Findings
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The role of public bodies - conclusions from the evidence
My approach to determining the complaints
Have individuals suffered injustice?
Has this injustice been remedied?
Informed choice and lost opportunity to take remedial action
Introduction
5.1 This chapter sets out my assessment of the evidence that my investigation has disclosed and my determination of whether the actions and/or omissions of the bodies complained about constitute maladministration causing injustice to individuals.
5.2 I will begin by outlining the key conclusions I have drawn about the role of the bodies complained about from the evidence I have investigated.
5.3 I will then set out the questions that I have asked. Finally, I will set out my conclusions on these matters.
The role of public bodies - conclusions from the evidence
5.4 I consider that the evidence about the matters that I have investigated demonstrates the following about the role of Government in occupational pension provision during the period relevant to my investigation.
5.5 First, the public bodies under investigation had responsibilities in relation to the aspects of final salary occupational pension provision that are the subject of this investigation.
5.6 In particular, DWP and its predecessor were responsible for the legal framework governing such provision and took the lead within Government on policy issues related to it. In addition, OPRA was the regulator of such provision and NICO participated (with OPRA) in the process of winding-up final salary schemes where that occurred. This is apparent from the nature of the legal, regulatory and administrative frameworks described in annex A to this report.
5.7 Secondly, the Government saw itself as acting – and told the public that it was doing so - in partnership with others both to promote the benefits of membership of occupational pension schemes and to remind individuals that, where they could, they had an obligation to save for their retirement.
5.8 The Government’s role in the promotion of membership of pension schemes is apparent from official statements throughout the period relevant to this investigation – ranging from the Ministerial press notice to accompany the publication in June 1998 of the report of the Pensions Education Working Group to DWP’s evidence to the Work and Pensions Select Committee in October 2002. It is also apparent from other official statements, including in the December 1998 Pensions Green Paper and answers given to parliamentary questions in November 2001.
5.9 The Government’s view that saving is an obligation on those who can afford to do so is also apparent from the 1998 Green Paper and from various Ministerial statements in Parliament such as those in February 1999 and November 2001.
5.10 Thirdly, the Government recognised throughout the relevant period that pensions were complex and often not a topic that was generally understood and that, consequently, there was a need for greater financial education, for improved awareness of pensions, and for clearer information about the various savings options.
5.11 This is apparent from the public observations of OPRA both in June 1997, shortly after the Pensions Act 1995 came into force, and in April 1999. It is also apparent from the work of the Government-appointed Pensions Education Working Group - published in June 1998 - from the official response to that work, and from the whole thrust of the Pensions Green Paper published in December 1998.
5.12 Fourthly, the Government saw itself as having a key role in promoting such better education, awareness and information about pensions and saving for retirement – and told others that it would do so.
5.13 This role was discussed in, among other places, the Pensions Green Paper of December 1998, in a Cabinet Office report in April 2000, in the joint DWP-Treasury consultation on the MFR issued in September 2000, in DWP evidence given to a parliamentary Select Committee in October 2002, and, most recently, in DWP’s later publications on ‘informed choice’.
5.14 Fifthly, the Government said at the relevant time that the information leaflets and other official publications issued by public bodies were an integral component of the promotion of the benefits of saving for retirement and aimed to assist people to make informed choices about various pensions options.
5.15 OPRA publicly accepted in June 1997 that part of its role was to ‘[get] across important messages to all those involved in workplace pension schemes, including scheme members’ and described its relevant publications as aimed at giving ‘trustees a better understanding’ of the issues related to running a pension scheme.
5.16 In addition, the then Pensions Minister told the TUC in June 1998 that DWP leaflets were ‘user-friendly’ and would ‘reinforce the message’ of the importance of saving for retirement. Moreover, in the December 1998 Green Paper the Government said that its then current proposals included the provision of ‘better information’ both on the various pensions options and on the general need to save. That Paper also described official publicity leaflets as being their ‘steps to ensure that people are better informed about pensions issues generally and about the options available to them as individuals in particular’.
5.17 While Government did on occasion state that their information products were not sufficient in themselves to enable individuals to make complex financial decisions, the December 2002 Pensions Green Paper did suggest that official material from that period on would ‘[move] the emphasis… away from promoting simple awareness of the need to save and towards information that will prompt people to take action’. Furthermore, in earlier evidence to a Select Committee in October 2002, DWP had suggested that the ‘role of the state’ was ‘to provide clear and accurate information about what pensions will provide so that people will understand how much they can expect at retirement before it is too late to do something about it’.
5.18 Finally, the Government accepted at the relevant time that it had certain obligations in relation to the accuracy, completeness, clarity and consistency of its publications.
5.19 There is no general statutory or common law obligation on public bodies to provide information or advice to members of the public. However, it was recognised by legal advice provided to DWP in May 2000 that, where DWP or another public body chooses to provide information, this should be correct and complete. Such advice constituted, along with other things such as its public statements, the ‘internal’ standards to which DWP should have had regard.
5.20 In addition, as noted in chapter 2 of this report, previous Ombudsmen have held that a public body may be deemed to have acted with maladministration either where it had knowingly provided information or advice which was misleading or inadequate or where it had failed to follow its own procedures or policies in relation to the provision of such information or advice. I concur with that view.
5.21 Leaving aside for now considerations of the law and of good administration, in such situations where information is provided – and in the context relevant to this investigation – DWP’s own internal guidance set additional standards against which its publications and other official statements might be judged.
5.22 Following the ‘Accuracy of Information Project’ – itself a consequence of reports by my predecessor and by the Comptroller and Auditor General which found that the quality of information provided by DSS about changes to the inheritance of SERPS had been seriously deficient – from March 2002 DWP’s ‘Public Information Policy Statement’ had set out such guidance.
5.23 The Statement provided, first, that, in order to meet ‘communication requirements’, all information provided by DWP should be ‘appropriate, relevant, correct, up-to-date, clear, concise and to the point, helpful and targeted’.
5.24 Secondly, and notwithstanding the lack of a general legal duty to provide information, it stated that:
It is widely accepted that the Department has a duty to give information or advice [to] inform the public about any new policies and developments that may affect them and, crucially, keep them informed on a continuing basis of their rights and responsibilities. It would be unreasonable for the Department not to do this and it is clearly a necessary part of our business.
5.25 It continued:
The Department must take care to achieve the necessary balance of resource and effort between announcing changes and new policies and our duty to provide routine information. The common law duty of care means that any information we provide must be timely, complete and correct. The Department may also be held responsible if we give advice and someone relies on our advice to their detriment.
5.26 In addition, this general strategy was, for information provided by the Pensions Service, complemented by a ‘Standards Framework’, aimed at front-line staff. This framework provided that ‘the Pensions Service has a responsibility to provide factual, accurate, timely and appropriate information to all of its customers through all appropriate media’.
5.27 In relation to the general advice provided by the Pensions Service, the framework said that it would encourage individuals to plan for a secure retirement and, where possible, to save to achieve this.
5.28 Finally, the quality assurance process established by the framework said that individual information and advice provided by the Pensions Service in correspondence, telephone calls or in face-to-face interviews would be reviewed by assessing, among other things, whether:
• the information and advice given was ‘accurate and up-to-date’;
• it was ‘comprehensive’;
• it was ‘tailored to the customer’s circumstances’; and
• it mentioned ‘appropriate future legislative changes’.
My approach to determining the complaints
5.29 Having set out key conclusions from the evidence that I have scrutinised as part of this investigation, I now turn to the determination of whether maladministration occurred and, if so, whether it caused - or contributed to - the injustice claimed by those who have complained to me and others in a similar position to those complainants.
5.30 Before doing so, I should explain that the findings I come to below were determined following consideration of submissions made by DWP during the investigation in relation to my initial concerns about certain issues. Those submissions, and my assessment of them, are set out in annex C to this report.
5.31 The rest of this chapter sets out my findings – that is, my answers to the following questions:
(i) did maladministration occur?;
(ii) if so, did individuals suffer injustice?;
(iii) if such injustice exists, has it been remedied?; and
(iv) did any maladministration I have identified cause - or contribute to - any unremedied injustice?
Did maladministration occur?
