The complaints and the Government’s response
Jump to
- Introduction
- The representative complainants
- The Government's initial response to the complaints
- Launch of investigation
- My approach to maladministration
Introduction
2.1 This chapter sets out in detail the complaints I have investigated – and the position of those who have complained to me – and also the Government’s initial response to those complaints.
2.2 It also explains the approach I have adopted to help me to decide whether maladministration has caused injustice to those who have complained to me – and to those in a similar position to those complainants.
The representative complainants
2.3 In line with my usual practice where I receive many complaints from people in similar situations who all claim to have suffered injustice due to the same administrative actions, I decided to conduct one investigation. On this occasion, I have used four complainants as representative of all those who had complained to me. I now turn to the position of those four complainants.
The representative complainants – Mr J
2.4 The first representative complainant is Mr J. He lives in Northern Ireland and is at the time of writing 62, having been born in June 1943. He worked for an agricultural company as a mechanical engineer from August 1974 to November 2002, being a member of its pension scheme and making additional voluntary contributions for the same period. He was originally compelled to join the scheme as a condition of employment and he has not worked since being made redundant.
2.5 He is married with three sons, the middle of whom also worked for the same firm. The company was placed in voluntary liquidation by its two principal shareholders, one of which was a major multinational company and the other the Government of another EU member state. Over 70% of those made redundant had given more than 25 years service to the company at the time of liquidation.
2.6 The scheme is still being wound-up but the trustees estimate that Mr J might receive only 14.9% of his expected benefits when the scheme is finally wound up, as there is a shortfall of £21 million on the statutory basis. He has also been told that even this proportion is not ‘guaranteed’. In August 2000, Mr J had applied for early retirement (the scheme’s usual retirement age was 62) but his company did not respond to his application. This did not unduly worry him as he believed his pension to be both guaranteed and safe.
2.7 In April 2004, Mr J suffered a serious heart attack which required surgery and he is still being treated for heart failure, for which he continues to take medication on a daily basis. He told me that ‘it is certain that the stress and worry regarding all of these issues have caused this illness’.
2.8 Mr J showed me some of the material that had been issued to members by his scheme. The principal explanatory booklet for the scheme issued in 1998 had said that ‘the plan must have adequate resources which satisfy the minimum funding requirement of the 1995] Act, which is designed to make sure that the benefits are protected whatever happens to the company’ and also that ‘the plan is designed to provide you with a guaranteed pension related to your earnings – and therefore to your standard of living – close to retirement’. It had also used the term ‘guaranteed’ on other occasions.
The initial relief which information about the FAS gave has now given way to despondency. I do not know if I will be covered by it… No-one from any of the government bodies ever warned me that there could be potential problems with my pension. All of the information coming over the years from public bodies had convinced me that my pension was safe and that I could rely on it in retirement.
It is the government’s responsibility to restore my pension in full to that promised and I also feel that I am entitled to some compensation for all the stress and suffering which this pension problem has caused.
The representative complainants – Mr G
2.11 The second representative complainant is Mr G. He is currently 54, having been born in September 1951. He is married with children and lives on the border between Warwickshire and Leicestershire.
2.12 He worked from August 1976 to June 2003 for the same distribution company, although over this time the company was subject to a number of mergers and takeovers. He began as an assistant depot manager, subsequently became a depot manager and then a contracts manager. From 1997 to 2003, he was the firm’s rates and contracts manager.
2.13 His employer decided to wind up the pension scheme in February 2002. It was 101% funded on the MFR basis at that time. He was subsequently advised that, as the scheme was not able to meet its liabilities in full, he would be likely to receive a pension that was only about 24% of his accrued rights and that this would reflect only approximately 75% of his Guaranteed Minimum Pension.
2.14 Mr G, being disillusioned with the actions of his employer and the effects that the wind-up of his scheme was likely to have on his pension entitlements, decided to look for new employment and he has, since June 2003, been a warehouse and distribution manager for another firm, based much further from his home.
2.15 Mr G told me that he had believed that his pension was guaranteed and provided copies of material, including of debates and press cuttings related to the passage of the 1995 Pensions Act, which he said had helped to give him this belief.
No information warning members of the level of risk has ever been issued by DWP or other public bodies. Nor did the Government see fit to insist that scheme trustees were required to inform deferred members of their perilous situation. If I had had any inkling that my “Certificate of Entitlement to Benefits” was not worth the paper it was written on or that my “benefit” could be reduced in such a substantial fashion, then I would have taken a cash transfer when that certificate was issued in September 2000.
