Trusting the pensions promise - Chapter 4

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Chapter 4 - The documentary evidence

Chapter 4 - The documentary evidence
	Introduction
	Events before 1995
	Events during 1995
	Events during 1996
	Events during 1997
	Events during 1998
	Events during 1999
	Events during 2000
	Events during 2001
	Events during 2002
	Events during 2003
	Events during 2004
	Events during 2005 and after

Introduction

4.1 This chapter sets out the evidence that my investigation has uncovered through consideration of departmental files, official publications, and other documentary sources.

The Maxwell affair

4.2 In December 1991, after the death of Robert Maxwell, a shortfall of £450 million came to light in the Maxwell companies’ pension schemes. It was discovered that, as a result of missing funds - which became the subject of subsequent litigation - the schemes were not able to meet in full their financial commitments. This included being unable to meet their liabilities to pay out employees’ pensions or to enable non-pensioners to transfer their accrued pension rights to another pension scheme or other approved savings facility.

The Pensions Law Review Committee

4.3 In the light of the issues raised by the collapse of the Maxwell business empire and the significant shortfall in its associated pension schemes, the then Secretary of State for Social Security, Peter Lilley, put in place a rescue package for the Maxwell pension funds.

4.4 In June 1992, he also asked Professor Roy Goode to chair a committee of inquiry, whose terms of reference were:

To review the framework of law and regulation within which occupational pension schemes operate, taking into account the rights and interests of scheme members, pensioners and employers; to consider in particular the status and ownership of occupational pension funds and the accountability and roles of trustees, fund managers, auditors, and pension scheme advisers; and to make recommendations.

4.5 The Pension Law Review Committee (PLRC), to give the committee its full title, reported on 30 September 1993.

4.6 The Goode Report – ‘Pension Law Reform’ - provided a critique of then existing pension law. The view of the PLRC was that such law was considerably complex but lacked structure and organisation. The law also allowed such wide powers and discretion to be left in the hands of the sponsoring employer and the scheme trustees that the interests of scheme members were not always sufficiently protected. In the Committee’s view, there was also an undesirable absence of a compensation scheme when things went wrong, in contrast to the position in relation to other investment activity, and there was no regulatory body with the jurisdiction and powers to monitor and enforce proper standards in the administration of occupational pension schemes.

4.7 The Report contained 218 specific recommendations, but, by way of summary, set out six ‘key recommendations’, namely:

(i) that Trust law should continue to provide the foundation for interests, rights and duties arising in connection with occupational pension schemes but should be reinforced by a Pensions Act administered by a pensions regulator;

(ii) that the freedom of action trustees had should be limited so as to ensure the reality of the pensions promise, to protect rights accrued in respect of past service, and to allow members to make appointments to the trustee board;

(iii) that the provision of information to members by their pension scheme should be improved both in content and in clarity and presentation;

(iv) that the security of members’ entitlements should be strengthened by minimum solvency requirements and by monitoring both by a pensions regulator and by scheme auditors and actuaries, coupled with restrictions on withdrawals by employers of surplus funds from schemes where such existed and also, as a last resort, the establishment of a compensation scheme to cover deficits arising from fraud, theft or other misappropriations;

(v) that, on establishing a scheme, the sponsoring employer should be free to reserve the right to close, freeze or wind up their scheme, to approve or to refuse increases in benefit and to reduce or to stop contributions, subject to the minimum solvency requirements; and

(vi) that the administrative burdens on employers and scheme administrators should be reduced wherever possible, and flexibility increased, through simplification of the relevant law and its administration.

The Government’s response

4.8 The Pension Schemes Act 1993 received Royal Assent on 5 November 1993. It consolidated the existing law relating to pensions schemes with the aim of making that law more transparent and better understood.

4.9 The Government also announced that it accepted the main thrust of the Report’s recommendations, which it noted had been widely welcomed, and published a two-volume White Paper, ‘Security, Equality, Choice: The Future for Pensions’, in June 1994.

4.10 The White Paper set out the Government’s proposals, on which views were sought, to implement the key recommendations of the Goode Report that it was inclined to accept.

4.11 In relation to the security of pension scheme members’ accrued rights, the White Paper proposed that a minimum solvency requirement would be introduced for defined benefit schemes. It went on:

The Government agrees with the PLRC proposals that a minimum solvency requirement should be introduced. This is not only to reinforce confidence that accrued rights will be protected but also to provide a basis and yardstick for setting a schedule of contributions to maintain an appropriate funding level – thus providing a key measure for trustees in maintaining and managing the scheme and for giving clear information to members on the health of the scheme…

4.12 The White Paper went on to describe which schemes would be subject to the solvency requirement, how minimum solvency would be calculated, the transitional arrangements for its phasing in, mechanisms for regular ‘health checks’ on each scheme, and the relationship between the solvency requirement and the indexation provisions set out elsewhere in the Government’s proposals.

4.13 Following a consultation process, these proposals formed the basis for a Pensions Bill.

Further discussions on detailed legislative proposals

4.14 On 11 October 1994, while the consultation process and preparations for the introduction of the Bill were undertaken, the chairman of the Pensions Board of the actuarial profession wrote to DSS concerning the basis of calculation for the proposed Minimum Solvency Requirement (MSR).

4.15 The letter specifically discussed proposals to introduce an equity element for pension liabilities in the case of large pension funds. This followed earlier discussions about a letter from DSS on 26 September 1994, which had set out the Government’s thinking in suggesting this.

4.16 After setting out the profession’s views on the impact of these proposals, the letter ended:

I explained that the views we discussed were provisional ones and that I would seek input from other members of the Pensions Board. The ideas have since been discussed in the Current Issues Committee, and generally supported, as long as it is clear that responsibility for the basis is accepted by the Government – i.e. the introduction of an equity element will increase the probability to some extent of schemes being unable to deliver the winding up liabilities and it is for the Government to decide where to strike the balance between security for the members and financial consequences for scheme sponsors.

4.17 The then Secretary of State for Social Security, Peter Lilley, wrote to Sir John Butterfill MP (as he is now) on 8 December 1994. Publication of this letter was the then Government’s chosen mechanism for publicising the changes to the basis for the proposed solvency requirement that had been agreed by it.

4.18 The letter said that ‘on the basis of further detailed analysis, and in response to comments made on the proposals set out in the White Paper, the Government has decided to… authorise a basis for calculating statutory minimum solvency which would allow the larger defined benefit occupational schemes to value a proportion of their pensioner liabilities by reference to equity returns’. It also set out other changes – to the proposed time limits for restoring scheme funding levels to the statutory minimum level and to enable the calculation of the statutory minimum solvency requirement to be based on market values over a period of months.

4.19 Mr Lilley continued (with original emphasis):

The basic rationale for a minimum solvency requirement is clear and is set out forcibly in the report of the Pension Law Review Committee. In the modern world, no employee can make the comfortable assumption that his employer will be around 20, 40, 60 years hence to pay pension benefits as they fall due. If an employer makes a defined benefit pension promise, the pension fund should therefore be adequate to secure that promise, irrespective of what may happen to the employer over the period before the final pension payment is made.

4.20 The letter continued:

The proposed statutory minimum solvency requirement will provide an important, objective measure of the adequacy of a pension fund; something which members and trustees will be able to monitor and against which the performance of the fund and other important matters can be measured.

4.21 After setting out the rationale for the introduction of an equity element, which it was said would have the effect of ‘not weakening the security of members to any significant extent’, the letter then stated that ‘this adjusted package of measures should ensure that the statutory MSR will deliver an appropriate level of security for members, without imposing unnecessary burdens on business’.

