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Pensions: Occupational Schemes

Volume 689: debated on Thursday 22 February 2007

My Lords, with the leave of the House, I shall repeat a Statement made earlier today by my right honourable friend the Secretary of State for Work and Pensions in another place. The Statement is as follows:

“With permission, Mr Speaker, I would like to make a Statement on yesterday’s judgment on the Government’s response to the ombudsman’s report concerning the security of final salary occupational pension schemes. Given the importance of this issue to many honourable Members, I want today to inform the House on the position we have reached in the light of this ruling and the decision last month of the European Court of Justice on the implementation of the insolvency directive.

“The High Court made five rulings in yesterday’s judgment. I will take each in turn. The court’s first ruling was that the ombudsman was entitled on the evidence available to her to reach the conclusion that official information published on the minimum funding requirement for pension schemes was inaccurate and potentially misleading and therefore amounted to maladministration. The court particularly criticised the then Government’s guide to the Pensions Act 1995, which was published in 1996. This, it concluded, gave the clear impression that following enactment of the new law, scheme members could be reassured that their pensions were safe whatever happened.

“The Government had, in good faith and acting on proper advice, taken a different view from that of the ombudsman, on the basis that the leaflets concerned were not a full statement of the law and were for general guidance only. However, we now need to study the court’s ruling on this matter very carefully. In particular, we need to consider the possible implications across government of the court’s significant proposition—on which this particular ruling was based—that findings of fact made by the ombudsman are binding, unless they are flawed, irrational or peripheral or there is fresh evidence.

“The court’s second ruling related to the important issue of causation. The ombudsman found that maladministration was a significant contributory factor in the creation of the financial losses suffered by individuals. She went on to argue that everyone who between 1997 and 2004 suffered losses on the winding up of their pension scheme was the victim of injustice because of maladministration. The Government argued that this was not well founded. The court found in favour of the Government on this point, describing this aspect of the ombudsman’s report as “logically flawed and unreasonable”.

“The court’s third ruling rejected the ombudsman’s finding that the Government were guilty of maladministration when they made changes to the pension scheme funding rules in 2002. The court decided that the ombudsman’s finding was not logically sound.

“In its fourth ruling, the court dismissed the claim that the Government’s refusal fully to restore the pension entitlements of all affected scheme members was in breach of the European Convention on Human Rights.

“The court’s fifth and final ruling concluded that I should reconsider the ombudsman’s recommendation that the Government should consider making arrangements to restore fully the pension losses of the people concerned when their employers became insolvent.

“In a clear sign of the complexity and importance of these matters, both sides have sought and been granted permission to appeal. We have not yet decided the precise grounds for such an appeal. It is absolutely right and proper that we take the time to study this judgment and consider its implications in detail.

“The judgment of the European Court of Justice in January on the implementation of the insolvency directive has an important bearing on the issue of financial redress for those who have lost some or all of their pension entitlement. The decision of the European Court of Justice effectively requires the Government to reconsider whether the present arrangements offer sufficient protection for people’s pensions when their employer becomes insolvent. The European Court of Justice has ruled that the system of protection which was in place before 2004 did not comply with the directive, even taking account of the subsequent introduction of the financial assistance scheme, albeit before its 2006 extension. We are therefore already reviewing the financial assistance scheme with this finding in mind. It is now for the High Court to be asked to decide whether damages for breach of the directive should be paid, taking account of the steer apparently given by the European Court of Justice that damages may not be payable.

“The Government have already acted to provide substantial financial assistance to people who lost pension rights when their employers became insolvent. The financial assistance scheme, supported by £2.3 billion of public money, has been set up precisely for this purpose. Throughout, we have always sought to ensure that those who have suffered the most should receive financial assistance to mitigate their loss. At the same time, we have sought to strike a balance with the interests of taxpayers, who can not be asked to accept responsibility for effectively underwriting the total value of pension savings. In considering the right way forward, we are always prepared to consider practical proposals from all sides of the House.

“I can confirm that, so as not to add to their financial difficulty, we will meet the costs of the applicants in this case so far, together with any costs associated with our appeal.

“People who have lost their pension rights in these circumstances have suffered a great deal. My aim will be to return to the House with our conclusions and our proposals for how we should proceed before the conclusion of proceedings on the Pensions Bill”.