5.32 As explained in chapter 2 of this report, my approach to the determination of whether maladministration has occurred is broadly structured around consideration of the following aspects of the complaints I have received:
(i) first, whether the information provided by the bodies under investigation was clear, complete, consistent and accurate;
(ii) secondly, whether the bodies under investigation took the disputed decisions about the MFR and the disclosure of risk without maladministration; and
(iii) thirdly, whether the bodies under investigation undertook their responsibilities in relation to the process of winding-up certain contracted-out final salary schemes without undue delay or other administrative error.
5.33 In dealing with the first aspect, I will consider the following information provided by DWP (and its predecessor) and OPRA in relation to the security provided to the accrued pension rights of scheme members by the MFR:
(i) what public bodies said about the intention of the MFR before it was devised and implemented;
(ii) what public bodies said about the security provided by being funded to the MFR level when it was announced and introduced; and
(iii) what public bodies said about such security during the operation of the regime of which the MFR was a component part.
5.34 In relation to the second aspect, I will consider three discretionary or policy decisions taken by public bodies in relation to the MFR and risk:
(i) the decision to change the MFR basis in June 1998 by amending the equity market value adjustment;
(ii) the decision, communicated in March 2001, not to make new disclosure to scheme members (as it was claimed had been recommended by the actuarial profession) of the risks to their pensions and to explain the degree of security afforded by being funded to the MFR level; and
(iii) the decision in March 2002 to change the MFR basis by making a further change to the equity market value adjustment.
5.35 Finally, in relation to the third aspect, I will consider whether the actions of NICO in relation to the schemes with which the four representative complainants were associated – and their handling of the wind-up of the other sample schemes I have examined – constituted maladministration.
Findings - official information
5.36 I turn first to whether the information provided by DWP and OPRA about the security of the pensions of members of final salary schemes was clear, complete, consistent and accurate.
5.37 In relation to the period prior to the introduction of the MFR, the two principal sources about the intention behind the 1995 legislation which introduced it - and about the specific purpose of the MFR - were the statements made by Ministers during the passage of that legislation and in the official leaflet published by DSS in January 1996 to explain what Parliament had enacted.
5.38 Having regard to the relevant debates set out in chapter 4 of this report, I consider that anyone reading or hearing the Ministerial statements about the MFR and the purpose behind this statutory mechanism would have reasonably believed that a scheme funded to the MFR level would have enough assets to pay the pensions already in payment and to provide a cash transfer value of the accrued pension rights of non-pensioners, regardless of what happened to the employer. On many occasions, Ministers emphasised that this was the case during passage of the legislation that introduced the MFR.
5.39 Leaving parliamentary statements aside to turn to the official information which is the focus of this investigation, the leaflet published by DSS in January 1996 stated that the aim of the Government in introducing the Pensions Act 1995, of whose provisions the MFR had been a key component part, was ‘to remove any worries that people had about the safety of their occupational… pension following the Maxwell affair’.
5.40 Despite the warnings of the actuarial profession in 1994 and 1995 that there was a danger that scheme members would be misled as to the degree of security that the MFR would provide and the Government’s recognition at the time that ‘it is important’ how what became the MFR ‘is explained to members’, the leaflet went on to say that the MFR ‘aimed at making sure that… schemes have enough money in them to meet the pension rights of their members’ and that ‘pensions are protected whatever happens to the employer’.
5.41 The leaflet also assured the reader that, on wind-up, a scheme funded to the MFR level would ‘provide all younger members with a cash value of their pension rights’. No mention was made that the Government intended for non-pensioners that they would only have a ‘reasonable expectation’ that this would be the case, still less that such an expectation meant only an ‘even chance’.
5.42 DSS had been given warnings that care had to be taken to ensure that scheme members did not misunderstand the degree of protection that the new legislative framework would provide for their pension rights. They had a responsibility to ensure that there were no significant omissions from any information they chose to publish.
5.43 Given this, I consider that the failure to ensure that the most fundamental aspect of the MFR – the policy intention that Government would adopt towards what the MFR would actually provide in terms of security for scheme members – was included in the official information given to people to ‘remove any worries’ they might have was highly unsatisfactory. It misled the readers of that leaflet by giving them assurances that were never intended to be met.
5.44 Turning now to the publicity surrounding the introduction of the MFR, this continued to give a misleading impression – by saying (my emphasis) that ‘schemes funded to this minimum level will be able, in the event of an employer going out of business, to continue paying existing pensions and provide younger members with a fair value of their accrued rights which they can transfer to another scheme or to a personal pension’.
5.45 Furthermore, during the operation of the MFR, official statements about the security provided by a scheme being funded to the MFR level continued to be vague, incomplete or misleading.
5.46 It was not the case that the concept behind the MFR was that ‘people who have built up pension rights should be able to draw their pensions in full, even if the employer is no longer there to pay extra contributions’ as was stated in the December 1998 Green Paper.
5.47 No mention of risk or of the real intention behind the MFR was made in any of the general information leaflets produced by DWP and it was not until the April 2004 edition of ‘Occupational Pensions: Your Guide’ that any mention of scheme wind-up as a relevant factor in relation to pension security was made.
5.48 I do not accept DWP’s submission that it would not have been appropriate to cover risk in its publications. I note that OPRA, the regulatory body, had told DSS in January 2001 that ‘risks need to be explained clearly to members’. The December 1998 Green Paper had also said that official information to be provided by DWP and others to support the need that existed for ‘clear information and advice’ and which would help to ‘improve the general quality and comparability of pensions information’ would (my emphasis) ‘include promoting awareness of the benefits and the risks associated with different kinds of investment and providing appropriate information and advice’.
5.49 Given this – and other similar examples - I consider that DWP’s current submissions about what I should now expect from official information are incompatible with what DWP and other public bodies at the time said about the information they would provide - and to the role that they then saw themselves playing in relation to financial education.
5.50 In addition, I note that the first time that public statements were made – albeit not in the leaflets aimed at the public - that the MFR provided for non-pensioners only ‘a reasonable expectation’ - defined as an even chance - of providing a transfer value that would, following investment, give them their full pension was on publication of the consultation on the MFR in September 2000. This was more than three years after the MFR became operational and almost five years since the enactment of the relevant legislation. Official leaflets aimed at the public never made this clear.
5.51 Whether it is ‘reasonable’ that such an expectation might denote only a 50% chance is not clear to me, although I do not consider that this would be a usual interpretation of such an expression.
5.52 Leaving this aside, I have seen that this intention had been referred to prior to September 2000 in internal DWP documents and in setting the terms of reference for the actuarial profession’s review of the MFR, which were only made public at the same time as the publication of the above consultation.
5.53 Indeed, as is shown in chapter 4 of this report, the Government had instructed the actuarial profession on 22 November 1995 that they should devise an actuarial basis for the MFR that would only deliver ‘at least an even chance’ that non-pensioner members would receive a cash value that, when invested elsewhere, would replicate the pension that they would have received had their scheme not wound-up.
5.54 However, this intention was significantly different from what was said publicly by Government about what the MFR was intended to achieve. I remain extremely concerned that no statement to the public had been made prior to September 2000 that this was the intention of the MFR - and that the implications of this were only clearly stated in April 2004.
5.55 Furthermore, DWP and its predecessor knew that scheme members had no idea of the risks to their pensions but their leaflets and other public statements did nothing to dispel that lack of awareness – indeed, they reinforced it.
5.56 Do all of these failings constitute maladministration? Public bodies chose to publish information to support Government’s general policies of making people aware of their pension options and of encouraging membership of occupational pension schemes.
5.57 Whether or not it had a general duty to provide information about these policies and about the legal framework that it had established and was responsible for overseeing, DWP provided such information.
5.58 According to legal advice it received, information DWP provided had to be ‘clear and reliable’ and its officials at the time had recognised that its role should be to ‘give accurate information’ on pensions options. ‘Telling only part of the story’ was also recognised at the time as being equivalent to providing incorrect information.
5.59 In this context, I consider that the early official publications issued by DWP and its predecessor did not meet the standards they set for themselves.
5.60 Furthermore, from 22 March 2002, DWP’s own formal internal guidance required that the information it provided was, among other things, appropriate, relevant, correct and clear. It had also earlier agreed, on 11 September 2001, that accurate information would contain ‘no significant omissions’.