4.22 The letter then set out ‘solid gains in security from the introduction of an MSR’ for scheme members. These including the following:

(i) that there would be ‘a consistent basis for measuring the adequacy of a fund in terms of its ability to deliver at least the cash equivalent of its members accrued rights’; and

(ii) that ‘the valuation basis should ensure that schemes have sufficient assets either to buy out their pension liabilities with annuity contracts or to deliver pension benefits as they fall due, and to pay a fair transfer value to non-pensioner members in respect of their accrued rights’. It was said that ‘this represents a fair and practical basis for assessing the adequacy of pension funds to meet their minimum liabilities’.

4.23 The letter, while noting that this would involve additional costs to schemes, stated that such a ‘price is worth paying to produce greater confidence that defined benefit promises will actually be met at the end of the day’.

4.24 On the same day as what became known as ‘the Butterfill letter’ was published, the actuarial profession issued a press statement about its contents. While welcoming the Government’s decisions as to the basis for the proposed minimum solvency requirement, the profession said that it was:

…concerned that the significance of the word “solvency” in describing the proposed test for very large schemes could give a false impression of the winding up position to ordinary members. We therefore see the need for a major effort by Government and those involved in pension provision to educate members of schemes as to the extent of the security for their benefits which the Minimum Solvency Requirement can be expected to provide.

4.25 On 20 January 1995, the actuarial profession wrote to the Secretary of State to express its view that ‘the term solvency was an inappropriate description of the test and was likely to mislead scheme members and others into believing that their benefits would be fully secure if their pension scheme wound up’. The profession suggested that a more appropriate term for the Government’s proposed scheme funding standard was a ‘Minimum Funding Requirement’.

4.26 On 15 February 1995, Mr Lilley replied to the actuarial profession. After setting out the background to the Government’s thinking, he said ‘as to the term “minimum solvency requirement” it could be argued that if minimum solvency is taken to be an absolute guarantee of solvency at all times then it could never be achieved’. He continued by saying that ‘the MSR calculation proposed by the PLRC already accepted the necessity of using the cash equivalent approach in respect of non-pensioner liabilities – which I believe is reasonable and realistic, but which we have to accept is not a guarantee’. He concluded by saying that he believed that ‘it is important how the MSR is explained to members – but whether or not public perceptions might change by using a different name is perhaps debatable’.

4.27 On 20 March 1995, the actuarial profession wrote to DSS officials to express its concern about the clarity of the intention behind some of the legislative proposals then being discussed in Parliament. After discussion of other matters, the profession said that it was ‘very concerned at the misleading impression that a signed minimum funding certificate may give to ordinary scheme members’.

Second Reading of the Pensions Bill in the Lords

4.28 In the meantime, and following its introduction into the Lords, that House gave the resulting Pensions Bill a Second Reading after a debate on 24 January 1995.

4.29 The late Lord Mackay of Ardbrecknish, then the Minister of State at the Department of Social Security, in moving the Second Reading said that:

There are four major principles underlying this legislation. First, confidence in the security of occupational pension schemes was undermined by the Maxwell affair and we intend to restore that confidence by improving security. Secondly, equal pension rights for men and women are required by the European Court of Justice rulings. The Bill will bring domestic legislation into line with European law and will make it easier for contracted-out salary schemes to equalise benefits for men and women in the future. Thirdly, in order to ensure a fair and sustainable basis for state pensions in the next century, we intend to phase in equalisation of state pension age at 65. Finally, we are committed to making personal pensions attractive across a broader age range, introducing age-related rebates for those investing in personal and money purchase pension schemes.

4.30 In setting out the purpose of the provisions of the Bill related to improving the security of occupational pension schemes, the Minister continued:

Pensions are for many people the most significant single investment they will ever make. They must be confident that the pensions promise of today will indeed be matched by the pension of tomorrow.

4.31 After setting out the specific proposals that were contained in the Bill to deliver this objective, the Minister continued:
No system can offer a total guarantee against fraud. However, we will do everything possible to eliminate the likelihood of fraud or other wrongdoing by strengthening the framework of pension provision.

4.32 In addition to proposals to give scheme members rights to clear and relevant information, to nominate trustees, and to have access to a dispute resolution mechanism for any complaints, the Minister then described the Bill’s provisions insofar as they related to the roles of scheme trustees and of their professional advisors – principally actuaries and auditors.

4.33 In relation to proposals for a statutory minimum solvency requirement to ‘underpin the employer’s pension promise’, he said:
This requirement will reinforce trustees’ and employers’ responsibility for ensuring that schemes are properly funded, thus enhancing security for scheme members. This will provide an objective benchmark for assessing the adequacy of the fund, setting contribution levels and monitoring the fund’s performance. It will act as a mechanism for ensuring that schemes have adequate funds to meet contracted-out benefits. Finally, it will provide the measure against which the amount of compensation will be calculated when a successful claim for compensation is made.

We have consulted widely on how such a requirement should be defined in order to balance the concerns of employers… against improving security for scheme members. We believe that we have struck the right balance to give scheme members the security they must have if occupational pensions are to prosper and to encourage employers to run good schemes.

4.34 In the debate, in addition to consideration of the other measures proposed in the Bill, criticism was levelled at the proposed solvency standard as not being consistent with the recommendations of the Goode report and as constituting a ‘watering down’ of the measures on which the Government had consulted through its White Paper. It was also suggested that the name proposed for the requirement was misleading, as the requirement related to scheme funding rather than constituting a solvency test.

4.35 In summing-up and responding to the debate on the proposed measures for increased security, Lord Mackay said:
Our concern has been to devise a consistent basis for valuing scheme liabilities as a measure of the adequacy of pension funds to meet their liabilities, and as a basis for assessing matters such as minimum contributions. In considering what should be the appropriate valuation basis, we have borne in mind the need to define an appropriate level of security for members’ pensions, and for an entitlement, without actually imposing unnecessarily high costs on employers, which might have led to a significant reduction in the level of occupational pension provision.

Consideration of the Bill by the Lords in Committee

4.36 Following approval of the Bill on Second Reading, the House of Lords resolved itself into Committee on 7 February 1995 to consider the Bill in detail.

4.37 In discussion about the proposed minimum solvency requirement and, specifically, in relation to the then Opposition’s attempts to amend the Bill to provide for a minimum contribution requirement instead, Lord Mackay said:

I am convinced that a measure of solvency that does not address the position of the scheme on discontinuance in some way will not be providing members with adequate security in the event of the scheme being wound up.

The overwhelming argument in favour of a minimum solvency requirement is that if an employer undertakes to provide a pension promise the scheme should be able to secure that promise at all times, especially in the event of a scheme winding up. It is at that time that the members’ position is most vulnerable. A minimum solvency requirement should ensure that, irrespective of what happens to the sponsoring employer, the fund will have enough money to meet the value of members’ accrued rights which will therefore be protected.

But security has a price… It is simply not possible, either practically or economically, to require ongoing pension schemes to fund at a level that will enable them to buy out all the liabilities with non-profit annuities. For many schemes the cost would be prohibitive…

We are introducing a new power to enable trustees to secure benefits on wind-up by providing members with a cash value of accrued rights. Where a scheme is only funded at the level of [the] minimum solvency requirement, the calculation for this will be that used for calculating liabilities for the minimum solvency requirement.

4.38 In asking the Committee to reject the Opposition amendments and to support the Government’s proposal, the Minister said:

We believe that our provisions, together with the proper operation of the minimum solvency requirement, will substantially reduce the likelihood of schemes winding-up in deficit.

4.39 A central discontinuance fund, which would provide support to members of schemes which could not meet their liabilities in full, was not in his view necessary and, moreover:

…there would be a real temptation for schemes to sail close to the wire… because they would know that they had a back-up if they wobbled on to the wrong side. I remind the Committee that there is a pension promise to each scheme. There is a promise with regard to the contributors and a promise for when members of the scheme become pensioners.

4.40 Consideration of the relevant provisions of the Bill continued on 13 March 1995, when the House of Lords considered the Report of the Committee. During this debate, Opposition members continued to press for an ongoing funding requirement in contrast to the Government’s proposal.