My Lords, that concludes the Statement.

My Lords, rather than being, as I usually am, grateful to the Minister for repeating a Statement, I am particularly pleased that today’s speakers have allowed us to break into their important debate on Iraq to take a gruesome Statement. Legal processes usually take a long time, but in this case they have been unusually quick. Immediately I heard the result of the judgment of the European Court of Justice, I put down a topical Question. However, by the time it would have been answered, it would have become sub judice, so it was turned down. We now have the opportunity to discuss the matter more fully.

The case arose from the fact that four people were among thousands who lost some of, or their entire, pension when their schemes collapsed. I am very pleased that the Statement set out the judgment so clearly. I congratulate the Government on that because they have not had much time to do it. The court’s first ruling, which is, I suspect, the one that most concerns the Government, was that findings of fact made by the ombudsman are binding. It appears to have agreed with her that the finding of maladministration was well founded and therefore binding. I do not know whether this is a new point of law, but if it is, I am sure that it would be appropriate to appeal. Whatever the result of that appeal, the Government have a moral duty to act in this matter. I am glad that the Government will pay the court fees of the applicants throughout this long drawn out process.

However, we should not forget the background to all this. When this Government came to power, they inherited a golden pensions legacy. The previous Government encouraged people to join their firm’s pensions schemes; at that time, it was thought to be the right thing to do. The stock market was healthy, many pension schemes had cash surpluses and the Inland Revenue insisted that firms took pension holidays. Nobody, especially the then Opposition, had any idea that many pension schemes would go belly-up. That was the scenario in 1997, when this Government came into office. What did the Chancellor do? In his first Budget, he started to abolish advance corporation tax, removing it entirely from pension schemes. That meant an extra £5 billion pounds a year to the Treasury, but it was a double whammy for pension schemes. Not only did they have less money to reinvest but they saw the FTSE drop and stay in the doldrums year after year. More and more schemes went into deficit. Still leaflets appeared encouraging employees to join their firms’ pension schemes. No wonder the Parliamentary Ombudsman found them guilty of maladministration and recommended compensation. As we all know, the Government turned down that report, saying that it would be too expensive to implement such a scheme.

It is ironic that these pension crises come in the middle of a Pensions Bill. In the previous one, now the 2004 Act, the Government had to do a U-turn after pressure from their Back-Benchers in another place to set up the financial assistance scheme to give a limited pension to a limited number of people who lost out when their employer became insolvent, but only from the date of the announcement until the introduction of the Pension Protection Fund. So far the FAS has resulted, as I understand it, in payment of only £3 million to 871 qualifying members. Perhaps the noble Lord will update me on that. It is also interesting to note that so far the scheme has cost £7 million.

It seems to me that, by setting up the FAS, the Government have sold the pass. Since they accepted the need for it then, what is the reason for not accepting the result of the High Court judgment now? They talk about cost, as they did then, but they talk about the total amount and not the amount they believe will need to be paid out every year. How much could that be? I am sure the Minister cannot answer that, but it is worth asking. I remind the noble Lord that this year’s uprating order results in a bill of an extra £3.5 billion, so money can be found if the need for it is there.

I do not ask for a blank cheque. It would be irresponsible for the Official Opposition party to argue for that, and it would be equally irresponsible for the Government to accept it, but some money can be found. It can be found from the taxpayer, it can be found partly from the unclaimed assets of insurance companies, and it can be found by rolling the financial assistance scheme and the Pension Protection Fund into a single entity. The scheme is not yet in deficit; is it not time that we stopped forcing people to buy an annuity at 75?

When was the last time the DWP encouraged people to join their firms’ pension schemes? Not only do we have a time bomb on our hands, we might well have a new one looming. The Government have accepted the bones of the report of the noble Lord, Lord Turner. That will result in setting up a new default pension scheme for people who do not join their firm’s own scheme, and preparations for it are in this year’s Pensions Bill. My noble friend Lady Noakes and I will have a lot more to say about that when the time comes.

I am more than disappointed at this situation. The dogmatic stance of the Government does nothing for the thousands of people affected, some of whom are suffering from terminal illness. They cannot afford to wait. They need the Government of the day to show leadership. Resolving this issue is critical in restoring confidence in the pensions system.

