Further enquiries
Jump to
- Introduction
- Key results of survey of complainants
- Submission by Dr Altmann
- The Government's further comments
- Further submissions by Dr Altmann
- Interview with independent trustees
- Observations by the FSA
- Actuarial advice
- Comments of actuarial profession
Introduction
3.1 This chapter sets out the results of the further enquiries I made as part of my investigation, to assist me to gain a better understanding of the complaints.
3.2 Before describing that work, I should explain that, as the matters which formed the subject of this investigation are complex and were often technical, I have treated Dr Ros Altmann – an investment expert, investment banker and economist, adviser to the pensions industry, and Governor of the London School of Economics - as the advocate for complainants. Complainants had requested that I do so and she had also been mandated to act on behalf of the action group representing a large number of individuals affected by the wind-up of their schemes.
3.3 The further enquiries I made as part of this investigation had the following key elements:
(i) we conducted a survey of every individual complainant registered with us to establish what their detailed position was, how the wind-up of their scheme had affected them, and the degree to which the FAS might remedy their losses. I received 198 responses to that survey and the key results from those responses are set out below;
(ii) Dr Ros Altmann submitted a considerable amount of evidence on behalf of complainants and provided comments on the main aspects of the response to their complaints by the bodies under investigation;
(iii) my investigator interviewed the four representative complainants, who provided valuable insight into their complaints. The results of these interviews are incorporated into the material set out in other chapters of this report;
(iv) we asked the bodies under investigation for further evidence and for their views on some of the more detailed allegations made by Dr Altmann and complainants during the investigation, which the Government provided on several occasions;
(v) we scrutinised the other written submissions of complainants which were held on our files, which have informed other chapters of this report, especially chapter 2;
(vi) my investigator also visited NICO on site, scrutinised a random sample of their files, and obtained detailed reports on action taken by NICO on the pension schemes of which the four representative complainants had been members - and also on a random selection of other schemes with which other complainants were associated;
(vii) in addition, my investigator interviewed independent trustees responsible for winding-up pension schemes to obtain an insight into their experience;
(viii) we met office-bearers of the all-party groups on Occupational Pensions and on Insurance and Financial Services and scrutinised many submissions by other Members of Parliament made on behalf of their constituents – these have been helpful in establishing the wider context in which the complaints are placed;
(ix) I sought the comments of the Association of British Insurers and of the National Association of Pension Funds, some of whose members administer occupational pension schemes, on matters related to the alleged delays in winding-up final salary schemes – those comments are set out in chapter 5 of the report;
(x) I sought actuarial advice on some of the issues raised by the complaints, the technical scope of which is set out in annex B to the report; and
(xi) finally, I also sought the comments of the actuarial profession on the same matters, which were provided by the Faculty and Institute of Actuaries.
3.4 In addition to the above, we scrutinised a considerable number of Government files, official publications and other documentary sources to establish the factual context in which the complaints were placed. The results of this scrutiny are set out in chapter 4 of the report.
3.5 I am extremely grateful to all those who assisted my investigation and for the helpful and comprehensive manner in which they did so.
3.6 The rest of this chapter sets out the key results of the survey I conducted, Dr Altmann’s first submission on behalf of complainants, the Government’s responses to my further enquiries (including the results of my investigator’s visit to NICO), further comments made by Dr Altmann, the main points made by independent trustees when my investigator interviewed them, and an outline of the actuarial advice I have received – and the actuarial profession’s comments on that advice.
Key results of survey of complainants
3.7 During late March, April and early May 2005, I conducted a survey, by means of a questionnaire, of all those whose complaints had been referred to me or who otherwise had contacted me about their complaint. I received 198 responses to that survey.
3.8 Of those respondents:
(i) 113 were male and 85 female;
(ii) 95 had been members of a scheme where the sponsoring employer was still solvent, 89 were members of an insolvent employer scheme, with 14 being unsure as to the status of the employer;
(iii) at the time that wind-up began, 79 had been active members of the scheme, 81 had been deferred members, 27 had been existing pensioners, 8 had been the qualifying spouse of a deceased member and 3 did not answer this question;
(iv) in relation to whether their scheme would be covered by the FAS, 45 said that it was on the indicative list of eligible schemes, 102 said that it was not on that list, and 51 said that they did not know whether their scheme might be eligible;
(v) in relation to whether they might individually be covered by the FAS, 19 said that they thought that they would qualify, 110 said that they would not qualify, and 69 did not know whether they would qualify;
(vi) 62 said that they had originally joined their scheme when membership had been a condition of employment and a further 9 said that they had been required to transfer back into their occupational scheme, following a review of their decision to buy a personal pension which had been found to be due to mis-selling; and
(vii) 63 could demonstrate that they had sought out and been provided with official literature about pensions (42 of these sent me photocopies or the originals of such material in response to my survey; another 21 had provided such with their original complaint). A further 12 could not produce an information leaflet now but could show through earlier copy correspondence that they had at one time possessed such material. 29 said that their scheme or another person had informed them that the Government guaranteed their pension and that they had not as a result sought out other confirmation of this. 119 of the total said that they had read in one place or another that being funded to the MFR level meant that their scheme would have enough money to meet its liabilities on wind-up.
Submission by Dr Altmann
3.9 Dr Ros Altmann made a submission to me on behalf of complainants following my decision to conduct an investigation.
3.10 She said that the bodies under investigation had not taken proper care when informing the public and members of final salary occupational schemes about the security of their pensions in their employer’s plan. They had not checked carefully enough what the true situation was and had told members that their pensions were safe, guaranteed or protected when, for many groups of people, this had not been correct.
3.11 She said that, if the law did not protect them and their contributions were not actually safe, the Government should not have carelessly ‘lulled’ members of final salary pension schemes into a ‘false sense of security’. Members had thereby been denied any opportunity to protect their pensions and had had no chance to consider other courses of action which may have diversified or otherwise secured their retirement income.
3.12 Dr Altmann argued that this had been caused by the careless decisions of Ministers and officials, their inaction in the face of warnings that members had no idea about the reality of the MFR, and inaccurate and woolly statements by Government agencies in their publications and elsewhere. Government had failed to warn of the risks individuals were taking when contributing to their employer’s pension plan or when leaving retained benefits in the scheme after leaving the service of the sponsoring employer.
3.13 Dr Altmann said that Government had a responsibility to put matters right, as it had promoted and encouraged individuals to join their employer’s scheme; as many members had been originally compelled to join, which was a requirement enabled by the law; and because then, once in a scheme, Inland Revenue rules had prevented them from contributing to any other pension at the same time.
3.14 The members had subsequently lost most or all of the retirement income which they were promised by their employer’s scheme. She said that these losses could have been avoided if members had been warned that their money was not safe:
(i) those who could have retired under the rules of their scheme would never have stayed on at the request of their company - if they had known that they could lose their pension - but would have taken the pension straight away;
(ii) some members had left employment because of ill-health, but had not taken benefits because they had been assured that their pensions were safe;
(iii) others who had transferred money in from other employers’ schemes (for example, from the schemes of public sector bodies like the former National Coal Board) would have left their money in the previous schemes if they had known that they could lose it all on wind-up;
(iv) individuals who had transferred money into employer schemes from money purchase arrangements might have chosen not to do this, if they had thought that their entire money could be lost; and
(v) members who had been in their 50s, who were worried about the financial health of their employer (and in some cases had then checked with Government agencies to find out if their pensions were safe in the scheme) could have transferred their money out if they had known that they could lose most of their expected pensions.