4.41 Lord Mackay, in countering the Opposition’s arguments, said:
During Committee, I said that the central weakness of an ongoing funding requirement is that it does not aim to provide any level of protection in the event of a scheme winding-up. I know that some noble Lords may want to argue that the bulk of employers do not become insolvent and that it is therefore unreasonable to require schemes, at all times, to have sufficient assets to meet their accrued liabilities. I do not accept that argument. On the contrary, I believe that scheme members have the right to a clearly defined measure of protection…

Members who have had their benefits reduced on a wind-up are unlikely to take much comfort from the fact that they would have been secure had their employer remained in business. To put it another way, it is quite unacceptable that employers should be able to continue trading at the risk of leaving their employees' legitimate pension expectations unfulfilled.

4.42 The Minister went on to ‘repeat the merits of the minimum funding approach and what it is intended to deliver’:

It will require schemes to hold sufficient assets to be able to secure pensions already in payment, either by buying annuities or paying benefits as they fall due, and provide younger members with a sum of money to be invested further. The pensions they eventually draw will obviously depend on how the money is invested and the rates of return on the investment, but there is every chance of it producing a pension at least as good as, and probably better than, that which would be paid from a deferred annuity. The minimum funding proposals offer a far better measure of security for all members of defined benefit schemes than any alternative affordable proposals…

…we need to respond for scheme members who are unfortunate enough to work for employers who go out of business and are thus unable to stand behind their pension fund. These members could well find that, as the law stands at present, they would receive less than they have a right to expect. We live in the real world where employers do go out of business. We believe that schemes must be funded at a proper level to secure benefit rights if that should happen.

4.43 The Minister then explained why it was now proposed to rename the minimum solvency requirement.

4.44 Lord Mackay explained:

… by changing the name to a ‘minimum funding requirement’, there is not the slightest deviation from what the requirement will do. It will mean that members can be confident that the value of their accrued rights is secure, especially in the event of the scheme or the employer company winding up… true solvency could only mean the ability to buy out all benefits with guaranteed insurance annuities. The PLRC recognised that such a measure of solvency would not be practical and would be unduly costly. The Government fully accepted this… It is only right that the members' investment, and their accrued pension rights, should be properly protected. Our proposals are designed to provide that protection. As suggested by the PLRC Report, we had called the vehicle for providing that protection a ‘minimum solvency requirement’. The change of name in no way reduces what the requirement is intended to achieve.

Third Reading debate in the House of Lords

4.45 The House of Lords considered the amended version of the Bill in a debate on 21 March 1995. Disagreement continued on what the most appropriate form of funding test would be to provide the best security for members’ accrued pension rights.

4.46 Lord Mackay reiterated the Government’s view that:

…our proposal for an MFR will not increase costs for most schemes. However, what it will do — by contrast to the [Opposition] amendment — is to provide a greater degree of certainty for the members of schemes that the rights they have accrued at any point in time will be adequately secured.

4.47 In response to a proposed amendment to protect the position of the indexation of existing pensioners’ payments in relation to the proposed new order of priority for the discharging of scheme liabilities on wind-up, the Minister said:

The intention is to ensure that when a scheme winds up, all of the members are treated fairly. If the scheme is fully funded to the level of the minimum funding requirement, all of the members should receive the full actuarial value of their accrued rights, including the right to indexation, should the scheme wind up. But there will be circumstances where schemes wind up less than 100 per cent solvent on the statutory minimum funding basis or are otherwise unable to meet their liabilities in full.

Obviously, we hope that schemes will not wind up in a position where they are unable to secure the benefits promised under the scheme. We believe that the minimum funding requirement and the wide range of other measures for enhancing scheme security incorporated in the Bill will minimise the chances of schemes winding up in this position. But we live in the real world, and we must cater for those cases where things do go wrong despite our best endeavours.

A scheme which does not meet in full the statutory minimum funding requirement will not be able to meet all of its liabilities on wind up. That is when the priority order will come into play and ensure that there is an equitable distribution of assets. It is only right that pensioners should receive some priority over active members. That is why we propose that they should, if possible, suffer no reduction in their income. That is reflected in the priority order we propose.

However, to go further and give priority to indexation for all pensions in payment would place at risk the rights of other members. We have to ensure that the assets are shared fairly. We believe that this can best be done by protecting pensions in payment first, then protecting the basic pension entitlement of all other scheme members, then sharing out whatever assets remain for the benefit of all scheme members.

Second Reading debate in the House of Commons

4.48 Following transmission of the Bill from the Lords, the House of Commons gave the Bill a Second Reading on 24 April 1995.

4.49 The then Secretary of State for Social Security, Peter Lilley, reiterated the key principles behind the Bill which, he said, together formed ‘lines of defence against fraud and misuse of pension scheme assets’. The MFR was described as the fourth line of defence.

4.50 The then Minister for Social Security and Disabled People, William Hague, in closing the debate for the Government, said:

Governments have to calculate the costs and benefits of their policies. Governments have to arrive at the right balance, which means that we will have strong, funded occupational pension provision in this country, thoroughly regulated without killing the goose that lays the golden eggs. That is what we are setting about in this major piece of legislation. It is the right legislation. It will bring security, equality and choice to pension provision. It deserves the support of the House.

Consideration of the Bill by Commons Committee

4.51 Following approval in principle of the Bill at Second Reading, Standing Committee D of the House of Commons considered the Bill in late May 1995 and in early June 1995.

4.52 During the afternoon session on 23 May 1995, Mr Hague said:

The key principle underlying the minimum funding requirement and cited by the Pensions Law Review Committee to justify the use of a discontinuance based test was, as the committee put it:

“where there is a risk, however, small, of the employer’s insolvency, funding will meet the requirements of benefit security only if at all times the assets of the scheme are sufficient to cover its liabilities”.

4.53 He went on:

The MFR will enable schemes to provide for pensions and for the accrued rights – nothing to do with the expectation of what might be accrued - of their non-pensioner liabilities.

4.54 In dealing with the then Opposition’s support for an alternative solvency standard based on a minimum contributions requirement, Mr Hague said:

The alternative that I advocate is the Minimum Funding Requirement, under which a scheme would have sufficient money on winding up to cover pensions in payment. If it was one hundred per cent funded according to minimum funding requirements, it would have sufficient funds to cover pensions in payment and to give a transfer value – the value of accrued rights – to non-pensioner members.

4.55 Following discussion about the Swan Hunter case, which had then only recently come to light – and specifically about allegations that, even though the Swan Hunter pension scheme would have been fully funded on an MFR basis had that basis been in place at the relevant time, the scheme was now only able to meet approximately 60% of its pensioner liabilities following wind-up and was not able to cover any of its liabilities towards its non-pensioner members - the Minister said:

Schemes funded to the minimum funding requirement will be able to pay every member the cash equivalent of their accrued pension rights, which they would be able to transfer into another pension scheme or into a personal pension.

4.56 When asked by John Denham MP about the position of people very close to retirement who could not transfer to another scheme, who would need to buy an annuity, and who would thus be ‘significantly worse off’, the Minister replied:

People in that position would have their rights valued on a different basis. If they were near to retirement there would be a much larger element of gilt rather than equity valuation to determine the appropriate value for them. These people would receive a larger value, which would be nearer to what would, in many cases, buy an annuity. That cash equivalent for those who are some distance from retirement would be most unlikely to be sufficient to buy an appropriate annuity, but it would be sufficient to transfer into another fund.

4.57 Mr Hague went on to describe 100% funding on an MFR basis as:

…a target which means that if at any stage that scheme winds up, it will be able to keep its pensions in payment and give the cash equivalent of approved rights to the non-pensioner members.