My Lords, in breaking into the Iraq debate, I wonder how many people heard, as I did, the noble Lord, Lord Hurd, say on the “Today” programme this morning that there are times when Parliament should be angry. If ever there were people in this country who are entitled to be really angry, it is the 120,000 robbed pensioners guided by the indefatigable Ros Altmann. If ever there was a time when both Houses of Parliament should be angry, it is here and now. The way the Government have treated these decent, hard-working people is shameful beyond belief. The Government have twisted and turned. They have ignored the ombudsman, the House of Commons Select Committee, with a Labour majority, and the European Court of Justice. Can the Minister not see that only now, when a High Court judge says the Secretary of State's position is one that,

“no reasonable Secretary of State could accept”,

when the Government have their back pressed right against the wall, when on this issue they are staring defeat in the face as they did once before—they are again staring defeat in the face in the Commons and the Lords—are the Government beginning to climb down? What a way to run the country.

What exactly do the Government mean by saying that they will take time to “consider” the implications of the judgment but—and obviously we believe that this is the start of a climbdown—will,

“return to the House with our conclusions and our proposals before the conclusion of proceedings on the Pensions Bill”?

Does that mean 10 minutes before Royal Assent or in good time so that in another place and here, when Peers and MPs have had the chance to consider the Government’s proposals seriously, if we are not happy we can table amendments to the Pensions Bill and vote on them to ensure justice? The timing of the Government’s proposals is crucial.

I have asked this question several times before, but it is equally relevant. Will the Minister update us on the latest figures for how much money has been paid out by the FAS and to how many people? The largest figures I saw were those last month; they suggested that about £2.35 million net had been paid to 871 people, which is less than £2,700 each—and, as it happens, less than the cost of running John Prescott’s office for a year. What an insult that is to these hard-working, robbed pensioners.

Does the noble Lord accept that, as we argued from these Benches during the passage of the Pensions Bill, it makes a lot more sense, as the noble Lord, Lord Skelmersdale, mentioned, to run the operation of the Pension Protection Fund and the financial assistance scheme together? Specifically, does he agree with these Benches that, as we proposed in our manifesto at the last election—indeed, I spoke with the members of the Pensions Action Group outside this House during the election campaign—at the very least these people are entitled to the same benefits as under the Pension Protection Fund? Furthermore, does he agree with me that the recent interest of the Conservative Opposition in this would be a great deal more convincing if it said what it was in favour of and what money it was prepared to commit to this, rather than, frankly, making evasive remarks about orphan assets? This is one issue on which David Cameron’s talk about all sorts of ideas while making no commitments really will not wash.

Those are our most serious concerns. I should leave the Government and the Minister in absolutely no doubt at our outrage at how these people have been treated and our utter commitment to get them justice through Parliament if proper proposals are not brought forward in very good time.

My Lords, the noble Lord, Lord Skelmersdale, says that the Government have a moral duty to act. Of course they have acted already with the financial assistance scheme— £2.3 billion worth of taxpayers’ money is to be applied to that effect.

I was sure that the Lord would not be able to resist returning to ACT and payable tax credits, but let me place clearly on the record what happened. The change in the treatment of tax credits was introduced at the same time as reductions in the rates of corporation tax. The main rate of corporation tax was reduced from 33 per cent to 31 per cent in 1997 and has subsequently been reduced to 30 per cent, the lowest rate in the history of the tax. The small companies’ rate has followed a similar pattern.

The Pensions Institute estimated that the so-called £5 billion a year figure was wildly overestimated and did not take account of the effects of the reductions in corporation tax—what that would mean for investment and what that would mean for more profitable companies. The real reasons why occupational and final salary schemes have run into difficulty is to do with factors such as increasing longevity, tumbling equity markets, which happened not only in the UK but also across the world, and a period when unrealistic returns from equity markets were taken into account. Now a more sober estimate is being made. There is also the impact of falling interest rates. Let us look at the impact of falling interest rates. Until mid-1997, gilts yielded 3.5 per cent to 4 per cent; by the end of 1998 that yield had fallen to 2 per cent, which means, other things being equal, that over two years the assets needed to cover liabilities could have increased by about 50 per cent. Lower interest rates had a real impact. That was nothing to do with a reduction in tax credits.