5.61 The May 2002 edition of ‘Occupational Pensions: Your Guide’, which was issued after the agreement of DWP’s Public Information Policy Statement, contained 28 pages of text. Yet it made no mention of the risks to accrued pension rights should a scheme be wound up with insufficient funds to meet all of its liabilities; nor did it mention the statutory priority orders which would have an impact on the amount of money a non-pensioner might receive in such a situation.
5.62 The position with the April 2003 revised leaflet was similar. Neither explained the policy intention behind – or the necessary effects on pension security of – the MFR. Both editions did, however, contain approximately 250 words about how an individual might make additional contributions to a final salary scheme and also more than 300 words about pension sharing on divorce.
5.63 Even following the first public statement – in what amounted to a footnote to the September 2000 consultation document – that non-pensioners had only an ‘even chance’ of replicating their pensions, conflicting messages were being given about the security afforded by the MFR to pension rights within final salary schemes.
5.64 In a parliamentary debate on 3 July 2001, the then Minister continued to say that the MFR was intended where a scheme wound up due to the insolvency of the sponsoring employer ‘to provide younger members with a fair value of their accrued rights’.
5.65 I note – but do not accept - DWP’s explanation (set out fully in annex C to this report) of what ‘fair value’ means.
5.66 Such an explanation is not consistent with the other, less qualified statements in Parliament and in official information about what a non-pensioner scheme member would be entitled to on wind-up. Furthermore, I am not persuaded that any reasonable person considering the phrase ‘fair value’ would take it to mean without further explanation what DWP now tells me that it always meant – that is, a value that would provide only a 50% chance of receiving the expected pension following the investment of a transfer value of accrued rights.
5.67 I have seen nothing that would make me doubt that the Government’s intention behind the MFR was always that it could only provide a limited degree of security to non-pensioner members – which was apparent from its design – and I have seen that the discussions behind closed doors within and between the public bodies responsible for occupational pensions policy generally reflected this.
5.68 However, this was not properly disclosed to those most affected by such an intention. I consider that the official information given to the public about the degree of security provided by a scheme being funded to the MFR level:
(i) was, prior to September 2000, misleading, incomplete and inaccurate - in that it gave assurances which were incompatible with the design and purpose of the MFR as prescribed by Government - and with its practical operation.
These assurances were that the MFR was designed to ensure that schemes had sufficient assets to meet their liabilities and that a scheme funded to the MFR level would be able to pay cash transfers of accrued rights to non-pensioners. In addition, no disclosure or even mention was made of risks to accrued rights or of the potential effects of statutory priority orders on wind-up;
(ii) was, between September 2000 and April 2004, deficient - in that it lacked any degree of consistency as to what might be expected from the MFR.
Some official statements and publications – especially those aimed at the general public - continued not to mention risk and to give a misleading impression as to the security of pension rights, while others began to explain the true position; and
(iii) was only broadly accurate from April 2004 onwards.
5.69 I consider that these findings are reinforced if DWP publications are read in conjunction with other official publications.
5.70 For example, OPRA’s publications, which are within the scope of this report, were inconsistent and therefore deficient. Earlier publications contained some potentially misleading statements that eventually were balanced by others that set out the real position more appropriately.
5.71 Complainants have told me that official assurances about the security of their pensions gave them what turned out to be a false sense of security. I can understand why they felt this. In my view, official information about these matters was not clear, complete, consistent or always accurate.
5.72 DWP’s own standards provided - and the advice it received at the time suggested - that information it produced had to be complete and accurate. I consider that the deficiencies in official information that I have identified above meant that this information did not conform to the standards set for itself by DWP - whether in relation to what it recognised and was advised was appropriate at the time, or to its public information strategy, or to its wider and self-acknowledged role within financial education.
5.73 Moreover, I would expect official information about such important matters to be clear, complete, consistent and accurate – especially where Government had at the time recognised that there was considerable scope for misunderstanding and also a need for clearer information. I consider that official information provided in this case fell far short of what was appropriate in this context and therefore it did not accord with principles of good administration.
5.74 For both of these reasons, I consider that the deficiencies in the relevant official information that I have identified constituted maladministration.
Findings - discretionary decisions taken by DWP
5.75 I now turn to consider the three discretionary decisions taken by DWP which have been complained about: two in relation to changes to the MFR basis and one not to proactively disclose to pension scheme members the fact that their pensions might be at risk - the latter allegedly in spite of a recommendation to do so by the actuarial profession.
5.76 In doing so, it is important to reiterate what I have said in chapter 1 of this report, namely that the law provides that I may not question the merits of discretionary decisions taken without maladministration.
The 1998 reform of the MFR
5.77 In relation to the first decision in March 1998 to alter the equity market value adjustment (MVA) assumption that formed part of the MFR basis, I have seen no evidence that that decision was taken with maladministration.
5.78 Not only was the decision taken after DWP had regard to the available options, it was taken after full consideration of the advice of the actuarial profession - which was supported by further evidence and statistics to back that advice up.
5.79 In addition, it was decided to give no publicity to this reform in addition to that given by the actuarial profession to inform their members. While not everyone would have taken this view when dealing with a decision that affected the pension security of so many people, the decision not to give publicity to the change to the MFR basis was a decision that DWP was entitled to take, and was not wholly unreasonable in all the circumstances.
5.80 Furthermore, in the absence of any official publicity about this decision, it would be difficult to establish that someone could have been misled about it.
5.81 I therefore cannot uphold complaints about this decision, as it was not taken with maladministration.
The 2001 decision not to disclose risk
5.82 I now turn to the decision not to disclose the risks to scheme members in the light of the actuarial profession’s recommendation that such disclosure should be made because scheme members did not understand the role and purpose of - and the degree of security provided by – the MFR.
5.83 It should be noted first that the recommendation by the actuarial profession was not that the Government should communicate directly with scheme members but rather that disclosure – perhaps through scheme administrators and trustees – should be effected by pensions professionals or by others in partnership with them, which may have included – or been facilitated by - public bodies.
5.84 In any case, as is clear from chapter 4 of this report, DWP consulted on the various options for disclosure and it established a consultative panel to help it decide, with key stakeholders, what should be done in the light of the whole of the actuarial profession’s recommendations.
5.85 I have scrutinised all of the papers provided to me relating to the work of the panel. It is apparent that there was no consensus on what should be disclosed, in what manner and by whom. The issue of disclosure was recognised as an important one and it was taken up as part of the work done to effect a more fundamental reform of the statutory framework, including the abolition and replacement of the MFR.
5.86 Not everyone would have taken the same decision faced with information that scheme members were under an illusion that the MFR provided them with more security than it did. However, the decision by DWP - not to undertake new and direct communication with scheme members to inform them of the risks - was one that DWP was entitled to take.
5.87 Nevertheless, it should be remembered that decisions as to how DWP should respond to the actuarial profession’s recommendations were taken in a context where the Government had recognised that it had a key role to play in informing citizens about their pension options and where the Government was encouraging individuals to join their occupational scheme where possible through its publications and other official information.
5.88 It should also be remembered that the actuarial profession had been concerned that scheme members might be misled as to the security of their pensions since before the MFR had been introduced – and had communicated those concerns to DWP’s predecessor and made recommendations about the need for an awareness campaign to dispel any misunderstandings.
5.89 It seems to me that the issue of new disclosure in the light of the actuarial profession’s recommendation could not be divorced from consideration of what had given scheme members the false assurance that their pensions were safe.
5.90 That being so, I am concerned that - faced with further evidence that scheme members were wholly unaware of the risks to their pensions and that they did not understand the degree of security that the MFR provided - DWP did not separately review the information about the security of final salary pensions that it had already placed – and was continuing to place – in the public domain.
5.91 I consider that, within the discretion afforded to it by the law, it was open to DWP not to make new disclosure about such issues.
5.92 However, at the same time, it seems to me that it was incumbent on DWP, given what it knew, to ensure that the information that it had already produced and was continuing to publish did not add to the misunderstandings that it knew and recognised existed about the MFR and the security of final salary pensions.
5.93 This was a relevant consideration but I have seen no evidence that DWP considered it. I have therefore concluded that the failure by DWP at that time to review the official information it provided constituted maladministration.