No financial product would be sold bearing this level of risk without the level of risk being emblazoned on it. Why not here? I have worked for 27 years on the basis that I was entitled to a pension as part of that employment. Loyalty is now seen as a weakness and “more fool you” for thinking that you would actually get what you had earned. My pension entitlement has been stolen and should be restored in full.
The representative complainants – Mr D
2.18 The third representative complainant is Mr D. He is currently 62 years old, having been born in November 1943. He is married with two sons in their thirties and lives in Devon.
2.19 He has worked for his current employer, an electrical instrument and fibre optics company - currently as an engineering draughtsman - since 1961 and he joined the pension scheme on 1 April 1965, as soon as he was allowed to do so, after having been assured by the company and by official leaflets that it was in his best interests to do so.
2.20 Mr D had made a number of requests for pension forecasts – including in 1988 and 1995 – and had always kept a keen eye on his pension rights. After the previous owners decided to ‘freeze’ the scheme in 1999 and before the commencement of wind-up, he was given an estimate of what transfer value he might receive if he were to leave the scheme, but was advised by the scheme actuaries not to leave the scheme as he would suffer financial loss if he did so.
2.21 After a change in ownership in 2000, the company – whose current owners are still trading – decided to close the pension scheme and commence wind-up. The scheme was under-funded and trustees had obtained a court order to establish that the sponsoring employer had to pay to the scheme approximately £2.5 million over no more than ten years.
My complaint is that the Government failed in their duty to ensure that my pension was protected in the way that the Government had told me that it was. The Government failed to warn me of any risks to my contributions as a result of my scheme winding up… The Government failed to place any risk warnings on its own assurances about the security of schemes like mine…
The loss to myself and family is almost incalculable. My retirement is now completely unknown and in tatters. After paying into a pension scheme all my working life and providing for my retirement as the Government told me to do, I shall receive very little if anything of my entitlement.
I feel that the Government should be responsible for making good the damage done by its actions and restore my pension in full. Had I ever been warned of the risks involved, I would never have continued my contributions to the scheme…
If the law had done what the Government assured people like me it would do, I would not have suffered these losses.
2.24 Mr D told me that the effects of the past five years, since he was informed that his pension was unlikely to be paid, despite official assurances that it was protected and guaranteed, had had a serious effect on his health and had caused severe stress to his wife and himself.
2.25 He concluded by telling me that ‘we believed Government when they said our pensions were safe and there was no mention of risks. We have been robbed of our pensions and only full compensation will correct this injustice and restore faith in pension schemes’.
The representative complainants – Mr B
2.26 The fourth representative complainant is Mr B, who lives in Tyne and Wear, although the firm for which he worked was based in the East Midlands. He is currently 63, having been born in May 1942.
2.27 He worked for his former employer, a shoe manufacturer, for 36 years. The firm is now insolvent. Mr B, who is married with adult children, also made additional voluntary contributions to his scheme totalling £25,000.
2.28 He had been for many years a trade union activist and had been the union convenor for some time prior to losing his job. The union had kept an information desk on the shop floor, which had included information about the company scheme from the scheme itself but also from official Government sources. The trade union had actively encouraged membership of the pension scheme. Mr B had become a member nominated trustee of the scheme in 1999.
2.29 Following redundancy, Mr B had had to sell his house and move to a smaller property elsewhere in the country and also had had to take on part-time and then night work, some of it of a heavy manual kind, in order to keep sufficient income coming into the household.
2.30 In his original complaint, Mr B told me:
Along with other trustees of the scheme, I had been given an OPRA booklet, ‘A Guide for Pension Scheme Trustees’ – reference PST/SAC/COI/7.97. I read this book thoroughly: as both a trustee and the [union] convenor, it was my duty to do so, so I could advise members appropriately. It convinced me that my pension and those of my colleagues was quite safe so long as the scheme was funded to the legal requirement…
The booklet said that “the MFR refers to the minimum amount of funds that should be in the scheme at any one time in order to meet the scheme’s liabilities if it were to be discontinued”. Nothing could have been more convincing. This single line alone gave me what I thought was justified confidence in the scheme.
Unfortunately, it was also totally wrong. It could and should have warned that if the scheme were wound up our assets would be used to pay existing pensions. I understand that later editions of the booklet have made this clear but far too late for me to be able to warn my colleagues.
