I have resisted commenting so far, but feel that, having been at the helm of the ‘Stripped of our Pensions’ campaign to get Government to compensate people who lost their entire pension after a lifetime of contributions and successive official assurances that their pensions were ‘safe and protected by law’, I think it is important to recognise that the PPF has done a tremendous job in protecting DB scheme members.
I will never in my life come up with a better slogan for a campaign than our ‘Stripped of our Pensions’ banner, which was fun to choreograph, but it was utterly accurate. These workers, all of them lifelong loyal employees of their firms and many had their whole life savings in their company scheme (in those days, if you had a company pension, then Government rules required you to put all your additional personal pension savings in there as well) were facing financial ruin.
Even part of their state pension was in their company pension scheme. So, after Maxwell, workers who had been assured that their pensions could not disappear in future because protection had been put in place, realised they had not been told the truth.
The actuarial assumptions behind the so-called ‘Minimum Funding Requirement’ (MFR) (which became the ‘Maximum’ Funding Requirement for most schemes) were only actually designed to give a 50/50 chance for members to get their full pensions. But members were told their money was safe and protected by law.
What went so wrong?
Firstly, the MFR actuarial calculation was designed to deliver only the 50% chance of full pension. This made it far too weak as a standard for pensions that were supposed to be ‘guaranteed’.
Secondly, even employers who were solvent were allowed to walk away from their pension liabilities as long as they had met this MFR standard – which saw many firms in the early 2000’s abandon their pension schemes by paying just MFR, but this was so inadequate to cover the costs of winding up the scheme itself, that even those workers in schemes where the employer had not gone bust, found they had lost their pensions too.
Thirdly, the MFR did not protect workers whose companies were subject to corporate and private equity ‘restructuring’. I saw private equity firms bought up traditional manufacturing companies which had long-standing DB schemes, then split that company into different parts – one new company was given the good assets that the new owners wanted to keep and the liabilities or unwanted assets were left in the old firm. That firm then failed and the new owners walked away with profitable assets in the new split off company, while the pension scheme was left attached to the bust firm.
This was morally horrendous, but perfectly legal at the time. Indeed, this is what led to the ‘full buyout’ requirements that were put into legislation for Section 75 debt – previously, this could be met by just MFR. The aim was to deter this kind of corporate restructuring.
Fourth, the Trade Unions recognised the problems for their members and turned to the EU Insolvency Directive to challenge the UK Government on the lack of protection for workers whose companies had failed without enough money to pay the full pensions. EU law required pensions to be protected on insolvency, but the UK system failed to do this properly.
Fifth, the problem was compounded by several Government decisions. These included the withdrawal in 1997 of ACT relief for company dividends, that meant pension schemes lost 20% of their dividend income overnight. No offsetting provision was made for this in the actuarial calculations. Government also decided to tax pension fund ‘surpluses’ in the late 1980s, which led trustees and companies to try not to have such ‘surpluses’.
Actuarial assumptions suggested the schemes had so much extra money that they could afford to increase benefits, while employers did not need to pay a penny into the schemes. Once again, these assumptions proved incorrect, because market moves meant the risk of sudden falls or tax and legislative changes had not been provided for in the asset allocation., The normal actuarial risk margins were missing it seemed and when the dot-com crash came, pension schemes were badly hit.
BUT in my view, the biggest problem was the legal ‘priority order’ on wind-up and the requirement in legislation to buy annuities to secure pensioner benefits in full (including all inflation-linking) before non-pensioner members (even those a day away from their pension) could get any money at all. This was the most iniquitous part and it was the combination of the pensioner cut-off (which still allowed directors to walk away from age 50 taking ‘early retirement’ and getting the scheme assets to buy annuities for them, but leaving loyal long-serving workers with no pension at all) plus the cost of deferred and index-linked annuities.
This priority order meant that even non-pensioners’ state pension contracted out rights were not covered on wind-up.
I believe that there should have been risk margins built in to actuarial forecasts and there should have been much more recognition of risk. The priority order should also have recognised the rights of long-serving members, rather than using stark ‘pensioner’ cut-off to refer even to early retirees and Directors.
This is why the PPF rules contained the reduction for early retirement! The PPF now ensures that workers’ pensions are protected and they can no longer lose their whole life savings and their company pension if their employer fails.
That is tremendous progress but the campaign was hard-fought. The Financial Assistance Ssheme was resisted by Gordon Brown for years, the workers in schemes whose employers had not become insolvent were not protected by EU Insolvency protection at all, so the Trade Unions were battling for insolvency but the Pensions Action Group which I spearheaded had to battle for the solvent employer schemes too.
Andrew Young was instrumental in helping to get the Financial Assistance Scheme recognised and in stopping the winding up schemes from buying annuities. I had called for that in 2003, but nobody would listen. Running the schemes on, rather than locking into annuities, allowed the assets to be used to help defray the short-term funding costs that the Treasury would need to pick up.
Andy was brilliant, he understood the need to remedy this injustice and Sara, his now wife, has done a splendid job at the PPF.
This whole episode (when I had to watch people die without their pensions, a wife who felt she had to lie to her husband on his death bed about having won our pensions battle so her husband could die in peace), people having to complain to Parliamentary Ombudsman after being fobbed off by Ministers, then seeing the Government totally reject the Ombudsman’s recommendation for full compensation, then having to mount a case in the High Court where I had to find lawyers to work on a no-win, no-fee basis to sue the Government for maladministration, then having to fund an Appeal Court case when the Government refused to accept the High Court ruling in favour of the Pension Action Group victims.
Moral of the story (I could write a book, but time does not permit and there is much more to this that needs to be learned) would be
1. there are no guarantees in pensions and people need to recognise there are risks which may reduce the amount received
2. pension ‘surpluses’ were really buffers against bad markets and actuarial assumptions need to make provision for both risk and upside returns (we’ve gone from over emphasis on taking risks in order to maximise returns, to an over emphasis on minimising risks (which means must lower returns) – both are wrong and I believe the aim should be to ;manage’ risks.
In a QE world, increasingly buying bonds and gilts will not deliver the returns needed to pay pensions in the long run. A diversified portfolio of asset classes which deliver different types of risk premia rather than relying on any one asset class too much will diversify risk and sources of return.
Finally, the cost of Section 75 buyout and annuitisation is ruinous and wasteful of corporate resources. Use pension assets to invest in growth-producing investments, in social housing, build to rent, old-age living, infrastructure and so on. And that means look to the consolidators to drive the future of pensions – economies of scale, investing for the long-term,ongoing funding rather than annuity purchases….
This blog first appeared as a comment to Con Keating and Iain Clacher’s post on the recent demise of DB Pensions
It is far too important to languish as a comment!