3.15 Dr Altmann said that the Government had denied all these people the chance to protect their retirement income, by encouraging them to join their employer’s pension scheme - and by carelessly telling them that their pensions were safe and that their accrued rights were protected by law.
3.16 In relation to the specific heads of complaint:
(i) Dr Altmann pointed to the statement on page 28 of the 1997 OPRA guide for trustees, which had said ‘the MFR refers to the minimum amount of funds that should be in the scheme at any one time in order to meet the schemes liabilities if it were to be discontinued’. She explained that this statement was untrue and the careless wording of these booklets, sent to trustees who would naturally expect the information from OPRA, the regulatory body, to be reliable, amounted to maladministration - as the MFR had never been designed to ensure that the assets of the scheme would be sufficient to meet liabilities on discontinuance. It had only been designed to be adequate for meeting the liabilities of pensioners and to have an even chance of meeting the accrued pension liabilities of those not yet retired. Thus, the regulator sent out a booklet to scheme trustees, which the trustees would have been reasonably expected to rely upon as being correct, and which led the trustees to believe 100% MFR funding meant adequate funds to meet all liabilities on wind-up;
(ii) She also said that the impact of statutory priority orders and the costs of buyout had not been mentioned in the OPRA booklet, yet they were significant in terms of members’ benefits on discontinuance. The trustees, who would have been unaware that the information from the regulator was not complete, relied on this and passed on incorrect information to members;
(iii) Dr Altmann also pointed to the wording of various DWP leaflets, including pre-2004 editions of ‘Occupational Pensions: Your Guide’, which she said had contained misleading statements about the protection and security afforded by the law and the MFR to accrued pension rights in final salary schemes. She said that, even though DWP was encouraging and promoting these schemes, it did not take enough care to ensure that its booklets were comprehensive or accurate. She said that DWP had not sufficiently considered the impact of these incorrect assurances of safety on all the various classes of member and had failed to ensure members were properly informed of what were the risks to their accrued rights; and
(iv) She also pointed to the report of the actuarial profession, which had highlighted that scheme members and trustees generally believed that the MFR offered them full protection and its recommendation that the Government should disclose to members what would happen to their pensions if their scheme wound up under-funded. She said that the Government had said that it wanted to help people understand their pension rights. However, if that were so and if there was no guarantee that these rights would be delivered by their scheme, she said that it would have been in accordance with good administrative practice had DWP been as careful as possible to ensure that scheme members were properly consulted and subsequently informed about the possible lack of security of their pensions. However, the Government’s consultation process had not included meetings or discussions with members of schemes themselves and it had failed properly to consider the true effects in all different possible circumstances of the implications of failing to warn members.
3.17 In relation to the remedy sought, Dr Altmann said that, while the Government had agreed to set up the FAS with £400 million funding (approximately £20 million a year) to offer ‘assistance’ to some of those who had lost out, this fund was not designed to fully compensate members for the losses they have suffered. It was designed to exclude several groups of members, even those who had lost as much as 90% of their pension, which was unfair in her view.
3.18 Dr Altmann said that the FAS only planned to restore some of the pensions to some of the victims. Therefore, in her view the Government had offered insufficient remedy to compensate for the damage done by its careless actions and its inexcusable inaction.
3.19 She said that instead it was her contention on behalf of complainants that the Government must compensate the victims of maladministration in full. Consideration should also be given to the financial recognition of the uncertainty, distress and adverse impact on their health which the stress of this situation had caused to the victims and their families.
The Government’s further comments
3.20 Following receipt on 20 December 2004 of the Government’s response to the complaints made by the representative complainants, and having considered the Government’s response and Dr Altmann’s submission on behalf of complainants, I asked both DWP and NICO for further information on 28 January 2005.
DWP
3.21 In order to further consider the complaints related to the actions or inaction of DWP, I asked to see the relevant DWP policy and any other files related to the production of their information leaflets (such as ‘Occupational Pensions: Your Guide’), their files related to consideration of the actuaries’ report, and their files concerning other work done in relation to the communication of information to scheme members.
3.22 In addition to this request for documentary evidence, I asked DWP three additional, specific questions.
3.23 First, I asked whether DWP considered that, as the Government’s acknowledged policy appeared to have been to promote membership of occupational pension schemes, it had a responsibility to provide clear and complete information about the principal risks to such schemes, including the risk of employer insolvency and/or scheme wind-up.
3.24 Secondly, I also asked for DWP’s comments on letters sent by Ministers to pension scheme members whose schemes had wound up under-funded in which it was said that, despite the problems suffered by members of some schemes, the Government would continue to encourage membership of occupational pension schemes.
3.25 Thirdly, I asked whether DWP considered that individuals had been entitled to rely on official publications as part of the process of making choices to opt out of (an element of) state pension provision by contracting out of the state additional pension and joining an occupational pension scheme.
3.26 The files I had requested were provided to me promptly and the results of my consideration of them (and other documentary evidence) are set out in chapter 4 of this report. In addition, I received the answers to the above additional questions, which combined the answers to the first and second questions, on 11 March 2005.
DWP response to first and second questions
3.27 In relation to the first question I had posed, DWP told me that the Government’s policy throughout the relevant period had been (as it remained), to encourage people to save for their retirement.
3.28 The Government believed that private pension arrangements, which were structured to offer a reliable source of income for life and which were tax-favoured in various ways to provide incentives, were one of the best ways to save for retirement.
3.29 DWP said that, while all forms of private pensions could be advantageous savings vehicles, the Government believed that what was likely to be the best arrangement, for those employees to whom it is available, was a pension – whether in the form of an occupational pension or a Group Personal Pension - to which the employer also made a contribution.
3.30 Within occupational pensions, DWP said that the Government did not have a particular preference for final salary or money purchase schemes: each might be more suitable for different employees, depending on their different types of job and career patterns.
3.31 To this extent, DWP said that the Government had encouraged membership of occupational pension schemes. However, this encouragement had had its limits. DWP said that Government policy had been – and continued to be - in the words of a Ministerial letter to which I had referred them, to ‘promote the general benefits of occupational pension provision’.
3.32 DWP said that the Ministerial letters had also made it clear that the Government saw this ‘general’ promotion of the benefits of such schemes as significantly different from the provision of advice to individuals as to their pension options.
3.33 Thus, it was DWP’s view that the Government’s policy of promoting the general benefits of occupational pensions could not be equated with, for example, a recommendation that an individual should join a particular occupational pension scheme or the promotion of a particular personal pension by an independent financial adviser.