In our case, the company had made little or no profit for several years and insolvency was widely expected. Our scheme was, however, funded to the required level. None of the deferred pensioners would have risked their most precious assets on the unlikely financial survival of their former employer without the misleading assurances such as those given to us by OPRA and other Government organisations.
2.32 Mr B has now been told that he is likely to lose approximately 90% of his pension benefits. He told me that the ‘only fair solution’ to this situation would be ‘the full restoration of the pensions of myself and my colleagues’.
Comments by other complainants
2.33 The comments made by the representative complainants were similar to the many others I have received, all of which I have reviewed.
2.34 Some of the more typical of these - in relation to the security provided by the Minimum Funding Requirement (MFR), which was the statutory mechanism against which pension schemes had to fund - include:
- Due to my age I was very interested in pensions and I had submitted an application for early retirement prior to the demise of the company but it went into receivership prior to them approving my application. It was common knowledge through government publications that, with the MFR, final salary schemes were guaranteed… The Trustees told me that I was one of the lucky ones to be left in a final salary scheme as there was no risk involved due to the measures the Government had put in place since the Maxwell scandal [male, active member at wind-up, insolvent employer scheme];
- When I asked our trustees what would happen if my company was not taken over but instead went bust, I was told that the law put in place after the Maxwell scandal would safeguard and protect our pensions [female, deferred member at wind-up, insolvent employer scheme];
- Although obviously not a pensions expert, I was aware that pension funds were kept separate from company funds and that the level of funding had to be maintained to meet a minimum level set by the Government. I naturally thought that this was to ensure that schemes were always adequately funded, a belief that was reinforced by the leaflets I read which did not mention any risk. My scheme wound up fully funded to the Government’s level but I will still lose at least half my pension rights [male, deferred member at wind-up, solvent employer scheme]; and
- We received both scheme documentation and official leaflets, including ‘A Guide to Your Pension Options’ (copy enclosed). The scheme material said that the law protected our pensions and the official material said it was safe, guaranteed and protected. It also strongly recommended that people join their employer’s scheme but without informing us that there was a risk to doing so or that we needed to know about the financial strength of the company. The situation we now find ourselves in was a complete surprise. At no time did the Government indicate, let alone tell us, that our savings might be at risk [couple, both active members of an insolvent employer scheme].
2.35 Other points made by many complainants included:
(i) that official literature had led people to believe that only certain questions needed to be asked about their scheme: ‘I asked every year whether my scheme was funded to the legal requirement. I was told every year it was and sometimes more than that… From what I had read, that meant to me that the scheme had enough money to meet its liabilities to pay us our pensions’;
(ii) that many respondents feel bitter that public sector final salary schemes are ‘guaranteed’ where theirs proved not to be: ‘it seems to me now that the only pension that is safe and secure is the one government officials provide for themselves. Those responsible for the leaflets which misled me and for the law and policy which created this mess still have their pensions intact and guaranteed – is this right?’
Another said: ‘I have paid for not only my pension but at least two others for all of my working life… the Civil Service, MPs and Judges pensions, who all have a guaranteed pension paid out of my wage packet via taxes… [and] the local authority workers pensions… paid for from the rates which I pay. In total contrast, there is my own pension now not worth the paper the promises were made on – promised to me as safe, secure and guaranteed by the very people who take their pensions from the taxes I pay’;
(iii) that, had individuals known that all of their pension was not safe, they would have made other arrangements: ‘I made voluntary contributions without knowing that it would be safer to use that additional money to diversify my savings and spread the risk’; and
(iv) that the ‘political’ message had been that the Maxwell ‘scandal’ had been due to insufficient statutory protection and that the new laws had been introduced to end the possibility of ‘another Maxwell’: ‘The whole thrust of the material I saw was that the role of Government and the law was to protect our pension rights against employers who did not fulfil their obligations. Now I am told that it is not the role of Government to ensure that my employer, who chose to close the scheme, should make good his promise’.
