neither of which is in my jurisdiction – are referred to only insofar as they help to place the actions of the bodies under investigation in context.
1.53 Moreover, those who administer or advise pension schemes are not in my jurisdiction – nor do I have the power to investigate complaints about pension scheme trustees.
1.54 Thirdly, as mentioned above, trades unions representing some of the individuals who have lost part or all of their pension rights in consequence of the winding-up of their scheme have initiated legal action in the European courts. That action relates to obligations placed on member states of the European Union by Article 8 of the EC Insolvency Directive to protect the rights of members of occupational pension schemes.
1.55 I considered whether the existence of this litigation constituted the exercise of an alternative remedy which would preclude me from conducting an investigation. I established that this action related to a complaint that UK domestic law is or was incompatible with European law, which, as I have explained above, is not one that I could investigate. Therefore I concluded that this litigation, on different matters and with a different focus, did not preclude me from undertaking an investigation. Furthermore, at no time during my investigation did the Government suggest in their responses to my enquiries that the existence of this litigation had introduced any difficulties in relation to my jurisdiction.
1.56 Moreover, insofar as complainants might have another remedy in the courts for the other specific complaints they made to me, I did not consider it reasonable to expect individuals to resort to expensive and uncertain litigation before the courts and, in any case, I was advised that no such remedy for most of the specific administrative complaints existed.
1.57 Finally, as also explained above, I may not question the merits of discretionary decisions taken without maladministration. Therefore, insofar as the complaints related to policy decisions made by Government Ministers or officials, my investigation was limited to establishing whether such decisions were taken with maladministration.
My decision to investigate
1.58 I had been shown indications that maladministration might have caused injustice to those who had complained to me – and to those in a similar position as those complainants. I also believed that my ability to access evidence which was not available to complainants meant that an investigation by me would achieve a worthwhile outcome, whatever its result. I therefore decided to conduct an investigation.
1.59 My decision was announced on 16 November 2004 through a letter to all who were then Members of Parliament, which was also sent to all those people who had by then complained to me.
1.60 My investigation was limited to those matters and bodies over which I have jurisdiction and was undertaken using four individual scheme members who made complaints representative of all those I had received. In addition, while I understood why individuals might direct their complaints at the Treasury, I investigated only those departments or other bodies which had policy responsibilities relevant to the subject matter of the complaints.
Other observations
1.61 Before turning to consider in detail the position of those who have complained to me, I wish to make three preliminary observations.
1.62 First, my jurisdiction covers the whole of the United Kingdom. One of the four representative complainants in this investigation lives in Northern Ireland, with the others living in the north-east of England, the East Midlands, and the south-west of England. The other complaints I have received on these matters have come from every part of the UK – and with some of those making complaints living overseas.
1.63 The statutory framework relevant to the matters I have investigated differed in detail – but largely not in substantive terms so far as the key focus of this report is concerned – between the different parts of the UK. For example, Northern Ireland had (and has) its own system of pension law – which, while its provisions were directly equivalent to those which existed in Britain, was established in the main by separate primary and secondary legislation. Similarly, in Scotland there were and are some relevant differences with the law as it stood in the rest of the UK – primarily in the fields of trust law, divorce and insolvency - as well as the existence of a distinct system of courts and other institutions.
1.64 Therefore, I have not concentrated in this report on spelling out in each case from which statute or from which piece of subordinate legislation any specific provision has been derived. I have also sought to use the broadest terms to describe legislative provisions, concepts, procedures and specific actions – which I acknowledge may sometimes differ in detail in the different parts of the UK.
1.65 Secondly, reference is sometimes made in this report to the revised legal framework created by the Pensions Act 2004, which received Royal Assent on 18 November 2004 – especially in relation to the pension protection and financial assistance measures it established. However, the primary focus of my investigation has been on the period between the first parliamentary discussion of the Bill which became the Pensions Act 1995 (that is, when citizens may first have become aware of the intent behind and content of those proposals) and the commencement of the 2004 Act’s principal and relevant provisions, which replaced the earlier regime.
1.66 Thus, the key period that is relevant to what follows is the approximately ten year period from 24 January 1995 to 6 April 2005.
1.67 Finally, the subject matter of this report is generally recognised as being complex and sometimes highly technical. To cover every aspect of the landscape of occupational pension provision and regulation over more than a decade – and all the issues related to that provision - would be a considerable challenge and one that would have made this report much longer, had I undertaken to do so.
1.68 I have also been deeply aware that the people most affected by the events covered by my investigation continue to encounter an uncertain financial future and that they have expressed a wish that I should do everything possible to present my report as soon as possible, while recognising that I must consider thoroughly the relevant issues. They also have sought clarity and an explanation of what has happened to them.
1.69 This report therefore is not an exhaustive study of all of the issues currently relevant to final salary pension schemes, nor does it set out every detail that I or my staff have considered and investigated. It is focused on the specific complaints that have been made to me in relation to the particular injustices claimed.
1.70 That said, I am satisfied that nothing of significance has been omitted from my report. I have also attempted to keep the language used as simple as possible and the degree of technical detail to the minimum necessary to ensure that my assessment is authoritative - yet still, I hope, clear.