The noble Lords, Lord Skelmersdale and Lord Oakeshott, asked for an update on the financial assistance scheme. Before I give the numbers, perhaps I should reiterate that there have been discussions and endeavours to simplify the application process. We have been in discussion with the pension scheme trustees and held meetings with more than 75 per cent of the schemes with members potentially eligible for initial payments, to ensure that they understand what information is required and when. The current position is that we estimate that 9,000 such people have already reached the age of 65 and are therefore eligible for payments under the scheme, but that, based on operational data, only 1,900 are in schemes where the trustees have applied for payment. We can pay out only when the trustees have done their bit and made contact. We seek to encourage them to do so more effectively.

We have paid out more than £3 million to 950 people. That figure is made up of 804 initial payments and 146 annual payments, which are available only when the schemes have completed winding up. A further 80 members will be paid as soon as they confirm their personal details and an additional 203 members have been assessed and will be eligible for the FAS when they are 65.

My Lords, what is the net figure? On 6 February, James Purnell said that the figure was £3,028,000 gross, £2,350,000 net to 871 people. What is the net figure today?

My Lords, I do not have that information readily to hand, but I will write to the noble Lord to confirm the position.

The noble Lord, Lord Skelmersdale, said that he is not in favour of a blank cheque but that we need to do something and that taxpayers’ money should be part of the solution. On that point, I agree with the noble Lord, Lord Oakeshott. Perhaps the noble Lord, Lord Skelmersdale, would say how much taxpayers’ money the Conservative Party believes should now be applied to address the issue. It is all very well urging us to do things, but how much taxpayers’ money does the noble Lord propose spending?

My Lords, the Minister will have to wait just a few more months before I am in his position and will then be in a good position to answer his question.

My Lords, I look forward to that.

The noble Lord also mentioned unclaimed assets. I was a bit unclear whether he was referring to unclaimed pension assets, the issue that his leader raised in another place. There is no such thing as unclaimed pension assets in the way that there are unclaimed bank assets, because pension schemes are run mutually, so assets belong to all members not the individual. That is not the same as unclaimed bank assets.

Both noble Lords talked about rolling together the FAS and the Pension Protection Fund. That was considered. There are two components. It is suggested that the administration of the financial assistance scheme should be undertaken by the PPF. We have looked at that, but believe that the right way to administer the scheme is as it currently is. The Pension Service is well experienced in dealing with a series of pension payments, which is effectively what flows from the FAS. That is quite different from the operation of the Pension Protection Fund, which is a residual collective scheme.

As for merging the assets of the two with current funds in which winding-up has commenced, in many such cases either the winding-up has been completed or, where it has not, schemes are significantly down the track of entering into contractual arrangements to provide annuities. It would be expensive to unpick that. Even if that were not the case, to merge the fund with the Pension Protection Fund would have all sorts of implications for allocation between groups of people and a potential impact on the levy that other schemes are asked to pay.

The noble Lord, Lord Skelmersdale, said that we were adopting a dogmatic stance in our response. Demonstrably, that is not the case. The tenor of the Statement is clear: we need to give serious and detailed consideration to this judgment and we have undertaken to come back as soon as we can once that deliberation has ceased. The noble Lord, Lord Oakeshott, presses me on whether that will happen in time to amend any pension legislation. In my short time in the House, I have never seen any process that has stopped Liberal Democrat or Conservative Members tabling amendments to legislation. Clearly, the intent is to take considered input from across the House, provided that that input is practical. It is all very well to assert things, but the provision needs to work in practice. That is the challenge that the Government face.

I hope that I have dealt with each of the points that noble Lords have raised but, if not, I am happy to have another go.

My Lords, that issue has potential implications across government. We need to ensure that we fully understand the import of the judgment. That is under consideration. We will need to return to it in due course.

My Lords, I apologise for not being present for the reading of the Statement; I have read it and was able to hear the contributions from noble Lords opposite.