3.34 Whilst it was the Government’s broad policy to encourage the take-up of private pensions, and particularly those with an employer contribution where this was available, the Government was not in a position to provide advice to individuals, whose circumstances would inevitably vary enormously.
3.35 DWP also said that there were particular reasons why it did not see the provision of ‘clear and comprehensive information about the principal risks’ of membership of occupational pension schemes as a concomitant responsibility of its policy of promoting the general benefits of such schemes.
3.36 This was especially so, DWP said, in relation to general leaflets like ‘Occupational Pensions: Your Guide’. DWP argued that to seek to provide such information would have been neither appropriate nor practicable in the sort of general public information material which it issued.
3.37 DWP said that all types of saving, which included all types of pension provision, were subject to a variety of potential risks. No pension arrangement, whether funded or pay-as-you-go, could therefore offer an unconditional guarantee of specific levels of benefit many years hence.
3.38 However, DWP argued that not all risks applied, or applied to the same extent, to all types of pension arrangement. Moreover, while some risks did apply to all types of pension arrangement, their consequences might differ significantly depending on the type of arrangement. Any attempt to explain comprehensively and in a balanced way all the various risks, and the extent to which they applied to different types of pension, would have required detailed, complex and lengthy analysis of a sort which would be wholly out of place in a general information leaflet.
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3.39 Furthermore, DWP said that an attempt to set this sort of material out comprehensively in general official literature about pensions would in practice create a misleadingly off-putting impression of the security of occupational pension schemes because attempting to set out all the risks relating to occupational pensions without putting them in the context of the various risks that apply to any sort of saving would in practice tend to discourage people from joining occupational pension schemes – a decision likely to be to their detriment in most cases.
3.40 In addition, DWP said that it would have been extremely difficult to describe in proportionate terms a range of risks which statistically were very unlikely to affect any individual scheme member, albeit that they might have had significant consequences for those that they did affect. Nor would the resulting document any longer resemble a general public information statement.
3.41 DWP acknowledged that its ‘Public Information Policy Statement’ included the requirement that information which DWP issued ‘must be timely, complete and correct. The Department may be held responsible if we give advice and someone relies on this to their detriment’.
3.42 However, DWP said that such timely, complete and correct information about the risks involved in pension savings in occupational pension schemes would be all but impossible in the context of general public information leaflets, as the purpose of such leaflets is primarily to provide a very general introduction to the subject of occupational pensions and to encourage individuals to obtain further information.
3.43 DWP said that it had been for this reason that its introductory leaflets had frequently referred the reader to other sources of information and, where appropriate, to independent advice.
3.44 Given their leaflets’ explicitly modest objectives and the issues about risk mentioned above, DWP said that it would have been inappropriate to seek to provide complete information about the principal risks in relation to occupational pension schemes.
DWP response to third question
3.45 DWP, in response to my third enquiry, told me that anyone contracting-out of the additional state pension must necessarily require information about state pension rules and potential entitlement as part of the background to such a decision, and it accepted that DWP had been a key source of such information during the relevant period and since then.
3.46 However, DWP said that official publications could only play a limited role in the process of deciding whether to contract-out.
3.47 In the case of occupational pension schemes, DWP’s view was that the decision on contracting-out was necessarily interlinked with the decision as to whether to join a pension scheme. To make such a decision, any individual would need to rely on advice and information from the trustees, or from an independent financial or other adviser.
3.48 DWP said that, while the act of contracting-out may be relatively straightforward, the rules governing contracted-out as opposed to contracted-in provision – and hence any ‘better off’ calculation, particularly across the longer-term – were complex.
3.49 Government leaflets (or equivalent internet information) intended for the general public could not act, in DWP’s view, as a full legal or financial statement of an individual’s position, or cover every circumstance which might affect their decision.
3.50 DWP said that, at most, such leaflets could act as a starting point, designed to encourage individuals to start thinking about saving for their retirement and pointing them in the direction of sources of further information. These were limitations which such leaflets and related material made clear.
3.51 Given this complex set of issues, DWP said that the Government believed that it was reasonable to expect people to take further action, beyond reading a general leaflet, before taking financial decisions with potentially significant long-term consequences for themselves.
3.52 DWP reiterated its acceptance that the information contained in its official publications should be accurate. However, it said that it did not follow that it would be reasonable for members of the public to treat such publications as being comprehensive or as providing individual advice.
3.53 DWP was firmly of the view that it would be unreasonable for the Government to be expected to take responsibility for financial decisions made (or not made) by individuals on the basis of their assumptions about circumstances not mentioned in official literature they had read:
(i) where they had relied exclusively on such literature; and
(ii) had taken no steps to obtain financial advice on the issue; nor even
(iii) confirmed their understanding of the position with DWP.
3.54 DWP said that it followed that, while it was accepted that official publications may provide a convenient starting point for individuals when considering whether to opt out of an element of state pension provision, general information leaflets could provide no more than such a starting point.
3.55 DWP said that it did not believe that it would be reasonable for an individual to rely upon general public information leaflets in isolation when making such a decision.
NICO
3.56 At the same time, I asked NICO for further information. Specifically, I asked them to provide me with a list of all of the wound-up schemes that NICO had worked on (or was still working on) to reconcile GMP entitlements during the relevant period; the dates at which each scheme had wound up (and the date when NICO had been informed that each had wound up); the total number, if known, and categorisation of scheme members covered by this work; the number of schemes and individuals affected by situations where the reconciliation process had been completed and the number where such work had not been completed; and a detailed report on the work done to date by NICO in relation to each of the four schemes relevant to the four representative complainants for this investigation – and an indication of the current position on each scheme.
3.57 NICO said that not all the statistical information I had asked for was available in the format in which I had requested it. However, they provided me with some statistics to help me understand the context for their handling of schemes winding-up and also offered my investigator the opportunity to visit NICO and to have access to their files and systems.
3.58 My investigator visited NICO on 3 March 2005. He was provided with access to NICO staff and their files and was able to read a random selection of case files and to interrogate their computer system freely.
3.59 As follow-up to that visit, in addition to the detailed scrutiny of the files of the four schemes of which the representative complainants were members, I asked for a report on NICO’s handling of a random selection of 22 schemes of which other complainants were members and also for further statistical information.
NICO’s handling of the four representative schemes
3.60 In relation to NICO’s handling of the scheme of which Mr J was a member – which had approximately 500 members - NICO had not been informed that the scheme had ceased for approximately twelve months after it had started wind-up.
3.61 In addition, I saw from the file that the scheme administrators had requested that NICO only take action on cases which the administrators identified as a priority and then only once they were in a position to ask detailed questions about scheme members’ entitlements to NICO. This did not happen for a further nine months.
3.62 Once the administrators sent in queries for resolution by NICO in relation to 22 members, NICO took action to resolve nine of those cases and asked for further information about the remainder in order for it to be able to resolve the queries. This took NICO sixteen working days to complete.
3.63 Similarly, the process of resolving other queries involved ongoing dialogue between the administrators and NICO but I saw that in all cases NICO responded to enquiries within reasonable timescales.