The representative complaints – the maladministration alleged
2.36 Speaking on behalf of all those who complained to me, the four representative complainants alleged:
(i) that DWP and OPRA did not take proper care when informing the trustees and members of defined benefit occupational pension schemes about the degree of security of the pension rights accrued by members of a scheme. In particular, both bodies failed to warn of the risks to non-pensioner members of such schemes in the event that a scheme was wound-up. Instead, the publications and other statements of such bodies appeared to provide unqualified assurance that such rights were protected by law and guaranteed. As a consequence, members and trustees of schemes were led to believe that their pensions were safe when this was not necessarily the case;
(ii) that DWP and the Treasury failed to take action to draw the limitations of the protection provided by the law to the attention of scheme members even though they had been warned by the Faculty and Institute of Actuaries in May 2000 that members of occupational pension schemes were unaware of the risks to their pension rights. Instead, official publications and statements continued to provide reassurance without the mention of such risks;
(iii) that DWP Ministers approved relaxations in the actuarial calculations underpinning the statutory requirement for minimum scheme funding in 1998 and 2002, without having due regard to the effect that these relaxations would have on the security of pension scheme rights should a scheme be wound-up with insufficient assets and also without ensuring that scheme members and trustees were made aware that the effect of these changes was a further reduction in the security of their rights; and
(iv) that NICO was responsible for delays in reconciling pension entitlements in respect of the members of schemes which were in the process of winding-up, which had had a significant effect on keeping such schemes in wind-up for longer than necessary. These delays had led to further financial loss to scheme members arising from additional administrative costs and in consequence of reducing annuity rates during the period of delay.
2.37 The representative complainants considered that all of the above constituted maladministration which had caused them, and people in a similar position to them, injustice.
The representative complaints – the injustice claimed
2.38 The representative complainants complained that members of schemes had not been able to make informed decisions about whether to diversify their pension and savings provision, about whether to remain in schemes when they left the employment of the sponsoring company, and when making other choices such as seeking new employment with a more secure employer, taking early retirement, or agreeing to stay at work beyond normal scheme retirement age.
2.39 They also complained that scheme trustees had been prevented from fulfilling their obligations to scheme members and that their professional reputation had suffered as a result.
2.40 Others who have complained to me have told me of the significant losses they have suffered, of the outrage they feel that this has been allowed to happen, and of the effects that these events have had on their health, their financial security, their future plans, and on the other members of their families. They have also told me of their loss of faith – in Government, in their employer, and in the wider pension system.
2.41 I am told that two scheme members have committed suicide since learning that they would not receive their full pension. I am also aware that at least two of the individuals who complained to me have passed away since my investigation began.
2.42 One of these was receiving a pension of approximately £10 per week – when he should have been entitled to a full ill-health early retirement pension – in the period before he recently died. A member of his scheme for more than thirty years, he should have received on retirement an annual pension of more than £10,000, plus a substantial lump sum; his scheme should also have provided a widow’s pension.
2.43 The other was a member of his scheme for 29 years and, similarly, would have been entitled to an annual pension of more than £10,000 and also a widow’s pension. Even if he had survived and qualified for the FAS, on current criteria his widow will not receive any pension at all from his scheme - and I understand that she may not qualify for a full state pension in her own right.
2.44 It is impossible to recite here all of the personal stories that I have been told. Some examples of the cases that I have seen include:
- that of a former manager of a small firm, who, when leaving the firm a few years prior to his scheme retirement age, decided to leave his pension within the scheme, believing it to be safe. He has since lost more than two-thirds of his expected pension and will not be eligible for FAS ‘assistance’;
- that of a man with 38 years’ service with the same company, who has lost approximately 80% of an expected annual pension of £20,000. He is now working beyond his expected retirement age.
His wife told me:
It is very likely now that, should my husband ever be able to retire, we will not be able to stay in our home. This is doubly sad as we purchased it as security for my very elderly mother. I dread the thought of forcing her to move at this stage of her life;
- that of a woman who worked for the same company for 27 years and who had been a member nominated trustee of her scheme.
She has lost all of her pension. She told me:
I was always told that my pension was safe, but now I can see that I would have been better off never putting money into it, because the law says that my money has to be used to pay other people’s pensions and not mine. I don’t know what I am going to do for the future. I have lost so much and nobody ever warned me that this could happen; and
- that of a man who worked for the same company for 43 years, who had expected to retire on an annual pension of £34,000 but who has been told that, due to the severe under-funding of the scheme, he will only receive an unknown proportion of his Guaranteed Minimum Pension and nothing at all from all of his contributions to the scheme.
2.45 However, complainants have told me that the injustice they feel is not ‘merely’ such financial loss, enormous though such financial loss is in most cases. There are three other aspects of the injustice they claim.
2.46 The first is a deep sense of outrage at the way that their pensions, in words that have been used to me on many occasions, ‘have been stolen’. A common theme among the many letters and other communications I have received was anger, directed both at Government and at employers, that the pension system had failed scheme members.