4.58 During further consideration of the Bill on 6 June 1995, the Minister explained again the rationale for the MFR with specific reference to the need to ensure that employer contributions to bring a scheme’s funding up to MFR levels were made within specified time limits. He said:

After everything that has happened in the past few years… we could not be proud of the Bill or of the Act that it will become if we were not in the end able to say that schemes must have sufficient assets available within a certain time to keep pensions in payment and give non-pensioners the value of their accrued rights.

Parliament would be in an embarrassing position and would not have done its job. That is the least that we should require of schemes. Without that requirement, what on earth would we say to people who may approach us after the Bill has been enacted and ask whether their pension funds will be able to keep their pensions in payment or give them the value of [their] accrued rights if [the scheme] winds up?

Without the MFR, the answer to such a question would be no. What on earth would we have achieved then?
The Minimum Funding Requirement would mean that the answer would be yes. That is all we seek with the MFR.

Royal Assent

4.59 Following consideration of technical amendments suggested by the House of Commons, and approval of the final version by both Houses, the Bill received Royal Assent on 19 July 1995.

Main effects of the Pensions Act 1995

4.60 As a result of the enactment of the Pensions Act 1995, many changes were made to the regime governing pension provision in the UK, including in relation to the basic state pension retirement age, to the rules for contracting out of SERPS, and to sex equality within state and non-state pension provision.

4.61 The principal effects of this new legislation that are relevant to this investigation were:

(i) that OPRA was established, with the remit of ensuring that occupational pension schemes complied with pensions law and the Authority’s other directions;
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(ii) that the MFR was imposed on most defined benefit occupational schemes not in the public sector, to ensure that a scheme was properly funded;

(iii) that a new statutory priority order for the discharge of pension scheme liabilities was introduced which would over-ride an individual scheme’s rules; and

(iv) that pension scheme members would be able to nominate one-third of their scheme’s board of trustees to represent members’ interests.

4.62 The Act provided that the detailed method of calculation to underpin the MFR would be set out in Regulations (and guidance) to be developed with (and by) the actuarial profession and approved by the Secretary of State - and that these and other provisions of the Act would be commenced at a later date.
Further discussion between DSS and actuarial profession

4.63 On 31 October 1995, the actuarial profession wrote to DSS officials to seek a formal statement of the Department’s position on a number of matters, in order to inform the profession’s work on devising the actuarial basis for the MFR.

4.64 DSS replied on 22 November 1995. In relation to the ‘underlying purpose of the MFR’, the DSS official said (with my emphasis):

…that the intention underlying the MFR (which was clearly expressed by Ministers during the passage of the Pensions Bill) is to require schemes to have a level of assets which should as a minimum be sufficient, if the scheme were to wind up, to enable it to pay in respect of each non-pensioner member a sum which if invested in an appropriate alternative pension vehicle could reasonably be expected to generate a pension benefit at least equivalent to that which the scheme would otherwise have paid in respect of rights accrued up to that point in time. By reasonable expectation we mean that there should be at least an even chance.

Official publicity concerning the Pensions Act 1995

4.65 In January 1996, DSS published a leaflet – ‘The 1995 Pensions Act’ (PEC 3) – which purported in its 21 pages to be a ‘brief summary’ of the ‘changes to state pensions, occupational pensions and personal pensions’ introduced by the 1995 Act. It said that ‘more detailed information will be published later’. This edition was a revision of an earlier leaflet, published in October 1995.

4.66 The introduction to the leaflet, under a heading ‘why was the Pensions Act needed?’ stated that ‘changes were needed’ as ‘the Government wanted to remove any worries people had about the safety of their occupational (company) pension following the Maxwell affair’.

4.67 Section 3 of the leaflet dealt with ‘changes to occupational and personal pensions’. After explaining the roles of OPRA, the Pensions Ombudsman, the compensation scheme, the Occupational Pensions Board, and trustees, the leaflet, under the heading ‘new minimum funding requirement for salary related schemes’, said:

The Pensions Act introduced a new rule aimed at making sure that salary related schemes have enough money in them to meet the pension rights of their members. If the money in the scheme is less than this minimum level, the employer will need to put in more money within time limits. The minimum funding requirement is intended to make sure that pensions are protected whatever happens to the employer. If the pension scheme has to wind up, there should be enough assets for pensions in payment to continue, and to provide all younger members with a cash value of their pension rights which can be transferred to another occupational pension scheme or to a personal pension.

4.68 The leaflet then went on to deal with members’ rights to information from their scheme administrators and trustees, with the Act’s provisions for pensions indexation, with the equalisation of pension rights for men and women, with the position of part-time workers, with new arrangements related to pension transfers and pension sharing on divorce, and with the flexible use of personal pension savings on retirement.

Announcement of the MFR Regulations

4.69 On 10 June 1996, Peter Lilley, the then Secretary of State for Social Security, announced that proposals for Regulations to give force to the MFR had been agreed.

4.70 In the press release – entitled ‘new statutory minimum funding requirement gives pension scheme members greater protection’ - that accompanied this announcement, it was said 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.

4.71 The press release then quoted the Secretary of State’s announcement of two changes to the originally proposed MFR basis following ‘extensive consultation’ – in relation to the valuation basis of pensioner liabilities of larger schemes and to the decision not to require the smoothing of MFR calculations.

4.72 He then said:

These two changes will reduce potential costs overall by some £20 million to £30 million a year over the period until the MFR comes fully into effect. They will make the operation of the MFR more straightforward. And they will maintain the level of security provided to members.

4.73 The ‘package’ of proposals being presented in relation to the MFR basis would in the Minister’s view ‘carefully balance concerns about imposing costs on employers whilst achieving member security’.

The MFR and Deficiency Regulations

4.74 The Occupational Pension Schemes (Minimum Funding Requirement and Actuarial Valuations) Regulations 1996 were made by the Secretary of State on 12 June 1996 and were laid before Parliament on 18 June 1996. These Regulations, which prescribed the method of calculation for the MFR that had been agreed with the actuarial profession and also other matters, came into force on 6 April 1997.

4.75 On 11 December 1996, the Secretary of State also made the Occupational Pension Schemes (Deficiency on Winding Up etc.) Regulations 1996. These Regulations prescribed the method of the realisation and discharge of the assets and liabilities of pension schemes on wind-up and also provided for the order of priority in which both would be realised and discharged. They came into force on 19 December 1996.

4.76 On the same day, the Occupational Pension Schemes (Winding Up) Regulations 1996 were made, which came into force on 6 April 1997.

OPRA Chairman’s speech on communication

4.77 On 3 June 1997, the then Chairman of OPRA gave a speech on the ‘communications challenge’ for all those involved in the pensions industry at an awards ceremony for pensions and investment journalists at the House of Commons.

4.78 He argued that the 1995 Act had helped focus attention on occupational pensions and that the roles of trustees, pension professionals, employers and scheme members were ‘now clearly defined’. He went on to say that more needed to be done to stimulate awareness about what individuals needed to do to ensure the best long-term provision for themselves and their families.

4.79 He continued:

Communication for OPRA means getting across important messages to all those involved in workplace pension schemes, including scheme members… Communication for OPRA also involves dialogue with the Government where, in the light of operational experience, the law we enforce may need amendment, update or clarification. Whatever the level of input required, OPRA stands ready to play a full part in the widening debate on the future of retirement provision.

Actuarial Guidance Notes

4.80 On 6 April 1997, a new version (4.0) of the actuarial practice standard guidance note, ‘Retirement Benefit Schemes – Winding-up and Scheme Asset Deficiency’, came into force. In addition, a new guidance note (version 1.0) was issued, entitled ‘Retirement Benefit Schemes - Minimum Funding Requirement’. Both guidance notes were issued by the Faculty and Institute of Actuaries.

4.81 In early July 1997, the Director-General of Fair Trading published his report of an inquiry into pensions, which had been launched on 19 September 1996, and which had had as its focus the identification of any practices that might adversely affect the economic interests of consumers.