3.64 With Mr G’s scheme – which had just over 1,000 members - it took the administrators just over nine months to inform NICO that the scheme was winding up. It also was a complex scheme, which had had more than one sponsoring employer and had involved both final salary and mixed benefit pensions in it.
3.65 Through consideration of NICO’s file, I identified two stages to the process of reconciliation – the first, initial stage encountered problems in relation to NICO’s computer system. However, those appeared to be resolved quickly.
3.66 Furthermore, the principal delay in the initial stage of NICO’s handling of this case related to a history of incorrect payments of national insurance contributions since April 1997 by one of the sponsoring employers, which had meant that age related rebates had not been properly recorded by the scheme for every member. This took NICO just over six months to rectify, which, given the circumstances, did not appear to be unreasonable.
3.67 Once this had been resolved, NICO responded, in the second stage of its handling, to each query from the scheme administrators within five working days.
3.68 In relation to the scheme of which Mr D was a member – which had approximately 400 members – the administrators took just over ten months to inform NICO that the scheme had commenced wind-up.
3.69 I saw from the file that the explanation provided for this delay was that there had been a change in scheme actuary and that it had taken some time for the relevant files and records to be transferred to the new actuary. In addition, the original notification did not give NICO enough information to take immediate action and further information had to be sought.
3.70 The information provided to NICO in due course raised more questions about whether the scheme had provided the correct information, including an accurate reference number. It was also clear from the volume and nature of the enquiries made by the scheme administrator of NICO that considerable discrepancies existed between the records of the scheme and those held by NICO.
3.71 Methods of preservation of pension rights have now been secured for those members about whom sufficient and consistent information is held and those were provided within reasonable timescales, given the administrative problems outlined above. However, I note that work continues to resolve the problems in reconciling records for other individuals.
3.72 Finally, with regard to the scheme of which Mr B was a member – which had approximately 800 members – the first notice that NICO had that the scheme had ceased and was in wind-up was provided in a telephone call from the scheme actuary more than ten months after that had happened. Three weeks later, NICO received a letter from the official receiver which advised that the employer had gone into receivership at approximately the same time. NICO was then informed formally by letter two weeks later that wind-up had commenced.
3.73 It soon became apparent that the sponsoring employer, which had been formed from a number of mergers, had not notified either the scheme or NICO of the transfer of certain members from one scheme to another. In addition, NICO identified revaluation discrepancies between the scheme’s records and its own.
3.74 Over the next year, correspondence and information was exchanged to rectify the discrepancies and to establish exactly which individuals of which former components of the company were members of the scheme.
3.75 I note that work continues to resolve these issues and also to explore deemed buy-back. However, the scheme was removed from NICO’s priority list on 18 August 2004 at the request of the scheme administrators and was replaced on that list by another scheme for which those administrators were responsible.
NICO’s handling of the random sample of other schemes
3.76 Having examined the handling of the other sample schemes, a similar pattern emerged. Many of the schemes whose members have complained to me were not notified to NICO as being in wind-up until well over one year had elapsed.
3.77 Similarly, the reconciliation process in relation to many of the schemes suffered from the existence of inconsistent records and from historical mistakes made by the personnel departments of the sponsoring employers.
3.78 While NICO computer problems did appear to figure in some of the delays, in all cases I have seen those problems were ameliorated by alternative clerical arrangements put in place by NICO or by other solutions. In the one case where it appears that such computer issues were serious, other factors meant that no progress would have been able to have been made on that scheme even had no computer issues emerged.
3.79 In many of the cases, the different parties responded relatively quickly to each others’ enquiries or requests for information. However, that was not always the case, despite attempts, usually by NICO, to establish closer liaison arrangements between NICO and the scheme administrators, their advisers, or those responsible for the affairs of insolvent employers.
3.80 None of the schemes I have observed were wound-up quickly and none of the scheme cessations I examined were notified to NICO particularly promptly, which led to delay from the outset.
Statistical information obtained from NICO files
3.81 In order to satisfy myself that the delays in completing wind-up and securing the benefits of scheme members were not wholly or mainly attributable to unreasonable delay or other maladministration by NICO on a wider or systemic basis, I asked NICO to provide me with additional information about their total workload - concerning the time taken by scheme administrators or independent trustees to inform NICO that a scheme was in wind-up.
3.82 The information we obtained from their computerised records showed that, at 22 March 2005, of the 8,513 schemes on which they were then working:
- in only 1,478 cases had the scheme notified NICO that it was winding-up, thus initiating the reconciliation process, within three months of scheme cessation;
- those notifying NICO within six months totalled 3,453 - with those within one year coming to 4,925; and
- in 1,646 cases it had taken more than two years from scheme cessation to notification.
3.83 The average time taken to notify NICO - thus launching the reconciliation process - was just over 14 months and more than 40% of schemes took longer than one year to provide notification.
3.84 In relation to NICO’s more recent workload, the position as at 18 October 2005 showed that the average taken was 14.19 months, with exactly 40% taking more than one year to notify NICO. At 15 January 2006, the position was, respectively, 15 months and 40%.
Further submissions by Dr Altmann
3.85 I asked Dr Altmann for her observations on the Government’s response to the complaints and on DWP’s further comments. She made further submissions to me on 18 March 2005 and on 2 August 2005.
3.86 She said that the individuals who had lost their pension rights through scheme wind-up both had been encouraged by public bodies to join their occupational scheme and had had the schemes promoted to them through official publications.
3.87 Dr Altmann argued that this encouragement and promotion constituted more than the provision of general and introductory information. In addition, when giving such encouragement and promotion, the Government had a duty to be balanced and fair in the information provided, even if it were of a general nature.
3.88 While noting that DWP in their response – and also in their publications – had made much of the fact that occupational schemes were not suitable for everyone, she said that the examples given – people who changed jobs often or who had low income – had been insufficient and had been focused on the individual circumstances of a potential member of an occupational pension scheme.
3.89 Dr Altmann argued that that was not the substance of the complaints. The issue underlying them was not whether individuals had been told to join a scheme that was unsuitable for their needs due to their own circumstances, but rather that no warning at all of the risks to their pensions – based on the circumstances of the sponsoring employer of the scheme they were being encouraged to join – had been made. Indeed, they had never been told that factors beyond their control could take their pensions away and instead had been told to join schemes that had been promoted as being safe, guaranteed and protected by law.
3.90 She argued that, even where Government is only generally promoting the advantages of private pension provision, it still had a responsibility to refer, even briefly, to any major risks to an individual’s investment and not just to emphasise the benefits of belonging to a scheme.
3.91 Dr Altmann noted that even introductory material might have included one sentence which said something like ‘of course, no pension arrangement can offer an unconditional guarantee and there could be circumstances, such as if your scheme winds up, when you may not receive the full pension you are expecting’.
3.92 In any case, she said, the ‘general introductory’ leaflets had dealt with a number of other issues of detail, including the effects of moving abroad in future and the pension sharing provisions for divorced people. To have not dealt at all with the most significant risk of all – that an occupational final salary pension was only as good as the sponsoring employer who had promised to pay it on retirement – was not in accordance with good administration.