2.47 Many individuals drew my attention to the assurances given by Government when the regime created by the Pensions Act 1995 was established. They told me that this regime – which it had been said aimed to provide protection for individual pension scheme members – had been introduced as a result of the Maxwell scandal in order to prevent pension scheme assets being plundered by unscrupulous employers but also to provide security for individuals. That regime had demonstrably and comprehensively failed, they said.
2.48 The second additional aspect of the injustice claimed relates to a sense that individual members of final salary schemes had been prevented from making informed choices about their provision for retirement and about their other financial planning.
2.49 Many individuals told me that, in a context in which Government, employers, and the pensions industry were all promoting membership of occupational pension schemes and where those responsible for the legal, regulatory and administrative frameworks that underpinned the security of such schemes were encouraging membership without mention of risk, they had been misled into making extremely critical financial decisions without any knowledge of the right questions to ask. This, in the view of complainants, amounted to misdirection and a dereliction of a duty on public bodies to provide balanced information about the statutory regime for pensions protection which they had introduced, which they operated and for which they were wholly responsible.
2.50 The final additional aspect of the injustice claimed by individuals was the profound effects that the loss of their pension rights had had on their self-respect and their family life.
2.51 Many individuals told me that the uncertainty and distress that they had suffered was compounded by a sense that they as individuals had failed their families by having been lulled into a sense of false security by official statements about their pensions. This also had been reinforced by the effects that the loss of their pension had had on other members of their families, many of whom had had to make a larger financial contribution to family income than expected, had had their own plans ruined, or who had had to deal with the stress and anxiety caused to the scheme member.
2.52 All of the above constitutes the injustice claimed by complainants.
Representative complaints - the remedy sought
2.53 The representative complainants considered that the FAS does not constitute an adequate remedy for the injustice that they claim to have suffered due to maladministration by the public bodies responsible for occupational pensions policy and regulation.
2.54 They consider that this is the case because the FAS will not cover schemes where the employer is still solvent; nor will it cover many members of schemes even where the employer is insolvent. Furthermore, such ‘assistance’ as may be provided by the FAS will not cover the whole loss suffered by even the minority covered by its terms.
2.55 They thus seek for themselves - and for others in a similar position to them - the restoration of their full pension and associated benefits (such as life cover) - and also financial recognition of the distress, inconvenience and uncertainty caused to them by the maladministration they allege.
The Government’s initial response to the complaints
2.56 Where I propose to conduct an investigation into any complaint, I am required, by section 7(1) of the 1967 Act, to afford to the principal officer of the department or public body whose actions form the subject matter of the complaint an opportunity to comment on the allegations contained in that complaint.
2.57 I received responses to the representative complaints from the Treasury, the DWP, OPRA and what was then the Inland Revenue on 20 December 2004.
Treasury response
2.58 The then Permanent Secretary of the Treasury noted that the complaints related to matters which were not the policy responsibility of the Treasury. Policy responsibility for occupational pension schemes and the MFR lay not with it but with DWP. He said that the Treasury takes an interest in issues such as these which might have an impact on those policy areas for which it is responsible, but that its sole focus was on monitoring such impact.
2.59 In the case of the MFR, the Treasury’s involvement had been in assessing the impact of the MFR on institutional investment and the effects that the various options for reform of the MFR might have had on financial markets.
2.60 The Treasury had worked jointly with DWP on a series of consultation documents and public statements on these issues, but that had not meant that at any time responsibility for the matters under investigation were the policy responsibility of the Treasury; still less had it undertaken any administrative actions in relation to the matters complained about that might be subject to an investigation by me.
2.61 The Permanent Secretary said that the Treasury had never advised scheme trustees and/or scheme members directly on any matter related to occupational pensions and that this would not have been appropriate as another Government department had policy responsibility for such matters.
2.62 That being the case, the investigation was more properly directed at DWP, although the Treasury had contributed to the DWP response. As I have said above, I accepted that this investigation is properly directed at DWP, OPRA and NICO.
DWP response
2.63 The then Permanent Secretary of DWP said that the Government did not accept that any of the complaints were well-founded or that the facts supported the allegations of maladministration made by complainants. He said that it believed that the complaints were based on a substantive misconception of the role of Government in relation to individual private pension schemes and their members.
2.64 He said that neither DWP nor the Treasury had a legal duty to provide information to pension scheme members, generally or in relation specifically to the MFR, and that this was the role of scheme trustees. Notwithstanding this, DWP had to a limited extent provided generic information to the general public about the various methods of saving for retirement, including occupational pension schemes, through its leaflets.