4.82 In relation to defined benefit schemes, the Director-General noted that such pensions:

…have provided and will continue to provide a comprehensive range of benefits which meet many of the needs of consumers. However… long stayers are rewarded at the expense of early leavers. This is implicit in the design of all DB [defined benefit] final salary pension schemes.

4.83 He went on to observe:

Notwithstanding a dramatic improvement in the position of early leavers over the last two decades, losses for early leavers persist. Furthermore, the transfer values that employees receive on leaving DB schemes are subject to a large degree of actuarial discretion that can dramatically reduce their size. The Pensions Act 1995 has had the perverse effect of reducing transfer values for early leavers though it has reduced the scope for variations.

The 1997 Budget

4.84 On 2 July 1997, the Chancellor of the Exchequer made his Budget Statement. In it, he said:

I can confirm also that this Budget will not proceed with the previous Government's proposal to phase out tax relief on employee pension contributions.

This point in the recovery is, however, the right time to make changes in corporation tax to encourage more long-term investment. My changes in monetary policy were designed to help companies make long-term investment decisions with confidence. The changes in corporation tax are directed to the same long-term objective…

I want the United Kingdom to be the obvious first choice for new investment, so I have decided to cut the main rate of corporation tax by 2 per cent, from 33 per cent to 31 per cent, the lowest ever rate in the United Kingdom.

4.85 He continued:

Too often, British companies have invested too little and too late in the economic cycle… The present system of tax credits encourages companies to pay out dividends rather than reinvest their profits. That cannot be the best way of encouraging investment for the long term, as was acknowledged by the previous Government. Many pension funds are in substantial surplus and at present many companies are enjoying pension holidays, so this is the right time to undertake a long-needed reform. The previous Government cut tax credits paid to funds and companies, so with immediate effect I propose to abolish tax credits paid to pension funds and companies.

Exchanges on the Budget changes in the Lords

4.86 On 10 July 1997, Lord Burnham asked the Government to explain whether they had calculated the consequences of the decisions on advance corporation tax on the MFR and on final salary schemes.

4.87 The then Minister, Baroness Hollis of Heigham, explained the policy rationale for the measure. In response, Lord Burnham asked whether the Government could estimate the number of schemes which would ‘fall into deficit’ as a result of the measure.

4.88 The Minister replied by arguing that ‘about half’ of all schemes were in surplus and were enjoying a partial or full contributions holiday and then defended the reform.

The Government’s Pensions Review

4.89 On 17 July 1997, the Government announced a review of pensions and initiated a consultation process with a deadline for responses of 31 October 1997. The terms of reference for the review were:

To review the central areas of insecurity for elderly people including all aspects of the basic pension and its value and second pensions including SERPS; to build a sustainable consensus for the long-term future of pensions; and to publish the Government’s proposals, for further consultation, in the first part of 1998.

4.90 In its press release announcing the review, the then Secretary of State was quoted as saying that the review would address ‘nine fundamental challenges’. One of these was ‘to get the regulation of pensions right… people need to have confidence in pensions and be sure their pensions are secure. We need to find a balance which provides an appropriate level of security, minimises the scope for abuse and does not impose an undue burden on providers’.

4.91 Another challenge was said to be ‘to raise awareness of pensions and improve the level of financial education so that people understand the importance of saving for retirement and make the right choice about which pension product is best for them’.

Revised Actuarial Guidance Notes

4.92 On 1 March 1998, the actuarial profession issued a revised version (4.1) of their guidance note, ‘Retirement Benefit Schemes - Winding-up and Scheme Asset Deficiency’ and also a revised version (1.2) of their other guidance note, ‘Retirement Benefit Schemes - Minimum Funding Requirement’. These made minor technical changes to professional guidance which are not of relevance to the heads of complaint.

Parliamentary Questions on the MFR

4.93 On 9 March 1998, John Denham, the Minister of State for Social Security, replied to a question from Quentin Davies MP which asked what plans there were to alter the minimum funding requirement on pension schemes so as to take into account the lower forecast net dividend yield in consequence of the recent Budget changes.

4.94 His reply was:

The detailed requirement for MFR valuations are set out in regulations and in an actuarial guidance note produced by the Faculty and Institute of Actuaries and approved by the Secretary of State. The Faculty and Institute have set up working groups to look at the effects of the July budget changes on a number of issues, including the MFR, and officials are in close contact with the profession.

Although the Faculty and Institute have made recommendations for changes to the valuation method following the Budget changes, they have now indicated that they wish to do further work on the operation of the MFR generally before revising their guidance note. Any changes must await their further recommendations.

4.95 On 13 March 1998, Nick Gibb MP asked the Minister to explain what assessment had been made of the consequences of the abolition of dividend tax credits for the MFR in the light of a recent report on that issue by a firm of consulting actuaries.

4.96 Mr Denham replied:

It is for the Pensions Board of the Faculty and Institute of Actuaries to make recommendations about any changes to the MFR. They will no doubt take account of [the] views in [the actuaries’] paper. We expect to receive a report from the Pensions Board when they have completed their consideration of these issues.

4.97 On 8 June 1998, Julian Lewis MP asked the Minister to set out what factors had underlain the decision not to initiate a full review of the MFR immediately after the July budget.

4.98 He replied:

The methodology and actuarial assumptions in the MFR were devised by the Faculty and Institute of Actuaries. We were informed that they would be carrying out a review following the July budget. We fed into that review a report by the Government Actuary, whose views we had sought on a number of issues.

4.99 On the same day, the Minister informed Howard Flight MP that the actuarial profession’s proposals for a change to the valuation method had been agreed and that their guidance note was being revised. He also said that there was an ‘ongoing review of the minimum funding requirement’.

Green Paper on the Welfare State

4.100 In the meantime, the Government had published on 26 March 1998 a Green Paper on the future of the Welfare State, entitled ‘New Ambitions For Our Country: A New Contract For Welfare’. This set out in outline (among other matters) the Government’s plans for pension reform.

4.101 The then Minister for Welfare Reform, Frank Field, made a statement in the House to announce the publication of the Green Paper. In relation to the Government’s proposals for pension reform, he said that a key principle underpinning those proposals was that:

…[the] public and private sectors should work in partnership to ensure that, wherever possible, people are insured against foreseeable risks and make provision for their retirement… We want everyone to benefit from a second pension, on top of the state pension. It is clear that, unless there is more saving towards retirement, we will continue to see into the next century far too many of our pensioners retiring on incomes that do not properly reflect the rising prosperity of the nation…

Later in the year, we shall publish the Green Paper on pensions. I can say today that the Government [also] plan to bring forward legislation later in this Parliament.

4.102 In April 1998, DSS published its research report number 75, entitled ‘Experiences of Occupational Pension Scheme Wind-up’.

4.103 The research, which had examined the experiences of members whose scheme had been frozen, wound up or was in the process of winding up, had been commissioned by DSS in January 1996. One of the aims of the research was to ‘find out how much members and beneficiaries know and understand about what has happened to their scheme and to their pension rights’. Another aim was to ‘obtain views on the information scheme members and beneficiaries received’.

4.104 Among the report’s conclusions were findings that:

(i) most members had some understanding about what had happened to their scheme and knew that the scheme was no longer operating in the way it had been. The majority knew that contributions had ceased to the scheme and that it had or would in due course cease to exist. Most also knew the reason for the changed status of their scheme, citing as the most common explanations the insolvency of their employer, a company take-over, or the sponsoring employer’s decision that the scheme was too expensive to run;

(ii) members were fairly evenly divided between those who had some understanding of what had happened to their pension rights and those who did not. Those who were not aware were said to be associated mostly with schemes which were frozen or those where the winding up process was not well advanced; and

(iii) members were evenly divided between those who thought that the information they had received about their scheme was good and those who thought it was poor. It was said that the latter group felt that they had not received enough information about the process and that such information as they had received had been difficult to understand, lengthy, and full of jargon and unexplained statistics.