5.94 This was a lost opportunity for Government to take action to remedy the huge discrepancy between what it had told the public was the purpose of the MFR and the policy intention that Government had been working with behind closed doors since the inception of the MFR.
The 2002 reform of the MFR
5.95 I now turn to the second decision, taken in March 2002, to change again the equity MVA element of the MFR basis.
5.96 In its initial response to the complaints I have investigated, DWP said that this change, like others, had been made following recommendations to do so by the actuarial profession - and had had the intention of realigning the MFR with its original level, from which it had departed due to economic and demographic trends. DWP also said that these changes were not at the relevant time seen to constitute a weakening of the MFR or of the protection afforded by it to scheme members. This position was reaffirmed by DWP in subsequent submissions.
5.97 As I understand matters, the actuarial profession, working to instructions given to them by DWP and its predecessor, made four sets of recommendations concerning the actuarial basis of the MFR.
5.98 The first set of recommendations was made in May 1998, although the precise recommendations made then were a revised version of earlier recommendations made in December 1997 in the light of the 1997 Budget. The profession argued that the MFR was then stronger than originally intended and proposed changes to its basis to weaken the MFR in order to bring it back to that original intention. The Government approved this set of recommendations and implemented the change to the MFR basis in June 1998.
5.99 The second set of recommendations was made in May 2000, although the profession had first intimated that it would make these recommendations in November 1999. The profession argued that the MFR was then weaker than had been originally intended and proposed changes to its basis to strengthen the MFR in order to bring it back to that original intention. The Government decided not to implement those recommendations. In ‘Security for occupational pensions: the Government’s proposals’, its March 2001 response to the MFR consultation, the Government said that:
The consultation document also included proposals for some limited changes to the MFR, recommended by the Faculty and Institute of Actuaries. Most of those who responded to the consultation document did not support the package of interim changes to the MFR and many commented that they should not be made if the MFR was to be replaced in the near future. The Government is proposing to replace the MFR and feels that it is not therefore sensible to introduce these changes now.
5.100 The third set of recommendations was made in September 2001. The profession argued that the MFR was then stronger than originally intended and proposed changes to its basis to weaken the MFR in order to bring it back to that original intention. The Government approved this set of recommendations and implemented the change to the MFR basis in March 2002. This decision is, with that made in June 1998, one of those that have been complained about.
5.101 A fourth recommendation was made in February 2003. The profession argued that, since the last change to the MFR basis in March 2002, the MFR ‘ha[d] weakened substantially’ to the extent that it was weaker than had originally been intended. The profession said that changes were necessary to strengthen the MFR and that, if those were not made, ‘retaining the MFR at its current strength’ prior to replacement of the MFR ‘would represent materially less security of members’ benefits, especially where schemes are funded at the MFR minimum level’ compared with the security ‘implicit in the MFR when it was originally introduced’. The Government decided not to amend the MFR basis as the MFR was due to be abolished.
5.102 It seems to me that a number of conclusions can be drawn from the above. The first is that it is clear that the actuarial profession, in line with its instructions, monitored the MFR basis against the policy intention set for the MFR by Government – and that the profession made a number of recommendations over time, which were aimed at ensuring that the MFR remained aligned with the level intended by Government.
5.103 The second conclusion I draw is that, of the four sets of recommendations made by the profession concerning the MFR basis, only two were implemented by the Government.
5.104 It is clearly not the case that the existence of a recommendation from the actuarial profession – couched in terms of ensuring MFR alignment with the Government’s policy intention - was sufficient cause for DWP to agree to change the MFR basis.
5.105 Indeed, while it may be nothing more than coincidence, the Government chose over this period to implement two sets of recommendations that would relieve the burdens on sponsoring employers while rejecting two sets of recommendations that would increase the degree of protection afforded to scheme members.
5.106 It is also clearly not the case that the decision-making approach taken by DWP was consistent in relation to each recommendation from the actuarial profession.
5.107 Decisions in relation to three of the profession’s recommendations – those decisions taken in relation to the sets of recommendations made in May 2000, September 2001, and February 2003 – were all taken after the decision by Government to replace the MFR. That replacement was part (or all) of the reasoning given for rejecting both of the recommendations that would have strengthened the MFR.
5.108 And yet the decision made in March 2002 to implement the profession’s recommendation to weaken the MFR basis was also taken after it had been decided that the MFR would be replaced.
5.109 Having carefully considered the above, I am not satisfied that the 2002 decision to change the MFR basis can be said to have been taken properly simply because it rested on a recommendation from the actuarial profession that was designed to maintain a policy intention. Nor am I satisfied that DWP’s decision was in line with consistent practice in relation to the other recommendations made by the actuarial profession.
5.110 No statement of reasons was set out in the submission to Ministers seeking approval of the 2002 change to the MFR basis as to why this particular recommendation was more worthy of implementation than the earlier one, which came from the same source and which had the same aim – and which was taken in the same context of impending replacement of the MFR.
5.111 I note also that the later decision in 2003 not to amend the MFR basis to strengthen it also relied on the impending abolition of the MFR, despite recognition that the MFR was considerably weaker then than had been intended, provided, for example, in a Ministerial answer given in July 2003 - which said that, by June 2003, 50% of pension schemes were funded below the MFR level but that, if no changes had been made to the MFR basis since May 1997, 75% of schemes would have failed the MFR ‘test’. Clearly, the MFR by June 2003 was a considerably weaker test than it had at first been – or than it had been originally intended that it should be.
5.112 If the March 2002 decision to change the MFR basis was not one that was taken within a consistent framework of implementing the recommendations of the actuarial profession to ensure alignment of the MFR with its original policy intention, on what basis was this decision taken?
5.113 The effects that the economic and demographic context was having on the strength of the MFR test were a prime factor in the decision-making context. As I have said in chapter 3 of this report, my focus on considering this decision is on assessing whether it was taken with regard to a properly documented evidence base and that it was taken with a full assessment of relevant considerations but without regard to irrelevant considerations. To do this, it is not necessary to come to a view as to whether the advice on that context, provided to DWP in September 2001 by the actuarial profession, was soundly based – or as to whether the assessment of it by my advisers, which I accept was undertaken some years later, is an accurate critique, although, as I have said, I am satisfied that the advice I have received is robust.
5.114 When investigating complaints about discretionary decisions, I will first consider the manner in which a particular decision was taken and the evidence base on which that decision was taken. Clearly, when doing so, I must have regard to the reasons given for the decision at the time.
5.115 Before turning to consider the explanation provided by DWP for its decision, it seems to me that the following can be established from the evidence I have seen:
(i) that, by May 2000, the MFR was weaker than had originally been intended as a result of a number of factors and trends, including external economic conditions and the abolition of scheme tax credits (according to, for example, the actuarial profession’s briefing submitted in November 1999, and Ministerial briefing provided by officials in October 1998, November 1999 and May 2000);
(ii) that it was known at the time that the type of change to the equity MVA that was proposed both in May 2000 and in September 2001 – if implemented alone – would have the effect of weakening the MFR (according to, for example, the September 2000 DWP regulatory impact assessment of the 2000 proposals and also the actuarial profession’s letter to DSS in September 2001); and
(iii) that the actual effects of the March 2002 change were to weaken the MFR test (according to, for example, the answer to a parliamentary question given on 14 July 2003, which bears out the significance and direction of this change).
5.116 In that context, how did DWP go about taking its decision? DWP had said at the time that it would undertake a ‘considered and balanced’ assessment of the actuarial profession’s September 2001 recommendation as part of a ‘full consideration’ of reform of the MFR.
5.117 In order to establish whether the March 2002 decision by DWP to approve the change to the MFR was taken without maladministration, I evaluated the degree to which DWP undertook such an assessment prior to making its decision to amend the MFR basis.
5.118 DWP has told me that they approved the 2002 change having been ‘guided by the clear recommendations from the actuarial profession as a whole, supplemented by advice from the Government Actuary’s Department’. As I have said above, such recommendations and such advice alone do not explain the reasons why DWP agreed to make this particular change to the MFR basis.
5.119 Yet, even if I were persuaded by such an explanation, which I am not, I have a number of concerns about the way in which DWP tell me that they took this decision. These concerns relate to whether DWP undertook the ‘full consideration’ of the evidence that it had said that it would undertake.