3.93 Dr Altmann accepted that it was for individuals to ask questions and to seek appropriate advice before making financial decisions. However, she said that the effect of official publicity, ministerial announcements and other Government policy had been to provide assurance that pensions were safe and that the only question that a member needed to ask was whether their scheme was funded to the MFR level. That led to a position in which people could not make informed decisions as they had not been told the correct questions to ask.
3.94 Dr Altmann said that she did not suggest that all members would have been dissuaded from joining a final salary scheme had they known the true risks - but they would have been able to take extremely important financial decisions in the light of all the information that they needed to have to make such informed choices. Some may have diversified their provision rather than make additional voluntary contributions to schemes; others may have monitored the financial strength of their employer more closely and taken action with their fellow workers to seek increased contributions from the employer.
3.95 She continued by emphasising the importance of Government decisions and the terminology that Government had used. She said that, as regards to contracted out schemes, the very name of the entitlement left little room for any doubt about the security of the pension received from the rebates, having been called by Government a ‘Guaranteed Minimum Pension’.
3.96 Dr Altmann said that this reinforced the feeling among members that their pensions were safe and protected by laws devised and overseen by Government. They had never been told by that Government that such pension rights might not actually be guaranteed nor even a minimum.
3.97 She continued by saying that the Government had also failed to carefully consider the effect that weakening the MFR would have on the security for members of schemes where a solvent employer simply chose to wind-up the pension plan, even if the employer could afford to meet the full buyout costs of providing the promised pensions.
3.98 In conclusion, she said that each part of Government had reinforced the message of the other and, even if each public body, on its own, felt that its actions were not so bad, ‘in combination the net effect was like encouraging people to bet their entire retirement income on the shares of just one company on the stock market’.
Interview with independent trustees
3.99 My investigator met three independent trustees, each responsible for overseeing the winding-up of a large number of schemes and all operating principally within different parts of the UK. One of the trustees had discussed the issues prior to meeting my investigator with her colleagues on the representative group for independent trustees and some of her views were provided on behalf of those colleagues.
3.100 The topics covered in the interviews revolved around five questions:
- what the independent trustees considered from their experience that scheme members, trustees, administrators and professional advisers knew about the role and purpose of the MFR;
- what they considered was known by the above groups in relation to the security of pension rights on scheme wind-up and on what basis or source such knowledge had been gained;
- what the independent trustees considered had been the key challenges in resolving the wind-up of the schemes with which they had been involved;
- what their experience had been of dealing with NICO; and
- what their view of the key factors that made the process of winding-up a scheme and preserving members’ pension rights such a protracted business.
3.101 I will now describe what the independent trustees told me in relation to each question above.
The MFR
3.102 The trustees agreed that, while scheme actuaries, lawyers, the trustees who were appointed by the sponsoring employer, and other pensions professionals were generally aware of the MFR – or had access to advice about its role, purpose and effects on their scheme - neither the member nominated trustees nor the generality of the members had any developed understanding or awareness of the role and purpose of the MFR.
3.103 One trustee said that he had attended a meeting of members not long after appointment to oversee the winding up of the scheme, and had had to explain that, although the scheme was funded to the MFR level, this did not necessarily mean that it would be able to meet all of its liabilities to them. He reported incomprehension and bemusement from members, as they understood that their pensions were guaranteed so long as the scheme was ‘properly funded in law’.
3.104 One trustee referred to the common misconceptions – ‘even within the industry’ – about the MFR that had persisted up until approximately 2000, which had equated the MFR with a solvency standard. This he said was patently not the case, especially after 2000, by which time the MFR had become ‘an exceptionally weak standard’ – even though many companies were only funding – legally – to that standard.
Security of pension rights
3.105 The trustees agreed that the scheme members they had encountered had had little if any idea before the wind-up of their scheme that there was any chance that the ‘pensions promise’ would not be met in their case.
3.106 One said that many members believed that they had an ‘individual pot’ which no-one else could touch and which would fund their retirement on the basis of the final salary formula – the years spent contributing to the scheme and their final earnings before retirement or leaving the relevant employment.
3.107 Another said that the MFR had never been explained to members properly and that the existence of a statutory funding mechanism had ‘given the illusion of safety and security’. Having a funding basis established by and determined with the approval of Government seemed to give the impression that the Government was satisfied that the level prescribed was sufficient to meet the ‘pensions promise’.
Key challenges in winding-up schemes
3.108 In winding-up the schemes that they had been involved with, the trustees said that the key challenges they had faced were managing distressed people when coping with the ‘cliff-edge’ effects of the statutory priority orders on scheme members under retirement age, while ensuring that assets were realised and properly allocated to the pensioners and the members, and doing all this as speedily and with as little cost to scheme assets as possible.
Dealing with NICO
3.109 All three trustees said that they believed that NICO provided a satisfactory service within the statutory, technological and administrative confines within which it had to operate. However, these confines were substantial and led to long delays and extra costs which were not appreciated by trustees or members.
3.110 A key theme in their experience had been that NICO was not enabled within the legal framework to be flexible as regards the reconciliation of contracted-out entitlements and that this had led to long and often involved negotiations and exchanges of correspondence in relation to quite small sums of money. This had had a serious impact on the amount of time it took to wind up a scheme. One described this as leading to an ‘intransigent’ attitude and to a ‘rigid’ system. However, another said that NICO had ‘vastly improved’ its service in recent years and had tried to be as ‘transparent’ and ‘helpful’ as possible within an ‘outdated’, ‘overly complex’ and ‘totally inflexible’ legal regime. The third said that the introduction of face-to-face meetings between NICO and independent trustees to help resolve problems had been a ‘significant’ improvement.
3.111 Another common factor experienced by the trustees was that NICO’s computer infrastructure had not been all that it might in the past and that this had had a detrimental impact on the time taken to deal with even some of the less complex schemes. The problems with NIRS2 had taken ‘many more months’ to resolve than had at first been expected. However, it was recognised both that this was matched by the often poor technology supporting scheme administration and also that advanced technology was no substitute for timely and accurate reporting to NICO of the data they needed, which trustees recognised had not always been forthcoming.
3.112 In relation to administration issues, the trustees recognised that the work NICO could do was heavily dependent on the quality of administration within schemes and the degree to which the records of each scheme had integrity and were kept up-to-date. It was agreed that, on appointment as independent trustee, they had found the state of scheme records to be in a variable state. One of the key factors identified by the trustees was that, where a scheme administrator had been changed during the life of a scheme, often there had been little attempt by the old administrator to keep records up-to-date once they knew that they were to lose the business - and also the handover from old to new administrators often left much to be desired.
Factors of delay in winding-up
3.113 All the trustees agreed that a number of key factors contributed to the delay in winding-up some schemes. Such factors identified included: the need to pursue from the employer shortfalls in the funding of a scheme, as required in law; the variable state of the scheme’s records and the time taken to agree entitlements with NICO; where an employer was insolvent, the inability of independent trustees to secure a portion of the assets owed as the scheme was an unsecured creditor; delays on both sides in the reconciliation process; and the complexity of pensions law.