This probably goes back to 1994-95. I led for the opposition team on the Bill. We were well aware that the minimum funding requirement was only meant to achieve a 50:50 probability of full funding. That was exactly why I and other colleagues moved for something called the central discontinuance fund. I am sad to say that that was rejected by the Government of the day, but it was then reintroduced by us as the Pension Protection Fund precisely to lay off that risk. If we do not have a central discontinuance fund, does my noble friend agree that we and the department are left with a real issue of moral hazard? What seems to be suggested is that on the basis of some admittedly incomplete DWP/DSS pamphlets produced by both Governments, the Government have a moral obligation financially to underwrite and guarantee the whole of the £900 billion private pension industry.

Since 1994-95, no employer truly believed that, because they did their best to fund up to MFR standards. Clearly, no pension trustees believed that assertion, because they did their best to fund up to MFR standards. I find it hard to believe the notion that large swathes of the British population were misled on the basis of a couple of DWP/DSS leaflets into believing that there was a guarantee of the £900 billion when two of the three players—employers and trustees—acted otherwise. So the Government are right to argue that the right response was the Pension Protection Fund and to introduce the FAS to help those who have done the right thing but for whom it was not reasonable to have a retrospective levy from the industry.

Finally, given the FAS, am I not right in thinking that the problem has not been the Government's willingness to pay or fund, because the Chancellor of the Exchequer has provided what I hope are adequate resources but—this was my problem in handling the issue—incomplete, inadequate or, in the jargon, dirty data? The real problem in trying to establish rights was that the data held by the trustees and companies were insufficient, incomplete and inadequate to make possible payments of public money for which we had to have an audit trail. I hope that the problem is well on the way to being cleared up, that the data are being collected, and that we can expect a proper and effective FAS that deals with precisely the problem of moral hazard which the Government of the day rejected in 1994-95 and which the Government should not accept across the board.

My Lords, as ever, my noble friend makes some very telling points and is extremely knowledgeable about pensions and many other things. I certainly agree that the concept that the Government should stand behind, underwrite and guarantee every private pension provision in the country is absurd. No political party would propose that. Indeed, it would not be sensible to do so.

On the financial assistance scheme, the problem is not that funding has not been allocated to it but that there are practical problems in collecting the data, which is why there has been engagement with trustees to try to improve that process. I take this opportunity to revert to a point made by the noble Lord, Lord Oakeshott. He talked about 120,000 robbed pensioners, as if the Government had somehow done this. I remind him, however, that many of those people are not at pension age. Indeed, many of them are a long, long way from pension age.

My Lords, the Statement repeated by the Minister said that the Government were,

“always prepared to consider practical proposals from all sides of the House”.

However, the plain fact is that they have not been prepared to consider any proposals whatever to deal with these issues. They have simply been in denial ever since the ombudsman’s first response, and have obdurately said that they will simply not deal with the issue.

We have consistently advocated the use of financial assets for which there may be no other use in the system. We originally advocated the use of unclaimed bank accounts, which are very similar to orphaned pension assets because they belong to someone, and if someone can establish ownership, they remain the property of that individual. However, there is the question of how you use the benefit of those assets while they remain unclaimed. The Chancellor has, of course, got his hands on those and spent them many times over already, so that may no longer be a practical proposition, although if the Minister is prepared to say that it is, I am sure that we will all want to discuss it with him.

We have also proposed researching the way in which orphaned pension assets could be used. Both these proposals are practical, but neither has resulted in any serious engagement on the part of the Government, so are we to believe that they will engage with us now on these issues? We believe that these issues should be looked at in the whole scheme of how the undeniable losses to these unfortunate pensioners should be dealt with. Today’s Statement is another obdurate statement. Does the Minister not feel an acute sense of shame at having to stand at the Dispatch Box and, instead of saying that the Government’s immediate response is to deal with the issue or to engage in practical discussions about how it can be dealt with, stating that their only response is to appeal the argument? That is a shaming statement for any Minister to have to make.

My Lords, let me start by addressing the latter point. I made it clear in repeating the Statement, as did my right honourable friend in another place, that we need to understand fully and properly the import of the judgment that has come down. It is a few hours old, and we quite properly need time to ensure that we examine all the issues and draw conclusions. It is entirely unreasonable for the noble Baroness to press us to commit to detailed action literally within a few hours of that judgment being delivered.

