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 Young
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….
Ros Altmann
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!
Ros That is an excellent blog. We had not seen it when posted as a comment. There is little on which we disagree but where we do it is interpretation rather than fact. We do particularly like the Maximum Funding Ratio description-in fact we have described the new regine as MFR II in the third as yet unpublished blog. It deserves a full and considered response. We will deliver that as soon as we can make the time..
Although I was only a bit player in the margins of all these developments working on FAS and the PPF setup, I can vouch for the determination and vigour which was brought to the campaign and its success. Thank you for elevating a comment to a guest piece.
All I can say as a FAS/PPF pensioner military veteran and elderly state pensioner is that no matter who was involved or who controlled our private money at the time their actions such as companies/trustees/actuaries or professionals acted ‘fraudulently’ to deprive us. The government were no better acted the same way, never truthful protecting their own interests rejecting process of law using ‘parliamentary sovereignty’ and completely ignoring damning report of the Parliamentary Ombudsman! This flouting of of contractual agreements is now being repeated by that ‘holly cow’ organisation the ‘BBC Television Authority’ to defraud us elderly again by accepting money from government to support a free TV Licence and then threaten to bill us for an exorbitant amount of money for a degraded service via their ‘free-view channels’ consisting mainly of a casserole of repeat programs mainly paid for already in the last century or before! So they want to be paid twice for a degraded service – fraud – fraud – fraud!
Ros
There is no doubt in our mind that governments had for decades misstated the security of pensions saving and that created a liability for them. We wonder if, in the spirit of ’cock-up’, they actually believed this themselves. The campaign was superbly well orchestrated – it must have been a true labour of love. We had not known, before, of Andy Young’s involvement. You are both to be congratulated.
We agree that the priority rules were the problem, but before moving to that issue we need to consider the “best estimate” nature of full funding under MFR. The best estimate is the point dividing equally the possible outcomes, so a 50% chance of better and 50% worse, but that does not mean that there is a 50% chance of losing the whole or even part of your pension as a member. In fact, if the scheme is maintained at 50%, everyone will get their pensions in full.
Leaving aside the question of the discount rate employed, which is a very big leave about which we have written extensively elsewhere, we need to consider the entitlements of members. The “best estimate” is the value which is equitable among all stakeholders of the employer (not just employees and pensioners)
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The member is not entitled to a full pension at any time prior to retirement. He or she is entitled to the contribution and the accrued value of this contribution to the date of valuation. Somehow the idea that members are entitled to their full pension at all times has arisen. It is fallacious. It cannot be correct that a new member has the same entitlement as a member on the eve of retirement.
What I am saying here is that a member’s entitlement for say one year of service varies in amount with the accruals over the time elapsed since award. These accruals continue into retirement, but for simplicity say they reach 100% at retirement, while for the new member at award they are simply the contribution. Several people have tried to justify full entitlements by referring to the judgement that pensions are deferred pay. These arguments do not bear close scrutiny. They are deferred pay, but the amount increases with the time elapsed and accruals since award.
S75 is fine as a punitive deterrent to scheme abandonment and the ravages of private equity but has no place in insolvency.
We will disagree with you on the PPF. We did not see any directors taking early retirement (that is not to say that it didn’t happen but how many were there in reality?). We have seen however, very many long-serving employees take it, frequently in redundancy packages. I have asked PRI Pensiongaranti about their experience – and got the response: theoretically possible but doesn’t happen. They pay full benefits to all. In any case, punishing all rather than just the miscreants is immoral -there is no moral hazard in respect to ordinary members, which leads us to think that the reductions are just a reflection of a grudging attitude.
If we had the PPF pay full benefits, as is the case in a number of other countries, all of these concerns about member security would disappear – and with that rafts of legislation. The PPF is actually by far the most expensive compensation scheme in the world.
We will end by once again congratulating you on a near-impossible job, not only done but done well in the face of terrible odds.
Iain and Con
Kon Keating. I am sure that all members of a company pension scheme realize that they are not entitled to a ‘full pension’ before their NRD but they ‘trusted that their money’ would be a protected amount until such date depending on the amount ‘built up’ as trusted service to their respective employers. These unfortunately could not be trusted as they ‘fiddled the figures’ or sold off/transferred rights to enhance their own profits as company directors or trustees, What us pensioners complain off is that those fundamental principles were not looked after or ‘ring fenced during their last year of service before reaching and being alive at their NRD. I believe the government let things run on ‘rudderless’ so that those unscrupulous people in charge were able to defraud us. No matter whatever ‘tech-speak’ you may put forward does not satisfy that ‘last year of service’. So many of us lost a considerable amount due to that fact and are continuing to do so due to the flawed indexing rules in the 2004 FAS arrangement that was the responsibility of Parliament and as pointed out by judicial review and the Parliamentary Ombudsman!
Peter
I am certainly not wanting to make light of your experience. I think that the response of successive governments has been shameful and disgraceful. It is one of the reasons that I am concerned by the review of judicial review that this Government has just commissioned.
The point that I was wanting to make is that there is a graduation of claims amounts among members and that these should have common priority. Any system of priority which divides members in some way will inevitably lead to inequitable treatment for some.
Con
Con. Yes you make your point very clear. Certainly every member of a pension scheme should have their ‘accrued’ rights ‘protected’ but obviously everyone would not get the same ‘pension’ on their NRD depending on economic performance, number of years employers allow their staff to serve, whether the rules of the scheme are fair (for instance mine were punitive by Director/Trustee that required their permission to retire early) although scheme rules said on could but in practice did no amount to ‘a hill of beans’ very unclear and designed to protect ‘the bosses’ and not the staff members. Once a staff member is forced to leave scheme employment they get ‘written off’ and most likely get ‘rights protection or future news or communications! As these rules are/were formulated under ‘private contracts’ staff had to either ‘accept to join’ on invitation from Trustees or not thereby not having a provision of any additional retirement pension other than the ‘State Pension’ but that is another story as the government continued to change those rules also to our disadvantage. Government can only make our flawed system work by formulating rules that ‘penalise someone’!