5.120 First, it appears that DWP did not ask the actuarial profession for evidence to support their brief assessment of the changed economic and demographic context that would help explain why the profession argued that that context in September 2001 was having the opposite effect on the strength of the MFR from what it had said was the case less than eighteen months previously.
5.121 Secondly, I have seen only one email, sent on 25 September 2001, from GAD to DWP in which these issues were discussed and in which GAD’s advice was given. The advice on this particular proposal was given less than three weeks after the actuarial profession’s recommendation had been made and amounted to two sentences.
5.122 Whether the economic context had changed in the way suggested by the actuarial profession in the period from May 2000 to September 2001 is not clear from the evidence I have seen, although whether such was the case should have been critical to any determination by DWP of whether a decision to change the MFR was reasonable in all the circumstances.
5.123 My advisers have expressed doubts that the advice provided by the profession was accurate in all the then relevant circumstances. Nevertheless, I accept that it was the view of the actuarial profession in September 2001 that changes to the economic context between May 2000 and September 2001 had had the effect of so significantly changing the strength of the MFR that it had in that period gone from affording considerably less protection than had been intended to being stronger than the policy intention had provided for. I also accept that this view was communicated to DWP.
5.124 As with any decision, I should say that I do not consider that advice or a recommendation from the actuarial profession – or from GAD or any other professional adviser - absolved DWP from seeking to establish all of the relevant facts before making their decision.
5.125 A decision-maker, although acting with the benefit of professional advice, retains responsibility for their decision. Regard should be had to all relevant considerations and those which are not relevant should be ignored. It should also be ensured that any decision taken is made on an adequate evidence base and that the reasons for any decision can be demonstrated subsequently.
5.126 Having examined the evidence before me, I am not persuaded that DWP’s decision was taken after proper consideration of all the evidence that could have been available to it.
5.127 It seems to me, first, that the advice provided by the actuarial profession was insufficient in itself to enable DWP to come to a ‘considered and balanced’ assessment as to whether to change the MFR basis. No supporting evidence or statistics were supplied in the profession’s brief letter of 5 September 2001.
5.128 That being so, I am surprised that DWP did not seek more detailed evidence from the actuarial profession to support the profession’s view - along the lines of that which had been given by the profession in relation to their 1998 recommendation to make a similar change to the MFR.
5.129 Moreover, I recognise that GAD would have had access to discussions within the actuarial profession. However, I am not persuaded that the advice provided by GAD to DWP was sufficient in itself to enable DWP to ensure that the evidence base on which it took its decision was properly documented and that the reasons for its decision were set out clearly.
5.130 While I accept that DWP asked GAD to provide a view as to whether DWP should accede to the actuarial profession’s recommendation, I consider that the advice provided by GAD can be read as being limited in a significant way.
5.131 GAD had been asked to provide advice on two questions: first, whether ‘events in the financial markets since 11 September [2001] mean that there is a case for taking action to change the MFR regulations to extend the deficit correction period in advance of the planned date of March 2002’.
5.132 Secondly, GAD was asked to give advice as to whether DWP should ‘accede to the request from the actuarial profession that the MFR equity MVA should be amended, by replacing the assumed long-term dividend yield of 3.25% with 3%’.
5.133 Thus, DWP had asked GAD for advice on one issue – related to proposals concerning the deficit correction periods – that was specifically limited to their view as to the effects of market volatility since the events in New York on 11 September 2001.
5.134 Its other request asked for advice on another issue – related to the proposal to amend the equity MVA – which was not time limited in the same way as the first, but which was related to GAD’s view as to the fundamental premise behind that proposal.
5.135 GAD provided detailed advice in response to the first request related to the deficit correction periods. This answered the question as put and provided evidence and analysis to support its advice. This was limited, as DWP had asked it to be, to an assessment of whether events in the two weeks since the attack on New York meant that it might be appropriate to bring forward the date on which the proposed changes should be made.
5.136 In relation to the second request for advice on whether the proposal to amend the equity MVA was appropriate, it is worth quoting here the GAD chief actuary’s response to that request in full:
In our view, recent events – in and of themselves – do not undermine the thrust of the argument of the actuarial profession. Accordingly, GAD would agree that the change to the equity MVA proposed by the profession is justified as a simple change which adjusts the MFR to a level of protection consistent with that applying when the equity MVA was last adjusted in June 1998.
5.137 I do not consider that it is clear from those two sentences whether the advice from GAD on the MVA proposal was limited to an assessment of whether events in the two weeks since 11 September 2001 had undermined the rationale behind the actuarial profession’s recommendation. If so, that was not what DWP had asked. DWP was concerned to establish whether the actuarial profession’s proposal was in principle appropriate.
5.138 In addition, if supporting analysis – equivalent to that done to support its advice on the proposal regarding the deficit correction periods - had been undertaken by GAD to support its advice on the proposal to amend the equity MVA, the chief actuary did not provide details of it.
5.139 Furthermore, it now appears from the Government Actuary’s response to this report (set out in annex D to this report) that the advice provided by the GAD actuary was not based on any independent assessment of the profession’s proposals but was rather based on the work that had been done by the actuarial profession.
5.140 GAD’s advice therefore gave no clear basis on which DWP could be satisfied that the rationale put forward by the actuarial profession in relation to the effect of events in the period prior to 5 September 2001 was in itself reasonable. Nor does it appear to have been supported by analysis other than that carried out by the profession itself.
5.141 It seems to me that DWP should have sought clarification so that it could document and confirm precisely what the scope of GAD’s advice was. In the absence of such clarification, DWP should have realised that they had not yet been given sufficient evidence on which to base their decision.
5.142 Moreover, it is surprising that, prior to recommending the MVA change to Ministers on 11 January 2002, no further analysis other than the advice from GAD (which appears to be limited to a consideration of events in the period from 5 September 2001 to 25 September 2001) was undertaken to establish whether the highly volatile economic conditions in the period following the attack on New York continued to have the effects on the strength of the MFR that had been ascribed to them four months previously.
5.143 It seems to me that, if it were possible for such significant changes to the MFR strength to occur over time – as it is claimed had happened in the period between 1 May 2000 and 5 September 2001 – then it was also possible that events between 25 September 2001 and 11 January 2002 (and beyond) may also have had such an impact – perhaps in a different direction.
5.144 This was a relevant consideration which was linked to the whole rationale for the actuarial profession’s proposal – the volatility of events - and one which therefore should have been analysed.
5.145 Indeed, I note that the actuarial profession, in its January 2001 response to the MFR consultation, had advised that the case for interim reform of the MFR ‘should be re-examined at the time any change is put forward, as… a different figure [for the equity MVA adjustment] may be supportable on the basis of subsequent movements’.
5.146 I also note the actuarial profession’s view now, which is set out in chapter 3 of this report, that ‘decisions about reacting to short term changes in the level of protection afforded by the MFR test were far from straightforward’ and that the Government had known this at the time.
5.147 It seems to me that this was precisely why a ‘considered and balanced’ assessment was necessary.
5.148 Regardless of what professional advice DWP had received, as this decision affected the funding of many private sector final salary pension schemes and as it was related to the security of the pension rights of many thousands of people, it seems to me that DWP should have done more to satisfy itself that it was right to implement this recommendation.
5.149 Did all of the above constitute maladministration? I consider that this decision was taken with maladministration as there is insufficient documentary evidence that explains the rationale for that decision - and as I have doubts about the reliance of DWP on professional advice which seems to me not to have been sufficient in itself to enable DWP to come to a decision that took account of all relevant considerations and which ignored irrelevant ones.
5.150 Thus my finding is predicated on what I consider to be failings in the process through which DWP took the decision – and in the completeness of the evidence considered by it in so doing.
Findings - NICO handling of wind-up
5.151 I have set out the evidence uncovered by my investigation in relation to complaints about delays by NICO in the winding-up of schemes in chapter 3 of this report.
5.152 I am concerned that the process of winding-up routinely takes such a long time to complete and that the situation has not been improved in the almost seven years since the Government consulted on measures necessary to speed up the process.
This routine delay has a detrimental effect on the monies available to secure the pension rights of scheme members.
5.153 Both the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF) believe that NICO is responsible for delays in the winding-up process – and also question the time I have found is taken by scheme administrators to inform NICO that their scheme is commencing wind-up.