4.105 The report did not deal with the awareness of the risks to their pensions that those members that had been interviewed as part of the research had had prior to the change in status of their scheme.

4.106 The actuarial profession wrote to DSS on 1 May 1998. The letter was headed ‘Minimum Funding Requirement: Effect of Budget Changes’. It began by stating that the purpose of the letter was to provide the profession’s ‘conclusions on the changes needed in the short-term, on the assumption that the Government wishes to maintain the strength of the MFR basis’.

4.107 The profession noted that it had, in December 1997, suggested changes to the MFR basis to ‘maintain the strength of the MFR basis at the level previously decided by the Secretary of State in light of the changes to ACT credits introduced in the last year’. These original suggestions were: first, that the assumptions in the MFR basis in relation to equity investments should be reduced from 9% to 8.5% for those below MFR pension age and from 10% to 9.5% for those above MFR pension age; secondly, that the equity market value adjustment should be reduced from 4.25% to 3.5%; and, finally, that net dividend yields on the FTSE Actuaries All-Share Index should be used in place of gross dividend yields.

4.108 The actuarial profession continued:

However, since writing that letter, it has become increasingly clear that the performance of the UK equity market over the last 12 months or so has been inconsistent with the underlying principles on which the equity MVA is calculated. This is due to stagnant dividend growth, which appears to be a result of changes in the way companies are rewarding shareholders (for example, due to the tax changes introduced by the July 1997 Budget). What is impossible to tell is whether these are temporary or permanent features. At the same time, there have been substantial increases in market values, resulting in the dividend yield being at a virtually all time low. The result, however, is that the equity MVA has increased to a much higher figure than expected – 152% as at 30 April 1998.

4.109 The letter went on to explain the principal two effects of this – increased MFR liabilities and increased cash equivalent transfer values for those leaving schemes. It continued by explaining that ‘[i]n the longer term, it will be essential to find a more robust method of dealing with changes in the equity market than the current MVA’ and that consideration of this would be part of the forthcoming review of the MFR that the actuarial profession would undertake on behalf of Government.

4.110 The actuarial profession’s letter concluded by setting out the technical basis of their advice.

4.111 On 13 May 1998, officials made a submission to Ministers in which they were invited to approve the actuarial profession’s proposal for interim reform of the MFR and also to agree to officials meeting the profession to discuss detailed proposals for their long-term review of the MFR.

4.112 The submission set out the background to the issues in some detail and then provided briefing on ‘presentation’. The latter, in relation to the short-term changes to the MFR basis, said:

The short-term changes, which are fairly minor, should cause no difficulty at all for Treasury Ministers. The MVA adjustment to a net figure has in any case already been agreed by Helen Liddell as it was part of the earlier recommendations which she accepted. The further small change to the MVA could be said to help ensure that the value of liabilities adjusts in line with market conditions (which is what the MVA is intended to do).

4.113 The briefing continued:

A long-term review of the MFR basis is likely to attract Treasury interest particularly in view of speculation in the Press that the changes in market conditions have been as a result of the removal of the ACT tax credit last July. We will need to talk to Treasury officials about the longer term review after we have talked to the F&IoA.

We recommend that these changes are kept fairly low key and that a press release is not appropriate. Because of the need to notify their members of the changes, which will hopefully come into effect very soon, the F&IoA are likely to issue a press release in order to notify their members.

4.114 The submission concluded by noting that the actuarial profession were concerned that the MFR valuation method was not sufficiently robust to be able to deal with changes in market conditions and that this would form part of their review of the MFR. Officials said that they expected the actuarial profession’s suggestions on MFR reform ‘to be fairly wide ranging’.

4.115 On 4 June 1998, a group of pension experts known as the Pensions Provision Group, which had been commissioned by the Government to examine the levels of pension provision in the UK and also to analyse possible future trends in that provision, published its report, ‘We All Need Pensions: The Prospects for Pension Provision’.

4.116 They concluded that it was:

…even more important that people have good second tier pensions in order to have adequate incomes in retirement and to avoid the need to depend on means-tested benefits, which themselves can have adverse effects on people’s incentives to save for retirement.

4.117 In a subsequent answer to a parliamentary question, John Denham, the then Pensions Minister, said on 16 June 1998 that:
The Pension Provision Group report… identified that many people will face an avoidable drop in income in retirement because they do not make adequate provision for themselves over and above the basic State pension. One of the key issues underlying this problem is the lack of financial awareness and good information on pensions.

The Pensions Education Working Group

4.118 On 16 June 1998, another group, the Pensions Education Working Group, which had been commissioned by the Government to consider the co-ordination, targeting and efficiency of pensions education and to advise on action needed to improve knowledge of pension issues, published its report, ‘Getting To Know About Pensions’.

4.119 The report made three principal recommendations:

(i) first, that a major pensions education and awareness programme was necessary;

(ii) secondly, that any such programmes should cover a range of initiatives, including personal finance education within the school system and annual and automatic information to be provided by Government and by pensions providers about pension options and entitlements; and

(iii) thirdly, that a programme of pensions simplification was overdue.

4.120 These recommendations were welcomed by the Government, who asked the Group to continue to take forward their work.

4.121 In a press notice published to accompany the report, John Denham, the then Pensions Minister, was quoted as saying ‘people at work and people taking up new jobs need better pensions information’.

4.122 The notice continued:

The Government will examine ways of stressing the benefits of joining employers’ pension schemes and wants to ensure that employees can get good advice about new stakeholder pension schemes at work.

4.123 It then quoted the Minister’s speech that day at the TUC Pensions Conference. He had said:

Today’s report… makes clear that people not only need to understand the importance of saving for retirement, but to have the skills to make the right choice about which pension product is best for them. And today I can announce the first steps in a major campaign to address this.

For the first time, Job Centre staff will stress the importance of pensions to jobseekers moving into work… A new series of user-friendly leaflets will reinforce the message. And improvements will be made to the state pension forecasting system to get the right information to customers.

Revised Actuarial Guidance Note

4.124 In the meantime, on 15 June 1998, the actuarial profession had issued a revised version (1.3) of their guidance note, ‘Retirement Benefit Schemes - Minimum Funding Requirement’. This incorporated guidance to reflect the change to the MFR basis.

DSS research report

4.125 On 8 October 1998, DSS published research it had commissioned on public attitudes to pension provision.

4.126 The press notice announcing publication of the report stated, under a heading ‘report highlights lack of public awareness on pensions’, that the research had shown that ‘…people find the whole area of pensions very confusing and many feel uncertain about their future’.

4.127 The press notice went on to describe the ‘main findings’ of the research, which included:

(i) that ‘the complex and changing pension system is often poorly understood by the public’;

(ii) that ‘pension planning is often limited and belated’;

(iii) that ‘people need more, better and accessible information on pensions, and want the Government to make sure the public is properly informed and advised’; and

(iv) that ‘personal pensions are seen as risky, and confusing’ and that ‘occupational pensions are seen as providing a good return’.

Briefing for Ministers on MFR

4.128 In a briefing note by DSS officials for a Ministerial meeting in October 1998, in relation to the purpose of the MFR it was stated that:

The MFR is intended to provide a reasonable level of security for members in the event of the sponsoring employer becoming insolvent and no further funds being available to pay into the scheme…

The underlying assumptions were shaken by the decision in the July 1997 Budget to abolish the 20% tax credit on UK equity dividends formerly available to occupational pension schemes, which invest on average about half their assets in UK equities. Adjustments had to be made to the assumptions in the MFR valuation method in June this year to avoid the risk of employers having to put extra funds into their schemes unnecessarily.

4.129 The above formulation was also used in later briefing for Ministers and officials in both DSS and the Treasury.

The Pensions Green Paper

4.130 The Government published its Green Paper on pensions on 15 December 1998. Entitled ‘A New Contract For Welfare:

Partnership in Pensions’, the document set out the Government’s ‘plans for radical reform of the whole pension system, to rebuild trust and ensure that everyone can look forward to a secure retirement’.