2.65 The DWP leaflets cited by complainants had therefore been public information leaflets which had provided a general introduction to occupational pension schemes. They had not been intended – as they had made clear - to provide comprehensive advice or a legally complete statement about final salary schemes. Rather they were intended to be a general guide to encourage people to think about saving for their retirement. The leaflets had been intended only to give an outline explanation of such schemes and as such could not have constituted individual advice to members about their pension choices, or their rights and liabilities through membership of a scheme.
2.66 The then Permanent Secretary said that, despite this, the information provided in them had been accurate and - in the context of a general, introductory leaflet - appropriate.
2.67 Given their essentially ‘introductory’ nature, they were also not misleading. The leaflets had not indicated that the benefits of an occupational pension scheme were assured or that an occupational pension would necessarily be the most suitable arrangement for everyone.
2.68 The then Permanent Secretary said that it would not have been responsible or appropriate for general leaflets of this kind to have covered what were accepted to be complex aspects of funding and investment risk which might differ significantly from one scheme to another.
2.69 In addition, while such leaflets were available to the general public through DWP’s pension information order line, through its websites, and from its Pension Centres, DWP did not target the distribution of such leaflets directly or through the pensions industry to individuals or to schemes.
2.70 The then Permanent Secretary said that he did not think it appropriate for individuals to be encouraged to take important decisions depending on differing assessments of financial risk on the basis of general public information of this sort. He said that the degree of risk and whether that risk may justify an individual taking action which itself incurs a different risk is particularly complicated and difficult to explain.
2.71 Such general leaflets did not seek – nor could they reasonably do so – to detail the different sort of risks, such as the longevity risk associated with deciding when to purchase an annuity or such as stock market investment risks, that exist in relation to personal investment decisions such as those related to private pension provision.
2.72 The then Permanent Secretary said that anyone reading the leaflets could not have reasonably thought that they were getting a complete picture of the issues surrounding the security of occupational pension schemes and, in particular, the security of their own scheme by so doing.
2.73 However, he said that DWP leaflets did sometimes refer to matters where the Government was aware of current public concerns and where it was taking or had taken specific action to address such concern. The Permanent Secretary explained that that was why the April 2004 edition of ‘Occupational Pensions: Your Guide’ had included a new statement about the problems being caused by insolvent wind-ups and the intended establishment of the PPF, which at that time had recently been introduced to Parliament in the Pensions Bill.
2.74 The then Permanent Secretary said that his Department had recognised widespread concerns from a number of groups about the way the MFR was working and in March 1999 it had commissioned a report on the MFR from the Faculty and Institute of Actuaries. While mainly concerned with the technical working of the MFR, the report also considered the question of disclosure of information on the level of security provided by the MFR to scheme members. It recommended that there should be full and clear disclosure of the limitations of the MFR test and of the consequences for accrued rights if a scheme should be wound up. However, the Permanent Secretary pointed out that the report had itself recognised that full and clear disclosure needed to be carefully handled and that it had also said that further work on the form and manner of any disclosure was still necessary.
2.75 He said that, even were the Government to accept that it had a responsibility to communicate directly with scheme members (which it did not), it would have been inappropriate and possibly injurious to scheme members to have attempted to have communicated specific warnings until this further work had been completed.
2.76 The then Permanent Secretary said that DWP had taken forward consideration of the disclosure issue in parallel to its work on reviewing and developing proposals for the replacement of the MFR itself, which had been in part undertaken by a Consultation Panel. He said that the Government had been open about this work and had recognised publicly the concerns that people had raised about the MFR.
2.77 He said that at no time had anyone involved in the formal consultation on this reform work suggested that DWP should issue information direct to scheme members (or indeed the general public) about the limitations of the MFR as a method of securing scheme benefits. The Consultation Panel, set up by the Department to assist it in the review of the MFR and consisting of experts from different parts of the pensions industry, had recognised that communication with scheme members on funding issues was a complicated and important issue. However, there had been no consensus as to how, in what form, or at which level of detail communication with scheme members could best be achieved. Research on this issue had been commissioned by DWP in August 2002.
2.78 That research, published in February 2003, had clearly borne out concerns about unwittingly causing unnecessary alarm and possibly inappropriate responses by scheme members as a result of full disclosure.