3.114 The trustees all recognised that these factors had contributed to the position for many years.
Other matters
3.115 The independent trustees made a number of other points of relevance to my investigation, not covered above. These included:
(i) that the pensions system, especially in relation to the involvement of public and regulatory bodies, was insufficiently ‘joined-up’ and that as a result many issues were not approached in a consistent and effective manner;
(ii) that words like ‘guaranteed’ should never have been used in relation to pensions or any other form of investment activity - and that the limits to the security of final salary schemes had been obscured by the regular use of such language by Government and others in the past;
(iii) that many scheme administrators had used official publications as the basis for their practice manuals and other scheme documentation and, while there was a duty to seek advice, many administrators saw public bodies as a source of information and advice at least as authoritative as either their lawyers or actuaries;
(iv) that it was not clear that the Government had learnt from the lessons of the past in ensuring that the limitations of the protection afforded by the new PPF are being made clear to scheme members and the general public;
(v) that it was not clear how the amount provided to fund the FAS could deliver anything other than minimal support or support to only a few – and that many of the potential recipients of ‘assistance’ from the FAS were extremely upset by the terminology used and the amount of money available;
(vi) that the changes over time to the MFR did not appear to have been consistent with the public’s perceptions of those changes, as they had not strengthened the MFR test but indeed had weakened it;
(vii) that the removal of Advance Corporation Tax relief had not only cost the pension schemes significant amounts of money, but had also invalidated the rationale behind the MFR (which in part led to the subsequent changes to it);
(viii) that there remained a fundamental tension between the need to ensure that employers were not dissuaded from starting or continuing to sponsor schemes and the increased costs of ensuring that a reasonable level of security was provided to scheme members – and that in the past Government initiatives had tended to portray moves to relieve the burden on employers as being a means of strengthening member protection. This had often been misunderstood;
(ix) that it had never been clear to many in the pensions industry whether the Government or the actuarial profession were responsible for the MFR; and
(x) that – even with the advent of the PPF - a programme of education is still necessary to underline the fact that employers provide pensions on a voluntary basis and that any occupational final salary scheme is only as secure as the employer standing behind it.
Observations by the FSA
3.116 The Chairman of the FSA told me that he did not agree with the view expressed by the independent trustees we had interviewed that the term ‘guaranteed’ should not be used, or only used with a clear qualification, in circumstances where the insolvency of the giver of the guarantee would result in the beneficiary not receiving all the benefits to which they were entitled. He said that ‘guaranteed’ did and does have a lay meaning – namely, that the consumer is being told what return they can expect when a financial product pays out on maturity in normal circumstances.
3.117 The Chairman said that the FSA has for a number of years had rules governing how financial products are promoted. Subject to the promotion overall being ‘clear, fair and not misleading’, those rules allow banks and life insurance companies to describe, in the case of the former, deposits as having a ‘guaranteed’ rate of return and, in the case of the latter, a policy (including a pension) as having ‘guaranteed’ benefits. In neither case does the FSA regard the consumer as being given a promise about the continued solvency of the firm providing the product. In the context of the schemes with which my investigation is concerned, the FSA has noted that it used the word ‘guarantee’ as a simple way of distinguishing between personal pensions, where the consumer bears the investment risk, and defined benefit occupational pension schemes, where the member is able to predict the level of benefit he could expect to receive on retirement and so it is the employer which bears the investment risk.
3.118 The Chairman told me that he considered that there were good reasons for this. He said that, in almost any financial transaction, a promise is only as good as the soundness of the giver of that promise. It would not help a consumer if every piece of material promoting a product were covered by a solvency warning – over-use would blunt such a warning or would cause unjustified concern and confusion. This was of equal relevance to final salary schemes, where the use of the term ‘guaranteed’ was not used by the FSA to indicate the continued solvency of the sponsoring employer of a scheme or the indefinite continuation of the scheme itself.
Actuarial advice
3.119 In order to assist me to investigate whether the decisions - both to change the actuarial basis of the MFR calculation and also not to subsequently warn members that these changes had allegedly had the effect of weakening the protection afforded by the MFR to their accrued pension rights - were taken with maladministration, I sought independent actuarial advice.
3.120 The focus of that advice was on whether the 1998 and 2002 changes to the formula underpinning the MFR were significant; and, if so, whether they implied or involved a reduction in the protection offered to scheme members.
3.121 I now turn to consider the advice I have received. What follows is necessarily only an outline of that advice.
The design of the MFR
3.122 My advisers tell me that the original design of the MFR had a number of limitations in terms of its ability to keep pace with market conditions and thus to maintain the level of protection it was intended to provide to members of final salary schemes.
3.123 I am advised that these conditions include:
- that the UK was moving into an era of historically low inflation and low real interest rates (as evidenced by the fall in fixed interest gilt yields);
- the removal by Government, in the July 1997 Budget, of the ability of UK pension schemes to reclaim the tax credit deducted from UK dividends. There was, however, at the same time an offsetting reduction in UK corporation tax from 33% to 31%. I am advised that the aggregate impact was nevertheless an immediate step reduction in income for UK pension funds;
- indications that companies were finding different ways of returning value to shareholders, for example through share buy backs, and that fundamental changes in the commercial environment were causing dividend yields to fall;
- in the late 1990s, the market values of UK equities were at an all-time high and rising - the so-called ‘technology bubble’ in equity prices; and
- the one-off effects of large scale acquisitions and disposals by companies included in the FTSE Actuaries All Share Index, which had distorted the yield on the index as a whole.
3.124 In addition to these contextual factors, my advisers also tell me that the non-pensioner MFR basis often placed a lower value on pension benefits than the pensioner MFR basis.
3.125 Taking these factors together, I am advised that the non-pensioner MFR basis had been weakened since its inception by the market effects highlighted above, such that the chance of an MFR transfer value being sufficient to provide the member’s pension, as measured on the MFR pensioner basis, was significantly reduced even without the changes to the MFR basis, which were made in 1998 and 2002.
3.126 Moreover, the long-term assumptions for the non-pensioner MFR basis did not take into account the falling gilt yields over the period.
3.127 I am also advised that the MFR pensioner basis did not keep pace with the cost of securing pensions by purchasing annuities because of improvements in life expectancy and the strengthening of other factors in annuity pricing bases.
3.128 These factors led to the MFR being seen as unsatisfactory as the statutory basis for scheme funding and in need of replacement.
Changes to the MFR
3.129 The changes made to the MFR basis in 1998 and 2002 were principally two changes to the equity market value adjustment. As a result, the changes did not affect the MFR liabilities for pensions already in payment and only partially affected those of non-pensioners within ten years of MFR pension age.
3.130 The full effect of the changes was only felt by non-pensioners more than ten years under MFR pension age, because the MFR effectively assumed that a member taking a transfer value from a scheme would invest it in full in UK equities until they were ten years from MFR retirement age. At this point, they were assumed to gradually switch it all into long dated gilts.