4.131 The Paper summarised the Government’s proposals for non-state pension reform as being:

(i) ‘better regulation’ to restore confidence in the system;

(ii) ‘better information on schemes’;

(iii) ‘better information on people’s own need to save’, including the development of annual joint statements of a person’s state and non-state pension provision, ‘so that they can see for themselves if they should save more for retirement’; and

(iv) ‘wider recognition of the benefits of occupational pension schemes and measures to encourage more people to join them’.

4.132 The Paper argued that the Government’s proposals were fair, affordable, provided security and would build ‘a new partnership in pensions’.

4.133 After dealing with the position of people who could not afford to save, and under a heading ‘those able to save – a public-private partnership’, the introduction to the Paper said:
Those who are able to save for their own retirement should do so. For this, they need to have trust in the system; for the right schemes to be available and affordable; to be able to cope with flexible working and variations in earnings…; and to know how much they should save to deliver the income they want in retirement.

4.134 The introduction went on to say that the Government believed that ‘the current system does not meet these needs’. It then described occupational pensions as ‘usually good value and secure and… generally the best choice’. It continued:
Occupational pension schemes are one of the great welfare success stories of this century. They are run voluntarily by employers, or groups of employers for their staff, and provide a pension on retirement and often other benefits.

4.135 It also noted that ‘some confidence in occupational schemes has been lost since the Maxwell scandal’. Furthermore, the Paper noted that while being ‘an excellent means of providing for retirement… the growth of occupational pension scheme coverage may have peaked’ - due to a decline in the number of people employed in large companies and the public sector, changes in the regulation of occupational schemes, and the move away from final salary to money purchase schemes.

4.136 Under a heading, ‘poor information and lack of trust in the pension system’, chapter 3 of the Green Paper, which set out ‘the need for change’, concluded by saying:

Few people really understand pensions. Few know about their own pension position and the action they need to take to improve it. Added to this lack of understanding, the Maxwell affair and the mis-selling of personal pensions has left many people lacking confidence and trust in any type of pension arrangement. People are not sure where to get advice and who they can trust. Much of the information that is available is of poor quality. Because of this, many people run the risk of making the wrong pension choices, their confidence and trust in pensions may be undermined and they may be put off saving altogether.

If people do not trust any type of pension scheme it can become a reason to do nothing, even though pension savings made early are worth far more than those made late in a working life. If people do not know their own position they cannot judge whether and how to make better provision, or be confident of finding the best way to improve their position.

To overcome these problems action needs to be taken to educate people about pensions and provide better, more secure pension schemes which give them confidence and restore trust.

4.137 Chapter 8 of the Paper was entitled ‘strengthening the framework for occupational pension schemes’ and was introduced by the statement that ‘occupational pension schemes provide a secure pension for millions. We want to build on this success by strengthening the framework for occupational pension schemes and encouraging those who can to join them’.

4.138 Notice was given that the Government was issuing a separate consultation on a package of technical measures it proposed would simplify the contracting-out of schemes and the procedure for the nomination of member trustees (see below).

4.139 The Government also said that it wished ‘to do more to encourage people to join occupational schemes’. In noting the decline in membership of such schemes, the Government said that ‘a continuation of this trend would be counter to our objective of increasing occupational pension coverage in the future’ and also that the Government wanted ‘to reverse this and achieve a significant reduction in the numbers of non-joiners’.

4.140 The Paper continued:

We expect some increase in the take-up of occupational pensions to result from improvements to pensions education. We have already taken steps to ensure that people are better informed about pension issues generally, and about the options available to them as individuals in particular. It is highly desirable that individuals are given the clearest possible statement of the value to them of joining their employer’s occupational pension scheme.

4.141 The Paper, in paragraphs 22 and 23 of Chapter 8, went on to consider the MFR:

We know that one of the areas of concern to employers is the MFR. The concept behind the MFR is a straightforward one – that is, 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. But devising a method of securing pension rights without imposing too much of a burden on employers is not so straightforward. We are asking the actuarial profession to look again at the present valuation method, and consider whether there are different ways of delivering the level of security we feel is right. There will need to be full discussions about any proposals.
We are also considering the viability of a Central Discontinuance Fund to which pension rights might be transferred when a scheme has to wind up because the employer is insolvent. We will be looking at this as part of our review of the MFR.

4.142 Chapter 8 continued with a discussion of possible reform to the provisions related to guaranteed minimum pensions and contracting out and the removal of regulatory burdens from certain schemes. It ended with a summary of the Government’s proposals for strengthening the framework for occupational pensions, two of which were proposals to make ‘improvements to the compensation scheme’ and to ‘encourage improvements in transparency and accountability’.

4.143 In proposing improvements to the arrangements for the protection of members of occupational pension schemes where the employer was insolvent and where the assets of the scheme had been lost because of theft or fraud, the Government said:
The present compensation rules could produce potentially very unfair results for members of salary-related pension schemes. When such a scheme winds up, pensioners generally have priority over other members. Therefore in a mature scheme, where many of the members are pensioners, active members could receive very little of their expected benefits.

It is an important principle that consumers should exercise care in the choices they make. This principle applies to pension scheme members who have access to information about how the scheme is run, the ability to nominate trustees and to complain if they think things are going wrong so that investigations can be carried out. It would not, therefore, be appropriate to provide 100 per cent compensation. But we believe it is possible to introduce a more equitable scheme consistent with this principle, which would be of particular benefit to members of mature schemes.

4.144 The Paper continued:

For salary-related schemes, we propose that the calculation of the amount of compensation payable should be based more closely on the age profile of the members. So instead of limiting the funding to 90 per cent of all the scheme’s liabilities, we will increase it to 100 per cent in respect of pensioner members and those who are within 10 years of the scheme’s pension age (who have to be identified already for the MFR valuation). That means that, when the scheme’s assets are allocated to meet individual pension rights, there would be a greater chance of providing younger members with a fair value of their basic pension rights, whilst preserving in full the level of pensions that are already in payment.

4.145 Chapter 10 of the Paper was entitled ‘education and trust’. It began with the statement that:

…people are confused by the many pensions options and have lost faith in the system. We need to help people to understand how they can ensure they have the level of income in retirement that they want and which type of pension is best for them. We need to rebuild trust so that people will save with confidence.

4.146 It continued:

People need better and more accessible information about state and non-state pensions. They need to know where to get information and advice from sources they can trust. At the moment much of the general and personal advice given is of variable quality. People rightly want trustworthy, clear and impartial information and want the Government to facilitate access to simpler products and better and more meaningful advice. That is our challenge.

4.147 The Paper said that one of the ‘clear’ and ‘key’ principles that underpinned a pension education and awareness programme was that ‘individuals need clear information and advice on alternative forms of pension provision to make the right pension choices’. It continued:

We believe it is necessary to bring about a radical improvement in the quality and accessibility of information on pensions, both in general and in the information people are given about their own pension position. We will work closely with the Financial Services Authority to improve the general quality and comparability of pensions information…

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The Government and the financial regulators have the central role to play in developing the long-term framework and for driving forward the specific initiatives needed to improve pensions information. In turn, we believe that the private sector can provide expertise, ideas and enthusiasm to make a significant contribution in many areas. In partnership, we can press ahead with a dynamic and effective programme of action to counter lack of awareness, interest and understanding of pensions.

4.148 In describing the work that the Government and the FSA would be doing in the wider financial context, the Paper said:

Any improvement in pensions information and public awareness will only have maximum effect if individuals have the basic skills to interpret information and understand the overall financial context in which decisions are made. This will include promoting awareness of the benefits and risks associated with different kinds of investment and providing appropriate information and advice.