2.79 The then Permanent Secretary said that, by the time the research had been received and considered by DWP, planning for the replacement of the MFR had been well advanced and it had been decided that, in this context, the specific issue of communication needed to be subsumed within the broader issue of how trustees should communicate information about the level of funding in a scheme once the MFR – which was widely recognised as being in need of wholesale reform - was replaced.
2.80 In relation to the changes to the MFR basis, the then Permanent Secretary said that there was a strong case for maintaining that these changes were a matter of policy not administration and that the relevant policy decisions had been taken reasonably and without maladministration.
2.81 He said that the changes to the actuarial basis underpinning the MFR calculation had been made following recommendations to do so by the Faculty and Institute of Actuaries and had been implemented through amendment of their Guidance Note (GN27). He also said that it was a misconception to state that the two changes made were designed to weaken the MFR from its original level, which had only intended to provide a limited degree of security for non-pensioner members.
2.82 The amendments had been made to ensure that the original MFR level was maintained in the light of economic and demographic trends and had been approved by Ministers on the recommendation of officials after the technical aspects of the changes had been checked with GAD.
2.83 These changes accordingly had not amounted to a weakening of the MFR from its designed level. Therefore, the then Permanent Secretary said that the concept of needing to ‘warn’ scheme members that the MFR ‘had been weakened’ had not arisen.
OPRA response
2.84 The then Chairman of OPRA said that, while OPRA accepted that their publication had contained the phrases quoted by complainants, that particular guide – and others – had made the full position clear when read as a whole and in context.
2.85 She said that OPRA had had no responsibility for communicating direct with scheme members – the responsibility for keeping them informed and up-to-date about the position of their scheme had always lain with the trustees of each scheme and OPRA had not thought it appropriate – or even possible – to bypass them in an attempt to deal directly with scheme members.
2.86 The Chairman also said that trustees of pension schemes had a responsibility to appoint professional advisers and had a duty to consider their advice on, among other matters, the technical aspects of the funding of their scheme. Moreover, trustees were under a duty to obtain actuarial valuation reports and a schedule of contributions from the scheme actuary. Regulations required that these reports had to include a statement to the effect that they did not reflect the costs of securing the liabilities by the purchase of annuities, if the scheme were wound up.
2.87 OPRA publications, including the July 1997 edition, had made clear that they were not a definitive statement of the law and that they were not a substitute for taking professional advice, which was emphasised in a number of places in each guide. The 1997 edition had been issued to those scheme trustees for whom OPRA had contact addresses, following a print run of 200,000.
2.88 The Chairman explained that, as the impact of the MFR would be gradual, as schemes had up to four years from April 1997 to prepare for their first MFR valuation, OPRA had issued a further guide in May 1999. This went into more detail about the implications of the MFR, including an explicit reference to the fact that the MFR would not ensure that all the scheme’s liabilities could be met in the event of the scheme winding up. It had also emphasised again that the guide was no substitute for getting professional advice. This guide, like all others, had been placed on the OPRA website. In addition, 40,000 copies had been printed and sent out to the trustees of all schemes to which the MFR applied.
2.89 The Chairman said that, at the time that the guides in question had first been issued, scheme surpluses rather than deficits had been the biggest issue for final salary schemes. It had been only following the collapse of the stock market and the realisation of the implications of increased longevity for the assets and liabilities of pension funds that funding deficits had become a real issue, the implications of which were still being worked through.
NICO response
2.90 The Chairman of what was then the Board of the Inland Revenue said that he accepted that the process for reconciling the entitlements of scheme members and securing their accrued rights on wind-up could take some time to complete. However, he said that he believed that this was attributable to the nature of the process rather than to any maladministration by NICO.
2.91 The time taken to reconcile the records held by schemes with national insurance records and, where appropriate, calculating Guaranteed Minimum Pension (GMP) amounts depended on a number of factors. These included the number of members, both past and present, in a scheme; the state of the records held by the scheme; and how quickly scheme administrators replied to queries from NICO.
2.92 There was, the Chairman said, considerable potential for differences between NICO’s records and those held by a scheme, especially in relation to the earnings recorded for each member. He said that employers had to notify both the scheme administrator and NICO of the earnings for each employee but often would change the amount recorded following enquiries from, or errors identified by, NICO - without informing the pension scheme of the revised figures. Such discrepancies were often only identified on retirement, transfer or wind-up, when GMP figures were calculated.