3.131 I am advised that, in practice, members taking transfer values to personal pension vehicles have a wide range of investment options and often invest much more conservatively than assumed in the MFR basis. This would typically have reduced the probability of MFR transfer values being sufficient to provide the deferred benefits given up. However, what follows is based on the assumptions underlying the MFR basis as it stood throughout the relevant period in question.
First change
3.132 With effect from 15 June 1998, the equity market value adjustment changed from being calculated as the ratio of 4.25 to the gross dividend yield on the FTSE Actuaries All-Share Index to the ratio of 3.25 to the net dividend yield on the FTSE Actuaries All-Share Index.
3.133 My advisers tell me that the reason for the change from a formula based on the gross yield to one based on the net yield was that, with effect from 2 July 1997, tax credits for pension schemes on UK company dividends were abolished.
3.134 They advise me, however, that the reasoning for the change in the 4.25 factor to 3.25 is not straightforward but that it seems to have been a combination of allowing for the stream of income payments that might be available following the removal of tax credits and falling dividend yields, which reflected the use by companies of means other than dividends for returning value to shareholders.
Additional minor change
3.135 With effect from 1 June 1999, changes to the FTSE Actuaries gilt indices also made a minor technical change to the gilt index to be used in the calculation of the gilt market value adjustment. I am advised that this is not of significance to the issues I have investigated.
Second change
3.136 With effect from 7 March 2002, the equity market value adjustment became the ratio of 3.00 to the actual dividend yield on the FTSE Actuaries All-Share Index. I am advised that the stated rationale for this change was set out in a letter from the actuarial profession to DWP on 5 September 2001.
3.137 The transitional period of the MFR had been due to end on 5 April 2002, at which point the maximum period within which any MFR deficit had to be eliminated was to have become five years.
3.138 At the same time, the Government proposed – and Parliament approved – an amendment to the relevant Regulations so that, with effect from 19 March 2002, where an actuary certified a schedule of contributions following an MFR valuation and the MFR funding level was less than 100%, the period for correcting the deficit was extended to a maximum of ten years.
3.139 Furthermore, at the same time, the period to eliminate serious shortfalls, defined as the deficit when the MFR funding level was less than 90%, was extended to three years by parallel changes to the relevant Regulations. This period was due to have become one year from 6 April 2002.
The significance of the changes on MFR calculations
3.140 My advisers analysed MFR liabilities for non-pensioners aged between 20 and an assumed MFR pension age of 65 - calculated in March 2002 on three bases: using the original 1997 formula; that in operation after the June 1998 change to the formula; and also that in operation after the March 2002 change.
3.141 They advise me that the 15 June 1998 change reduced the value of MFR liabilities for members more than ten years away from their MFR pension age by 9.4%.
3.142 I am also advised that the 7 March 2002 change to the formula reduced the value of MFR liabilities for members more than ten years away from their MFR pension age by 7.7%.
3.143 Thus, the effect of the combined changes, compared to the original 1997 basis, was a weakening in the MFR basis of approximately 17%, although this could only be an approximation because, by the time of the later change, the gross dividend yield had ceased to be published.
3.144 My advisers also undertook calculations using their stochastic model (see annex B) to assess whether the MFR provided to members a ‘reasonable expectation’ of achieving equivalent benefits through a personal pension both before and after the changes to the MFR basis. This was done by generating sets of possible outcomes at January 1996, April 1997, June 1998 and March 2002 according to the basis set out in annex B. The probabilities are shown in the table below:
3.145 The Government’s intention was that non-pensioners should have at least a 50% chance of receiving their full pensions if their scheme was fully funded to the MFR level. The two changes to the MFR calculation on this analysis reduced the probability of meeting that original intention by between 6% and 9% at ages up to 45. At age 55, by which time the member is only ten years from retirement, the reduction was considerably larger.
3.146 Consequently, after the March 2002 change, I am advised that MFR transfer values only had just above a 35% chance (at ages up to 45) of providing the member’s pension.
3.147 As I have said above, this analysis does not reflect the further falls in probabilities that would be seen if improvements in life expectancy and other loadings in annuity terms (which my advisers estimate could have reduced the probabilities to less than 30%) or the significantly reduced probabilities for under-funded schemes were also taken into account.
3.148 The advice to me is that both changes to the MFR basis resulted in a significant reduction in the liabilities which any scheme was deemed to have and, assuming no additional funding was forthcoming, a scheme’s disclosed funding position against the MFR level improved across the board.
Protection afforded by MFR and the policy rationale
3.149 What of the protection afforded to pension scheme members and their accrued rights by the MFR?
3.150 My advisers tell me that the weakening of the MFR basis through the changes to the equity market value adjustment outlined above accounted for about half of the reduction in protection from the original policy intention, with the rest being in consequence of the changed economic and policy context.
3.151 They also tell me that such changes went in the wrong direction if the intention had been to rectify an already weakened MFR and return it to its original strength. Instead the changes relied on an assumption that more of the return to pension schemes would come from capital growth, instead of dividend income, than had been the case historically.
3.152 I am advised that the 2002 change to the equity market value adjustment was the only one of the three earlier proposals for interim reform of the MFR proposed by the actuarial profession in May 2000 that would have had the effect of weakening the MFR.
3.153 In their response to my enquiries on this matter, DWP has stated that the intended effect of both the 1998 and 2002 changes was to realign the MFR more closely with the strength that was originally intended. In support of this assertion, DWP noted that, regarding the 1998 change, the Institute and Faculty of Actuaries had said that it was required because changes had ‘called into question the continuing consistency of the MFR basis with the Government’s original intentions’ and, regarding the 2002 change, that it was stated in a letter sent on behalf of the actuarial profession to DWP in September 2001, that the further change to the MFR was ‘aimed at bringing its strength back to that originally intended’. That is, that developing economic trends had caused the MFR to operate at a stronger level than originally intended and that a weakening of it would realign it with its original strength.
3.154 DWP also told me that these changes were recommended to Ministers in the light of the actuarial profession’s advice, and after seeking independent confirmation from GAD that what the profession was proposing was reasonable in the circumstances; that the changes were welcomed publicly by the actuarial profession (in a press release of June 1998, the Faculty and Institute of Actuaries welcomed the changes because they ‘correct a distortion in the results which was causing increasing concern to employers and their advisors’); and that no concerns about the actuarial effect of the changes were drawn to DWP’s attention at or after the time the changes were promulgated.
3.155 However, I am advised that it is impossible to reconcile these submissions about the effects of the changes to the MFR basis with the original policy intention behind the MFR.
3.156 This is because the MFR had, by the time of the changes, already been weakened from its original level; and the effects of the changes implemented by the Government involved a significant further weakening (on top of the 1998 change) of the protection afforded to scheme members by measurement against funding levels on an MFR basis.
Comments of actuarial profession
3.157 I asked the governing bodies of the actuarial profession to comment on the advice I had received, which is set out above. I received their comments on 13 January 2006.
3.158 The profession stressed that it was ‘not criticising the work carried out by [my] actuarial adviser’ but rather they felt that ‘those of us who were involved in recommending the changes in MFR to the Government can contribute additional insights to assist in a fuller understanding of the circumstances’.