4.149 In setting out the detailed work programme to take forward the Government’s agenda, the Paper categorised this as involving personalised pensions information, work-related advice (including the need to emphasise ‘the importance of occupational schemes’), and general pensions information. In relation to the latter, the Government proposed to issue new DSS pensions leaflets, complemented by a marketing campaign, to support the promotion of financial education in schools, the piloting of pension information helplines and also the development of a Plain English guide to pension terms.

4.150 It then dealt with some new DSS leaflets, which had recently been issued (see above), and said:

We published a new series of DSS pension leaflets in June 1998 which help to meet the need [for standardised and simplified pensions information and a general introductory document issued by the Government]. The leaflets are concise, accessible and relate information directly to decisions individuals need to take at various life stages. The leaflets met the Plain English Crystal Mark standard and have been awarded the Money Management Council Quality Mark for providing clear and unbiased information on money matters. We are running a nationwide marketing campaign to promote the leaflets.

4.151 The Government sought responses to the proposals set out in the Paper by 31 March 1999.

The ‘technical’ consultation document

4.152 At the same time, the Government issued a consultation document, entitled ‘strengthening the pensions framework’, which set out the more detailed or technical proposals that were referred to in the Green Paper.

4.153 In the introduction, the then Minister, John Denham, said that the focus of the consultation was on measures related to contracting-out procedures and also on some amendments to the provisions of the Pensions Act 1995. He continued:

People should be encouraged to join their employer's occupational pension scheme where, as it usually is, it is in their best interests to do so. But they will only do so if they believe their pension rights are properly protected. Security is of paramount importance. But we must also avoid actions which will deter employers from continuing to run occupational pension schemes. So it has been important to allow most of the major changes introduced by the Pensions Act to settle in before deciding what further action is necessary. It is costing schemes and employers some effort and money to meet the requirements of the Pensions Act, and we do not want to increase their costs unnecessarily, or to discourage employers from sponsoring and supporting occupational pension schemes.

We already know from those who run and advise pension schemes, that there are some simplifications which should be made now. We want to achieve simplifications where we can reduce the burden on schemes without adversely affecting the security of members' rights.

4.154 The document, in part 4, set out suggested improvements to the framework provided by the Pensions Act 1995. It explained:
Pension funds can work effectively only if their members can have confidence that the benefits promised to them when they are working will actually be delivered when they retire. The Pensions Act 1995 and the regulations made under it have provided increased security for members. There remain, however, restrictions and inconsistencies which we believe create or perpetuate unfair treatment.

4.155 The paper then went on to suggest ways to remove these restrictions and inconsistencies and it sought responses to the proposals by 12 February 1999.

Compensation for NIRS2 delays

4.156 Alistair Darling, the then Secretary of State for Social Security, announced on 1 February 1999 that he would be bringing forward measures to compensate those who had suffered financial loss due to delays in the receipt of social security benefits that had been caused by problems with the Government’s NIRS2 computer system.

4.157 In the official press release, he was quoted as saying that he had been ‘concerned for some time about these delays and [was] determined that any inconvenience suffered by those who would otherwise not get anything should be properly recognised’.

Commons debate on Government pensions policy

4.158 On 3 February 1999, the Opposition launched a debate on the pensions policy of the Government through a motion which argued that:

…the Government has failed pensioners and thrown away a unique opportunity for reform… [we deplore] their attack on pensioners through the abolition of the [advance corporation tax] dividend tax credit, which will cost pensioners and all future pensioners £5 billion per year; [we believe that] the Government has further hurt occupational schemes by increasing the regulatory and cost burden in the pensions Green Paper; [we reject] the Government’s proposals, which will make pension provision more complex and offer no real security for pensioners in the future; and [we condemn] the Government for their extensions of means-testing in the welfare and pensions system, which will undermine the incentive to save.

4.159 Answering the debate, Mr Darling said:

We firmly believe that everyone who can save ought to save. We want to give people the flexibility, the choice and the incentives to do so. A one-size-fits-all approach to pensions will not do; everyone has different requirements.

There have been huge labour market changes. In the past, many people had access to occupational pension funds, which are extremely good options for those who are lucky enough to be able to take advantage of them. As the House well knows, however, many people do not have that option. Although personal pensions are certainly a good option for some, they are not so, as we know only too well, for low-paid people or even for some moderate earners.

4.160 He continued:

Above all, the Government must ensure that people have a range of options. We must increase flexibility to ensure that as many people as possible save. That is our objective: we want people to save more, invest more and to ensure that they can provide for themselves adequately in their retirement… It is very clear: we are telling people to do the best that they can for their retirement.

Welfare Reform and Pensions Act 1999

4.161 Following both the consultation exercises referred to above, the Government implemented some of its proposals through secondary legislation, such as the introduction of a new requirement that scheme trustees should provide information to members about their policy on ethical investment.

4.162 Other proposals, which required primary legislation, were set out in a Welfare Reform and Pensions Bill, which received its Second Reading in the House of Commons on 23 February 1999.

4.163 The Bill:

(i) established the framework for the introduction, sale and regulation of stakeholder pensions;

(ii) made amendments to the regulatory framework for other pensions;

(iii) enabled the courts to order that pensions could be shared on divorce like other assets;

(iv) made changes to the provision of bereavement benefits;

(v) reformed incapacity benefit and some of the provisions of disability living allowance; and

(vi) introduced a new ‘single work-focused gateway’ to handle claims for unemployment benefits.

4.164 The changes to the regulatory framework for pensions included provisions related to the monitoring of employers’ payments to personal pension schemes; dealing with late payments by employers to occupational pension schemes; the effect of insolvency on unapproved pension rights; the forfeiture of rights under pension arrangements; and the compensation arrangements for members of occupational pension schemes which had lost assets due to fraud or other dishonesty.

4.165 The then Secretary of State for Social Security, Alistair Darling, in moving the Second Reading of the Bill, informed the House that the aim of the pension reform aspects of the Bill was ‘to ensure that the system provides security in retirement for future pensioners and allows pension sharing on divorce’.

4.166 Following parliamentary approval of the Bill, the Welfare Reform and Pensions Act 1999 received Royal Assent on 11 November 1999.

Announcement of MFR review

4.167 On 3 March 1999, DSS issued a press notice announcing the review of the MFR. The notice explained:

The review’s aim is to find the best way to safeguard the pension rights of those in occupational pension schemes. The review will focus on the valuation method, and consider fundamental changes in approach to the existing system.

Mr Timms [the Pensions Minister] said:

“The terms of reference of the review are thorough and wide-ranging. The aim is to find ways to protect people’s pension rights that are reasonable and affordable. The work will not be straightforward. The issues that need to be addressed are complex and will require careful consideration. We shall be taking this forward in partnership and are grateful for the help provided by the profession. The review of the Minimum Funding Requirement is part of the process to strengthen the framework for occupational pension schemes.”

The review of the MFR will be carried out by the Faculty and Institute of Actuaries Pensions Board in conjunction with the Department of Social Security. There will be full discussion of any proposals.

DSS consultation on a quality accreditation scheme

4.168 On 11 March 1999, DSS issued a consultation document entitled ‘Strengthening the Pensions Framework: the Quality in Pensions Accreditation Scheme’.

4.169 The central aim of this initiative, according to the Foreword by the Pensions Minister, was to raise standards and to encourage the spread of best practice in all occupational pension schemes, with a view to reinforcing the role of employers in pension provision and of providing employees with confidence in the quality of that provision.

4.170 One of the proposed criteria on which applicants for accreditation would be judged was ‘scheme communication’. Each applicant scheme would be assessed as to whether it provided ‘clear information about the structure of the scheme and the benefits available to all members and prospective members’.

4.171 The accreditation scheme was later dropped.
Parliamentary questions on reform of the MFR

4.172 On 19 March 1999, Stephen Timms, the Pensions Minister, replied to a question from Nick Gibb MP who had asked for details of who would be undertaking the review of the MFR.

4.173 The Minister replied:

The Pensions Board of the Faculty and Institute