5.154 The ABI told me that its members were:
…firmly of the opinion that 14 months [the average time taken for a scheme administrator to contact NICO] is an inaccurately large figure and it is one which – universally – they do not recognise. Although periods of over one year and longer do occur on rare occasions, the average time is more in the range of 4 to 6 months. Our research suggests the problems, when they do arise, generally lie outside of the direct control of insurance companies.
5.155 NAPF told me, in a similar vein, that:
…we would be astonished if it takes an average of 14 months to notify the surrender of a contracted out certificate. Evidence from our members suggests that 3 to 4 months is more typical.
5.156 On the role of NICO within the causes of delays to winding-up generally, NAPF told me that:
…we estimate that roughly 50% could be attributable to NICO, although this varies from scheme to scheme. A scheme with good quality data might account for less than 50% while one with poor data might account for most of the delay.
5.157 The ABI listed a number of the causes of delay from their perspective. These included failures by employers or trustees to always return the necessary documentation and information in a timely fashion, which in their experience hindered scheme administrators - and also issues related to the time taken to appoint independent trustees and to deal with complex and often legal issues about pension entitlement and equalisation.
5.158 However, the ABI also said that NICO had a role to play among the causes of delay – principally in relation to the long-term effects of delays in confirming GMP entitlements and associated communication problems.
5.159 I have considered carefully the evidence before me. The statistical evidence I have analysed demonstrates that the fourteen month average is correct for the total workload NICO undertakes. Not all pension scheme administrators are members of the ABI or NAPF and it may be that their experience is not matched among those other administrators.
5.160 In any case, with respect to the random sample of 22 schemes we have analysed during the investigation, this pattern is broadly replicated – with a 15 month and 7 day average and a median of approximately 11 months. The position for the four representative schemes of which the lead complainants were a member is, however, slightly better – being an average of 11 months.
5.161 I also note that 22% of the respondents to a GAD survey of the administrators and trustees of pension schemes in wind-up, which was published in April 2004, had not reported that their scheme was in wind-up to the regulatory authority.
5.162 I do not doubt that the difficulties which NICO, the ABI and NAPF all highlight – related to the quality of records both at NICO and among scheme administrators, which both depend largely on the accuracy of those provided by sponsoring employers or trustees – play as important a part in the systemic delays I have identified as the time taken to notify NICO at the outset of the winding-up process. However, neither of these issues can be laid wholly at NICO’s door.
5.163 Having considered the available evidence, I am satisfied that, while on occasion things might have been done differently, NICO is not responsible for administrative error or other maladministration which is the root cause of this unsatisfactory situation.
Maladministration: summary of findings
5.164 I have made three findings of maladministration, namely:
(i) that official information - about the security that members of final salary occupational pension schemes could expect from the MFR provided by the bodies under investigation - was sometimes inaccurate, often incomplete, largely inconsistent and therefore potentially misleading, and that this constituted maladministration;
(ii) that the response by DWP to the actuarial profession’s recommendation that disclosure should be made to pension scheme members of the risks of wind-up – in the light of the fact that scheme members and member-nominated trustees did not know the risks to their accrued pension rights - constituted maladministration; and
(iii) that the decision in 2002 by DWP to approve a change to the MFR basis was taken with maladministration.
Have individuals suffered injustice?
5.165 Having determined that maladministration did occur, I now turn to consider whether individuals have suffered injustice as a result.
5.166 As I explained in chapter 2 of this report, those who have complained to me claim to have suffered injustice which has four aspects:
(i) lost opportunities to make informed choices when considering pensions and savings options or to take remedial action in relation to the funding position of their scheme - due to misleading and incomplete information provided by public bodies and others about the risks involved in membership of a final salary scheme, which they promoted;
(ii) the financial loss of a considerable proportion (in some cases all) of their expected pension - once the wind-up of their scheme was triggered;
(iii) a sense of outrage – because the public bodies responsible for the framework of pensions law and regulation did not provide adequate protection through - or accurate information about the level of protection provided by - that framework; and
(iv) the distress, anxiety and uncertainty caused to them and their families - by the effects of the above.
5.167 It is clear to me from the evidence I have reviewed about the personal circumstances of all those who have complained to me that they and their families have suffered financial loss, a sense of outrage, and considerable distress, anxiety and uncertainty.
5.168 I am also satisfied that they have suffered injustice through an inability to make informed choices or to take remedial action. It is not in dispute that scheme members were not provided with full information about the degree of security afforded by the MFR; what this investigation has sought to establish was whether the information provided about these matters by official sources constituted maladministration.
Has this injustice been remedied?
5.169 Before considering whether the maladministration I have identified above was the cause of – or a contributory factor to – this injustice, I must first determine whether the injustice I have outlined has been remedied.
5.170 The FAS was established by the Government not in recognition that it had a legal liability or other responsibility for the financial loss which had been suffered by members of defined benefit occupational pension schemes - but as a means of providing, in the words of the then Minister, ‘significant help to those who have lost the most’.
5.171 This remains, however, the only attempt to provide support to – in other words, to remedy the injustice suffered by – those pension scheme members who have lost their expected pensions.
5.172 I am aware that, at the time of writing this report, payments have begun to be made to those covered by the FAS – more than one year after Royal Assent was given to the Pensions Act 2004. However, DWP tell me that:
… monthly payments are now being made to 24 scheme members in four different pension schemes following applications from their scheme trustees… These are all “initial” payments at 60% of expected pension rather than final payments at 80%... [such] payments have been introduced to ensure people do not have to wait until their schemes fully wind up before getting help. The level is set at 60% to seek to avoid people being overpaid and then being required to pay money back once their scheme has wound up.
5.173 That being so, it cannot be said on the basis of these few payments at the rate that they are being paid that the FAS has already remedied the injustice claimed by complainants.
5.174 But what of whether the FAS will remedy such injustice once it becomes fully operational? I am quite clear that the FAS will not constitute an adequate and appropriate remedy for the injustice claimed by those who have complained to me, for the following reasons:
- first, it does not cover the position of those members of a final salary scheme where the sponsoring employer is still trading or otherwise is not insolvent;
- secondly, it only provides at maximum 80% of the ‘core benefits’ expected by those scheme members it covers - it is payable to bring the total pension received by a member up to that figure;
- thirdly, ‘assistance’ is only available to those members within three years of scheme retirement age at 14 May 2004 and, in most circumstances, only from the age of 65 - regardless of normal scheme retirement age;
- fourthly, ‘assistance’ is to be paid at a fixed rate for life with no increases;
- fifthly, ‘assistance’ is subject both to a de minimis lower threshold (of £520 per year – below which nothing will be paid) and an upper limit on the ‘assistance’ to be paid (of £12,000 per year); and
- finally, there is to be no payment of ‘non-core’ benefits, such as in respect of additional contributions or for life cover. In addition, widows will only receive half their deceased spouse’s FAS entitlement.
5.175 I am therefore satisfied that an injustice exists, which has not been – or which it is not intended will be – remedied. I now turn to assess what were the causes of the injustice I have outlined above.
What caused this injustice?
5.176 It seems to me that it must be common ground that the trigger for the financial losses incurred by complainants and others in a similar position to them was the winding-up of their scheme with insufficient funds to meet its full liabilities to all its members – in other words, the scheme’s inability to meet the ‘pensions promise’ to all of its members.
5.177 However, I have found that those responsible for the legislative and regulatory frameworks within which final salary occupational pensions are provided did not adequately disclose the true position as regards the degree of protection offered to scheme members in such circumstances by the legislative and administrative provisions Government was responsible for establishing, operating and enforcing. I have also found that DWP took certain relevant decisions with maladministration.
5.178 In addition, as should be clear from above, the injustice claimed by complainants does not only consist of financial loss - although of course that is a significant component of the injustice they have suffered.
Informed choice and lost opportunity to take remedial action
5.179 I will turn first to the lost opportunities to make informed choices about saving for retirement and to take remedial action in relation to the funding of their pension scheme.
5.180 It seems to me that, had individuals had all the information they needed, they would have been able to make properly informed choices about the options – whether in relation to membership of their scheme or to seek to remedy funding issues concerning their scheme – that were open to them.