3.159 Without setting out some ‘legitimate wider considerations that were important at the time’, the profession thought that the analysis and conclusions set out above would fail to provide a sufficiently balanced view of what was a very complex matter.
3.160 The profession then set out such considerations in relation to both the 1998 and 2002 changes to the MFR basis.
1998 change
3.161 The profession told me that, immediately prior to the June 1998 change to the MFR, the equity market value adjustment (MVA) had risen to such an extent that some schemes were in danger of breaching the Surplus Regulations and becoming liable to a tax charge. In other words, they said that the minimum funding ‘test’ was causing some schemes to exceed the maximum funding allowed with full tax privileges.
3.162 An even more powerful concern, widely felt by employers, scheme trustees and actuaries at that time, had been that it was possible at most ages for a member of a final salary scheme to take a minimum transfer value, calculated on the MFR basis, and to invest that transfer value in a gilt based personal pension such that they could be virtually 100% certain (subject to future annuity rates) of obtaining a greater pension than they were giving up by taking the transfer value.
3.163 The profession said that this meant that the MFR test had become very much tougher than the Government’s specification of ‘at least an even chance’ of replicating the scheme’s benefits.
3.164 The profession told me that the high equity MVA prior to June 1998 enabled members to be virtually certain of getting better benefits. This supported their contention at the time that the MFR had become tougher than the Government had originally intended. Consequently, the profession’s recommendation in May 1998 that the Government agree to change the equity MVA was aimed at returning the MFR to the strength Government had originally intended it should be.
2002 change
3.165 In relation to the 2002 change to the equity MVA, the profession told me that this had been driven by a need to reflect changes in companies’ behaviour in relation to buying back shares as an alternative to the payment of conventional dividends.
3.166 The profession said that at the time there had also been strong criticisms of the arbitrary nature of the MFR formula, such as evidenced by the impact of corporate activity, which the profession had referred to in its May 2000 report of its review of the MFR for Government.
3.167 The profession told me that contemporary analysis had shown that a scheme which had been 100% funded on the MFR basis immediately after the June 1998 change to the equity MVA and which had adopted a ‘neutral’ passive investment strategy would have become less than 90% funded over a period of less than two years. In other words, the profession said that this demonstrated that the MFR had been becoming a progressively tougher test than had been originally intended and that action was required to return it to its original strength.
3.168 It was in this context that the profession’s recommendation had been made. Moreover, the recommended adjustment had been more complicated than it had appeared on the surface, as it was made to reflect two competing trends – improved mortality and a higher than intended equity MVA – which would in addition have a differential impact on individual schemes. This had been explained clearly in their letter of 5 September 2001 to DWP in which their recommendation had been made.
Further comments
3.169 In addition to its comments on the two changes to the MFR basis, the profession told me that all final salary pensions regulation in the UK has always been (and still is) a balance between providing security for members’ benefits while not increasing costs to employers by so much that they cease to provide, on a voluntary basis, such pensions for their employees.
3.170 The profession said that it was not possible, at one and the same time, to meet all of the following three conditions:
- investment of pension scheme assets in equities;
- stable employer contributions over time; and
- stable levels of member security over time.
3.171 The profession said that, by way of example, to achieve stable protection of members’ benefits and stable employer contributions, it would be necessary to require schemes to invest all their assets in gilts (assuming insurance company buy out rates followed gilt prices). Alternatively, if investment was in equities, then in order to achieve stable protection of members’ benefits, it would be necessary to require companies to pay additional contributions whenever the equity market fell relative to the gilts market.
3.172 The profession told me that, given those imperatives, it was not surprising that the level of member security provided by the MFR was volatile. They said that this had been known by Government at the time of the March 2002 change to the MFR basis, as it had been clearly illustrated in the profession’s May 2000 report on their review of the MFR that DWP’s predecessor had commissioned.
3.173 The profession said that ‘therefore, decisions about reacting to short term changes in the level of protection afforded by the MFR test were far from straightforward, given the desire, from the employers’ and ultimately the members’ perspective, for a stable environment for planning employers’ financial obligations to their schemes’.
My assessment
3.174 I am grateful to the actuarial profession for their comments, which gave me useful insight into the context in which their recommendations in May 1998 and in September 2001 were made. I would make two further observations on their comments.
3.175 My first observation is that I do not doubt that the other contextual factors to which the profession drew my attention – including the need to consider the interests of employers by not increasing costs – might have been important considerations for the profession or for Government at the time.
3.176 However, my concern in seeking actuarial advice on the economic and demographic context in which the DWP’s decisions to amend the MFR basis in 1998 and 2002 were taken was limited to consideration of whether the MFR at the relevant times met the original policy intention that Government had set for the MFR.
3.177 In response to the complaints made about those decisions, the Government said that the rationale for agreeing to amend the MFR basis on both occasions was that the changes would realign the strength of the MFR with its original policy intention. While there may well have been other concerns of which the decision-makers within DWP might have been aware, the evidence set out in chapter 4 of my report makes it clear that the stated rationale for their decision on both occasions was realignment with this policy intention.
3.178 Thus, the advice I have received was properly restricted to an assessment of whether the MFR was, at the relevant times, able to deliver an even chance for non-pensioners that they would receive their pensions following investment of the transfer value provided. I am satisfied that the advice I have received on this question is robust.
3.179 Secondly, while many of the broader comments made by the profession have been echoed by my advisers, they have advised me that some of the observations made by the profession are surprising.
3.180 My advisers tell me that the Surplus Regulations did not make a significant contribution to a position in which schemes became ‘under-funded’ on the MFR basis. My advisers tell me that it can be shown that, even allowing for quite different scheme profiles, MFR funding levels would have to have been well in excess of 150% to run the risk of breaching the Surplus Regulations at the time of the 1998 change. I have seen no evidence whatsoever that any of the schemes whose members have complained to me were ever funded to such levels.
3.181 Moreover, I do not see how the minimum funding requirement for all schemes – and thus the protection of all scheme members’ pensions – could be weakened merely because some schemes were very well funded. Sponsoring employers of such schemes were allowed to take ‘contribution holidays’. I therefore do not understand the suggestion that there was no alternative to weakening the MFR test for all schemes because of the position of the best funded schemes.
3.182 In any case, even if concerns about the effects of the Surplus Regulations were part of the context in which the MFR changes were made, these concerns formed no part of the stated reasons given by DWP for making those changes. The same is true for any concerns that, when the 1998 change was made, it was possible at most ages for a member of a scheme who was provided with a transfer value to invest it in a gilt based personal pension so that they could be virtually 100% certain of obtaining a greater pension than that given up by taking the transfer value.
3.183 In considering complaints about the decisions in both 1998 and 2002 to amend the MFR basis, I assess those decisions having regard both to the reasons given by the decision-makers at the time – alignment with an intention that would enable non-pensioners to have an even chance of receiving their pensions following investment of a cash equivalent transfer value – and to the way in which those decisions were taken.
3.184 Having set out the enquiries I made during my investigation, I now turn to set out the results of my scrutiny of various documentary sources of evidence relevant to the complaints I have investigated.