Are we prepared to engage? Yes, of course we are. That was made clear in the Statement. The noble Baroness uses the term “orphaned pension assets”. I am not quite sure what she means by that, but if she would like to send us something on them, we would be very happy to look at it. It is not true to say that the Chancellor has snaffled other unclaimed assets. The initial record searches by banks and building societies suggest that several hundred million pounds may lie unclaimed. There may be an annual flow in the region of tens of millions of pounds from that source, but this is not a reliable income stream on which to make promises of pension compensation. It should also be remembered that, before any use of that money can be made, the banks have quite properly said that they would put a publicity campaign into effect. Indeed, they have committed themselves to doing so. It remains to be seen whether more claims are made as a result of that campaign. Both factors could substantially reduce the amounts that are available. The Commission on Unclaimed Assets is an independent body that was set up by the Scarman Trust to look at how the money should be used, but I repeat that we will duly consider any practical issues that the noble Baroness and her party wish to put forward.

My Lords, I find it somewhat ironic that Members opposite are so keen to criticise the Government. We should be clear that, before this Government acted, there was no protection for occupational pensions when companies were declared insolvent. Somehow that seems to have been brushed aside as being of no consequence whatever. The noble Lord, Lord Skelmersdale, could not resist repeating the hoary old myth of the advanced corporation tax and that convenient figure of £5 billion. The doubtful veracity of that was well and truly nailed by the Minister. I thank the noble Baroness, Lady Hollis, for putting the size of the problem into perspective—again, something that the Opposition seem unable to grasp.

Some of the people who caused the insolvencies of these companies were frequently protected from the financial consequences of their actions, while the people who dedicated their working lives to the company and who created the wealth, believing that part of their reward was a decent pension, have become the innocent victims. I hope the Minister agrees that the creation of the financial assistance scheme, with a not insignificant sum of £2.3 billion of public money to buttress it, coupled with the pension protection fund, is an important step forward. No one pretends that these are necessarily perfect solutions; these are very complex issues.

I welcome the Statement on a complex set of rulings given by the High Court on a very complex subject. The Government are absolutely right to pause and evaluate the situation before returning to the House. I share the hope that they will take the decisions of the High Court into account and come back to us with their conclusions and proposals on how we should proceed. I do not think that we on this side of the House should be prepared to take any lessons from Members on the other side of the House on managing pensions, given the previous actions of Tory Governments.

My Lords, I find it impossible to disagree with the thrust of my noble friend’s comments. He is absolutely right; this Government have already acted by committing £2.3 billion of taxpayers’ money, which is no small sum, over an extended period. He is absolutely right that no previous Government have addressed the issue in this way. I repeat again my question to the noble Lord, Lord Skelmersdale, and I look forward to his detailed reply so that I can understand exactly how much the Conservative Party will use in extra taxpayer resources to address this issue.

My Lords, will the Minister confirm for the rest of the House that the period after the Front Bench responses is normally used to answer and respond to questions, not to statements?

My Lords, my short time in the House has taught me that questions can be posed in a variety of ways. Some are short, others are slightly longer, and Members of the House are very experienced at making their points by way of questions or otherwise. That seems to be a very good practice.

My Lords, I refer briefly to the use of language in the Statement. It says in two places,

“when their employers became insolvent”.

I think the Minister will agree that that is not necessarily a trigger for the loss of pension rights, because if the pension scheme, particularly the defined benefit pension scheme, has been set up correctly, the assets of the scheme, which belong to the members, are under the legal and incorporated control of the trustees. There are many companies that have ceased to trade for reasons good and bad. In a global economy that moves at the pace that this economy moves, some of the reasons are quite understandable. For quite a number of years, I was a director of a company in which a substantial percentage of the company’s shares were held by a pension scheme that was entrusted with the assets of the members, and the company concerned had not traded for years. None of those pensioners lost any of their accumulated rights for the past service that they had with the company. I make that point only because this is a very complicated situation. The one thing that seems to be completely wrong is to turn it into a rhetorical, political debate.

Yes, my Lords, it is complicated. I had hoped that we could have consensus on the matter, but I have to respond to the points that are put to me. The noble Viscount says that this is not just a matter of employers becoming insolvent, which is right. The financial assistance scheme, as I understand it, kicks in in circumstances where the scheme itself is being wound up or there is commencement of winding up and the employer becomes insolvent. If the scheme is fully funded, there is no reason why it should not continue in existence. If I am wrong on any of that, I will certainly write to the noble Viscount.