5.181 It is clear to me that they were not aware that questions needed to be asked – other than to ensure that their scheme met the MFR test. I consider that these lost opportunities flowed directly from that lack of knowledge and from a ‘false sense of security’.
5.182 Furthermore, I am satisfied that official information promoted the reasonable belief that, so long as a scheme was funded to the MFR level, it would be able to meet its liabilities to all its members in full.
5.183 Government had given itself responsibilities to properly inform citizens about their pension options – and told them that these responsibilities were supported by its publications. In addition, an ability to make informed decisions was an objective said by Government to be one that it saw as being supported by such official information.
5.184 It seems to me that Government assigned these responsibilities to itself – and told others that it had done so. In addition, it was Government policy to promote membership of an occupational scheme and it also chose to do that.
5.185 In that context, therefore, I consider that it was all the more important that official sources should have provided clear, balanced and appropriate information about the options open to people to enable them to ask the correct questions to help them fulfil the ‘obligation’ to save that the Government told them they had.
5.186 Taking all of the above into account, I am satisfied that this form of injustice – these lost opportunities - was caused by the incomplete, inconsistent, unclear, and often inaccurate information given to scheme members, trustees and sponsoring employers through official sources.
Outrage and distress
5.187 What caused the sense of outrage to individuals whose pension schemes have wound up without sufficient funds to meet all its liabilities to them?
5.188 I recognise that those who have complained to me also feel a sense of outrage towards - and have been distressed by - those who chose to close down their scheme – or, in respect of those schemes which wound up due to the insolvency of the sponsoring employer, by the circumstances which caused them to lose their job and their pension. Those are not matters for me.
5.189 However, as the Prime Minister recognises in the Foreword to the Ministerial Code, there is a ‘bond of trust’ between the British people and their Government. It seems to me that citizens should be entitled to expect that the publications of official bodies - which create, oversee, administer and enforce the legal frameworks which they are told are there to protect their interests – do not mislead them.
5.190 I am satisfied that the individuals who have complained to me have suffered a sense of outrage that has primarily been caused by what they see as the failings of a system of regulation and control that they were told would act quickly to protect their interests, would provide a secure environment for their pensions so that another ‘Maxwell’ could not happen, and would provide the information necessary to enable them to make perhaps the most important financial decisions of their lives.
5.191 Finally, having reviewed many submissions from those affected, I am satisfied that the stress, distress and uncertainty that the individuals who have complained to me have suffered was caused to a significant degree by the shock that they felt when what they never knew might happen to their pensions did occur – and when they realised that the official assurances that they had trusted proved to be misplaced.
Financial loss – the context
5.192 In my view, maladministration caused injustice in the manner set out above. But what of the financial loss incurred by those individuals?
The system of occupational pension provision
5.193 I recognise that such losses were crystallised – and, in many cases, exacerbated – by events that occurred within a system of occupational pension provision which had many components other than the administrative actions of the public bodies considered in this report.
Exacerbating loss - delays in winding-up
5.194 I consider that, whatever the cause of the financial losses suffered by complainants, the many years that it routinely takes to wind up a final salary scheme generally exacerbate the financial losses suffered by those whose scheme winds-up without sufficient funds to meet all of its liabilities.
5.195 The longer it takes to complete winding-up, the more professional and other fees are incurred by the scheme. These take priority over scheme benefits and are deducted before the assets of the scheme, once realised, are distributed among scheme members.
5.196 While I have not found in this investigation that the cause of these delays was maladministration on the part of NICO, I consider that these delays are an inherent part of the system of winding-up final salary schemes.
5.197 Those delays are the responsibility of everyone involved in the system, including NICO and OPRA (or those now undertaking OPRA’s relevant functions).
The causes of financial loss
5.198 But how were such losses caused in the first place? As I have explained above, the financial losses sustained by complainants (and others in a similar position to them) were triggered by the wind-up of their scheme in such a position as to be unable to honour the ‘pensions promise’ to all its members.
5.199 That trigger – the winding-up of schemes – clearly was not caused by deficiencies in official information about pension security. I consider that there are a number of aspects of the system of occupational pension provision which are relevant when seeking to explain the cause of the financial losses suffered by those who have complained to me.
The actions of some employers
5.200 First, it is clear that the voluntary decisions by some ongoing and solvent firms to close their schemes led directly to a situation where those schemes ended up with insufficient funds to meet all their liabilities, as these – often unexpected - decisions triggered the winding-up of the scheme.
5.201 In addition, where a company has become insolvent, it is sometimes the case that the company had not by that time made all of the contributions due to the scheme and that, on insolvency, there was little money left to rectify the scheme’s resulting funding deficit.
5.202 In some senses, these decisions (or events) are the responsibility (or the misfortune) only of the companies themselves.
5.203 However, I note that the law allowed companies to voluntarily close schemes, although in later years more restrictions were placed on this right.
5.204 I also note that, even where a sponsoring employer was deemed to have responsibilities in law to put in additional funding to their scheme, until 19 March 2002 the law only required them to bring the scheme’s funding level up to the MFR level – and even then, only over time. It was not until 15 February 2005 that all pension schemes were able in law to seek to recoup the full costs of buying-out pension liabilities from sponsoring employers, whether the latter were still solvent or not.
5.205 As I have established in this report, the position prior to this did not mean that the financial losses sustained by the relevant complainants would not have occurred. This is because where an employer discharged in full its legal liabilities in relation to scheme funding this might still have led to significant – but lawful – shortfalls.
5.206 Thus the actions or demise of some sponsoring employers led directly to the initiation of the wind-up of the scheme – with associated significant funding shortfalls in some cases which led to some of the losses to some scheme members.
5.207 However, even where an employer had fulfilled all of its legal responsibilities to its scheme and had put in enough funding to bring it up to the MFR level, this did not necessarily mean that no losses have been incurred by the scheme’s members.
5.208 The actions of employers alone cannot therefore explain what caused the financial losses incurred by complainants. If such losses occurred in situations where an employer fulfilled all of its legal responsibilities to a scheme, what other factors contributed to these losses?
The legal framework
5.209 Secondly, I consider that certain provisions of the law itself had a direct impact on the circumstances in which the losses I have outlined in this report took place. Government developed the statutory framework which governed the matters which have formed the subject matter of this investigation. Parliament enacted those laws.
5.210 There are five aspects of the relevant legal framework which are relevant to situations in which certain schemes wound-up with insufficient assets to meet all of their liabilities to all of their members:
(i) the provisions of the statute and subordinate legislation that governed the MFR established the context in which financial loss was – quite lawfully - able to occur. These included the design of the MFR itself, the provisions that allowed companies to make up funding shortfalls over some considerable time, and also what was prescribed as being required to be disclosed to scheme members;
(ii) the legal provisions which allowed employers to take ‘contribution holidays’ during periods when scheme funding was strong is also relevant. I note that there were little restrictions on such ‘holidays’, which in some senses reinforced the effect of the provisions which enabled funding shortfalls where identified to be made up over some time;
(iii) the law relating to tax relief and the removal of such where schemes were deemed to be significantly ‘over-funded’ may also have been relevant to some schemes, as it acted as a potential disincentive to provide additional funding in periods when a scheme was not ‘under-funded’;
(iv) the law relating to the insolvency of companies is also relevant, in that its provisions meant that pension schemes were unlikely to be able to obtain monies due to them from sponsoring employers because of the low and unsecured priority afforded to schemes. I note in this context that, prior to 15 September 2003, certain public bodies had preference when the remaining assets of such companies were distributed to its creditors; and
(v) the statutory priority order is also relevant, as it prescribed how a pension scheme’s assets should be distributed on wind-up.
5.211 However, it should be recognised that the law itself reflected the policy intention of Government and the will of Parliament - and also decisions made by Government, approved in some cases by Parliament, to make changes to the legal framework over time.
Policy decisions taken by Government
5.212 Therefore, thirdly, it is evident that certain policy decisions by Government – which were discretionary and which I have not investigated – played a significant role in the context in which the financial losses suffered by complainants occurred.
5.213 In October 1998, briefing by officials in DWP’s predecessor department had recognised that the decision in the 1997 Budget to abolish the system of tax credits given to pension schemes had ‘shaken’ pension scheme funding. In November 1999, DSS officials told a Minister that that decision had ‘had the effect of weakening the MFR test as prescribed at that time’.