2.93 The Chairman explained that, in the late 1990s, NICO had experienced difficulties in the changeover to their new computer system – known as NIRS2. This had had an effect on the reconciliation process, as NICO had been unable to provide computer-generated scheme lists and entitlements. However, NICO had introduced alternative arrangements where scheme administrators and/or trustees could ask for clerically prepared calculations in what the schemes considered to be priority cases.
2.94 He said that the problems with NIRS2 and the availability of the alternative service had been publicised widely throughout the pensions industry and that he therefore did not believe that they had had any significant impact on the reconciliation process.
2.95 The Chairman recognised that annuity rates had reduced in the early 1990s, and that therefore, where two schemes started the wind-up process on the same day, a scheme that completed wind-up in the 1980s would have got a better rate than one that completed in the 1990s.
2.96 However, he said that the reasons for delay in winding-up were due to many factors beyond the control of NICO. These included the need sometimes for trustees to take legal action against a creditor, such as the sponsoring employer, so as to realise all a scheme’s assets.
2.97 The Chairman said that he was satisfied that NICO had done everything possible it could have done, including the introduction of a number of local initiatives designed to progress winding-up cases within reasonable timescales.
Launch of investigation
2.98 Having received responses from the bodies under investigation, and not being satisfied that those responses had resolved the complaints or provided an explanation of the relevant facts that cleared up the issues, I decided to continue my investigation.
2.99 The next three chapters of this report set out the results of my investigation. They focus, first, on the results of the further enquiries I made as part of my investigation; secondly, on the facts my investigation uncovered through consideration of the relevant documentary and other related evidence; and, finally, on my findings in relation to the complaints.
2.100 Before dealing with these matters, I will set out the approach I have used to assist me to determine whether to uphold the complaints I have investigated.
My approach to maladministration
2.101 No definition of maladministration was provided in the 1967 Act, from which I derive my powers. Indeed, my predecessors have largely resisted attempts to ‘define’ rigidly the concept, as they considered that this might lead to an overly restrictive view of the types of complaint that my Office might consider – and also to situations in which rigid definitions became easily outdated.
2.102 However, in the Second Reading debate on the Bill that became the 1967 Act on 18 October 1966, Richard Crossman (the then Leader of the House of Commons) said that an attempt to list the qualities that might constitute maladministration would include bias, neglect, inattention, delay, incompetence, inaptitude, perversity, turpitude, arbitrariness and, in his words, ‘and so on’.
2.103 One of my predecessors also added to this list in what he said was more ‘modern’ language - in his Annual Report to Parliament for the year 1993. He added the following traits: rudeness; an unwillingness to treat an individual as a person with rights; a refusal to answer reasonable questions; neglecting to inform an individual on request of his or her rights or entitlement; knowingly giving advice which is misleading or inadequate; ignoring valid advice or overruling considerations which would produce an uncomfortable result for the person overruling; offering no redress or manifestly disproportionate redress; showing bias whether because of colour, sex, or any other grounds; an omission to notify those who thereby lost a right of appeal; a refusal to inform adequately of the right of appeal; faulty procedures; the failure to monitor compliance with adequate procedures; cavalier disregard of guidance which was intended to be followed in the interest of the equitable treatment of those who use a service; partiality; and failure to mitigate the effects of rigid adherence to the letter of the law where that produces manifestly inequitable treatment.
2.104 However, it has been a commonly held precept of all Ombudsmen that the determination of whether maladministration has occurred is always related to the specific circumstances of each case.
2.105 The focus of the complaints within my jurisdiction that I have investigated is threefold and is related, first, to whether the bodies under investigation misled or misdirected complainants as to the security of their pension through the information provided by those bodies to the public. A second focus is whether those public bodies took various decisions that reduced such security without informing those affected of the consequences of those decisions; and the final focus is on whether public bodies have been responsible for unreasonable delays in resolving the winding-up of certain pension schemes.
2.106 Having considered the nature of the complaints within the context I have described above, my approach to determining whether maladministration occurred will be to establish the following:
(i) whether information provided by the bodies under investigation was clear, complete, consistent and accurate;
(ii) whether the bodies under investigation took the disputed decisions about the MFR and the disclosure of risk to scheme members without maladministration - that is, reasonably and with due regard to all relevant considerations; and
(iii) whether the bodies under investigation undertook their responsibilities in relation to the process of winding-up certain contracted-out final salary pension schemes appropriately - that is, without undue delay or other administrative error.
2.107 I now turn to consider the evidence uncovered by my investigation and on which I will base my assessment of the above questions.