5.214 I consider that it is evident that this decision had the effect of reducing the income available to all pension schemes every year. It also appears that, at least to DSS officials at the time, this decision weakened the protection offered to scheme members by the MFR. This also had a differential impact on those schemes which were already less well funded. While I note that there were compensating provisions established at the same time, these related to relieving the tax burden on the sponsoring employer – and did not relate to the pension scheme. DWP tell me that these provisions were designed to produce positive changes in behaviour and, as such, it is difficult to be certain of the benefit to pension schemes. Nevertheless, I consider that this decision is of relevance to the subject matter of this report.
5.215 Furthermore, the Government chose, at the same time as the second decision to weaken the MFR basis in 2002, to extend the periods during which sponsoring employers had to make up shortfalls in their contributions to bring a scheme up to the MFR level. This meant that, where a scheme was not funded to the MFR level, employers could quite properly take up to ten years to rectify the position. If in the meantime an employer became insolvent, this decision might have been highly significant.
5.216 In addition, while I have not found that the 1998 decision to weaken the MFR basis was one taken with maladministration, I consider that it is evident – not least from parliamentary answers given in July 2003 - that that decision had the effect of reducing the amount of money that had to be paid into pension schemes. This led to schemes operating prior to wind-up with fewer assets than they would have had a legal right to claim had this decision not been taken.
5.217 It is not for me to question whether these policy decisions were appropriate. I have sought instead to ascertain whether they – with other factors – were a relevant part of the wider context in which the financial losses suffered by those who have complained to me occurred.
5.218 Having considered the available evidence, I am satisfied that these decisions played a significant contributory role in the context in which the financial losses suffered by complainants occurred. Those decisions are, of course, the responsibility of Government.
The role of maladministration in creating financial loss
5.219 The above four factors – delays in the winding-up process, the actions of some employers, the nature of the relevant legal framework, and some of the Government’s policy decisions – all relate to key component parts of the system within which final salary occupational pensions were provided.
5.220 The actions of scheme trustees, administrators and their professional advisers were another factor in this system. I note, however, that the law provided for compensation to be paid to remedy financial loss attributable to the unlawful actions of those responsible for schemes.
5.221 While it is not for me to question the merits of this system, or to make findings in relation to any of those factors, it seems to me to be impossible to determine the degree to which the maladministration I have identified in this report has contributed to the financial losses incurred by complainants without some consideration of these other factors.
5.222 It may well be that the systemic features that I have outlined above played a significant role in enabling the financial losses sustained by complainants and those in a similar position to them to occur. Parliament, Government and others may wish to reflect on the degree to which these factors were relevant.
5.223 However, I must ask whether maladministration played any role in bringing about financial loss.
5.224 Before considering this, I should say that my assessment of this question which follows is limited to the effects of the deficiencies in official information that I have identified.
5.225 It is clear that reducing the level to which a pension scheme had to be funded – to maintain the Government’s policy intention, albeit not one properly disclosed to scheme members – may have had an effect on the circumstances relevant to the financial losses suffered by complainants. The 2002 decision to change the MFR basis – like the earlier decision in 1998 - may thus have had an indirect effect on the injustice suffered by members of some schemes.
5.226 Where I identify maladministration, it is my usual practice to seek to put individuals back into the position they would have been in had that maladministration not occurred. Taking that approach to the maladministration I have identified in relation to the March 2002 decision, it seems to me that, had the decision-making deficiencies not occurred, this would have made no material difference to the degree of knowledge that scheme members had – which in my view is at the heart of these matters. That decision would have still been taken – only on a proper basis.
5.227 That is why my assessment which follows is restricted to considering the impact of the failure by public bodies to disclose risk and to properly inform scheme members of the degree of security they could expect from their scheme being covered up to the MFR level.
5.228 Had the members of schemes known fully the risks to their pensions, I consider that many of their financial decisions would unquestionably have been different.
5.229 For example, it seems to me highly likely that those who transferred pension entitlements into their scheme from that of a previous employer or from another savings vehicle would have wanted to spread the risks to their financial future and would most likely have decided to leave their entitlements where they were.
5.230 Others, those who had money available to make further pension provision – as recommended by Government – would most probably have chosen not to make additional voluntary contributions to the scheme but would instead have sought to spread the risks by investing that money elsewhere.
5.231 Had this maladministration not occurred, there were a number of things that scheme trustees, members and sponsoring employers could have done – and in my view any reasonable person most probably would have done. These actions would have had as their aim the significant improvement of the financial position of a scheme or the diversification of individual risk. If successful, such actions might have prevented or minimised the financial losses suffered by members in relation to the pension and other benefits derived from national insurance contributions and their contributions to the scheme itself.
5.232 Had official information about the degree of protection afforded by the MFR and the resulting risks to members’ pension rights been accurate, complete and consistent, I consider that the actions I discuss in more detail in annex C to this report might well have ameliorated the financial position of schemes and would therefore most probably have led to lesser, if any, financial loss of this type.
5.233 These actions include the facts that:
(i) scheme trustees could have opted for a ‘gilts-matching’ investment strategy which would have maximised the contributions made to the scheme by employers, which would have had a clear impact, especially in the cases where the scheme was not wound-up in due course due to the insolvency of the employer;
(ii) scheme members could have pressured employers to raise contributions, perhaps through their organised representatives; and
(iii) sponsoring employers could have sought to make additional arrangements – perhaps through merger with other businesses or by attracting new capital – to enable them to be able to increase the contributions to their schemes.
5.234 I have found that Government provided incomplete, inconsistent, misleading or inaccurate information about the degree of protection that the law provided.
5.235 Even what was intended by the MFR was not properly disclosed by the Government to scheme members in official information leaflets until April 2004, although it had been indirectly alluded to – or on occasion been set out in broad terms - in other official publications or statements since September 2000. I consider that these failings led to the members of schemes and others being unaware of the need to take any of the possible forms of remedial action that I have outlined above.
5.236 These lost opportunities were the result of the maladministration I have identified in this report and, in my view, contributed directly – with other factors - to the situation in which the loss of pensions and other benefits which were to be derived from the members’ contributions to their scheme were able to occur.
5.237 Members at the same time also lost the pension derived from their national insurance contributions, described by Government in relation to the majority of the relevant period as a ‘Guaranteed Minimum Pension’ which, had they not contracted out, would have remained within the State additional pension system and would now still be safe. Knowledge of the risks might also have influenced individual decisions on contracting-out.
5.238 I consider that the financial loss of pensions derived from contributions either direct to schemes or by way of national insurance contributions was therefore a consequence of the maladministration I have identified - as well as of the other contributory factors I have identified above.
5.239 But what of whether that maladministration caused injustice? It seems to me that the financial losses suffered by complainants did not come about as a result of the workings of a system about which individuals had been properly informed - and where the risks inherent in that system had been highlighted to them clearly by those responsible for it.
5.240 On the contrary, the financial losses incurred by complainants were crystallised before those individuals even knew that such an eventuality might befall them and in a context where they had had no warning to enable them to take remedial action or to otherwise protect their position.
5.241 That seems to me to be a clear injustice. Not only did those individuals trust the information they were provided with about the framework put in place by Government to protect their pensions, they were unable to properly consider their financial position or to make fully informed choices about their pension options.
5.242 They were also unable to consider what action they could take to remedy the financial weakness of their scheme, as the official information given to them was deficient.
5.243 Official information effectively distorted the reality of the position in which scheme members found themselves. As a result, they were wholly unaware that their pension rights were dependent on the ongoing security of the employer sponsoring their scheme.
5.244 That constitutes an injustice which was caused by maladministration. While I cannot say that maladministration alone caused the financial loss suffered by complainants, I do consider that it was a significant factor in creating the environment in which those losses were crystallised.
Injustice: summary of findings
5.245 I have found that injustice – in the forms of a sense of outrage, lost opportunities to make informed choices or to take remedial action, and distress, anxiety and uncertainty – was caused by maladministration.
5.246 I have also found that the maladministration I have identified was a significant contributory factor in the creation of the financial losses suffered by individuals, along with other systemic factors. A further consequence of that maladministration was financial injustice – the distortion of the reality facing scheme members so that they were wholly unaware that their pension rights were dependent on the ongoing security of their employer.
