trusting in the pensions promise - home - bbc...

HC 984

Trusting in the pensions promise

Helpline: 0845 015 4033Fax: 020 7217 4000

Email: [email protected]

www.ombudsman.org.uk

Millbank TowerMillbankLondon SW1P 4QP

Published by TSO (The Stationery Office) and available from:

Onlinewww.tso.co.uk/bookshop

Mail, Telephone, Fax & E-mailTSOPO Box 29 Norwich NR3 1GN

Telephone orders/General enquiries 0870 600 5522

Fax orders 0870 600 5533

Order through the Parliamentary HotlineLo-call 0845 7 023474

Email [email protected]

Textphone 0870 240 3701

TSO Shops

London123 Kingsway London WC2B 6PQTelephone 020 7242 6393 Fax 020 7242 6394

Birmingham68-69 Bull StreetBirmingham B4 6ADTelephone 0121 236 9696 Fax 0121 236 9699

Manchester9-21 Princess StreetManchester M60 8ASTelephone 0161 834 7201Fax 0161 833 0634

Belfast16 Arthur StreetBelfast BT1 4GDTelephone 028 9023 8451Fax 028 9023 5401

Cardiff18-19 High StreetCardiff CF10 1PTTelephone 029 2039 5548Fax 029 2038 4347

Edinburgh71 Lothian RoadEdinburgh EH3 9AZTelephone 0870 606 5566 Fax 0870 606 5588

The Parliamentary Bookshop12 Bridge StreetParliament SquareLondon SW1A 2JX

Telephone orders/General enquiries020 7219 3890

Fax orders 020 7219 3866

TSO Accredited Agents(See Yellow Pages)

and through good booksellers

Trusting in the pensions promise

Trusting in thepensions promise:government bodiesand the security offinal salaryoccupational pensions

6th ReportSession 2005-2006Presented to Parliament Pursuant to Section 10(3) of the ParliamentaryCommissioner Act 1967

Ordered byThe House of Commonsto be printed on14 March 2006

HC 984London: The Stationery Office£25.00

Chapter 1 Introduction and background: 01Introduction 01My role and jurisdiction 01Pension provision in the UK 02Government and occupational pensions 03Background to the complaints 04The complaints received 05Assessing the complaints 06My decision to investigate 07Other observations 08

Chapter 2 The complaints and the Government’s response: 10Introduction 10The representative complainants 10

- the maladministration alleged 14- the injustice claimed 15- the remedy sought 17

The Government’s initial response to the complaints 17Launch of investigation 22My approach to maladministration 22

Chapter 3 Further enquiries: 24Introduction 24Key results of survey of complainants 25Submission by Dr Altmann 26The Government’s further comments 28Further submissions by Dr Altmann 34Interviews with independent trustees 36Observations by the FSA 39Actuarial advice 39Comments of actuarial profession 43

Chapter 4 The documentary evidence: 47Events before 1995 47Events during 1995 50Events during 1996 57Events during 1997 58Events during 1998 60Events during 1999 69Events during 2000 82Events during 2001 93Events during 2002 106Events during 2003 124

Contents

Events during 2004 132Events during 2005 and after 142

Chapter 5 Findings: 147Introduction 147The role of public bodies – conclusions from the evidence 147My approach to determining the complaints 149Did maladministration occur? 150Have individuals suffered injustice? 164Has this injustice been remedied? 165What caused this injustice? 166Informed choice and lost opportunity to take remedial action 166Outrage and distress 167Financial loss – the context 167The causes of financial loss 168

Chapter 6 Recommendations 174Introduction 174Remedies sought 174Who is covered by my recommendations? 174My recommendations 175Other observations 178

Chapter 7 The Government’s response to my findings 180Introduction 180Response of Her Majesty’s Revenue and Customs 180DWP’s initial response 180My assessment of the response from DWP 182Further response from Government 192My response to the Government’s position 193

Chapter 8 Conclusion 196

Annex A The context 200

Annex B Actuarial advice to the investigation 220

Annex C Further DWP submissions made during the investigation and my assessment of those submissions 224

Annex D The Government’s response to my report 235

Annex E The response to my report from the advocate for complainants 247

ABI Association of British Insurers

DSS Department of Social Security

DWP Department for Work and Pensions

F&IoA Faculty and Institute of Actuaries

FAS Financial Assistance Scheme

FSA Financial Services Authority

GAD Government Actuary’s Department

GMP Guaranteed Minimum Pension

MFR Minimum Funding Requirement

MVA Market value adjustment

NAPF National Association of Pension Funds

NICO National Insurance Contributions Office

OPRA Occupational Pensions Regulatory Authority

PPF Pension Protection Fund

SERPS State Earnings Related Pension Scheme

Abbreviations regularly used in this report

Introduction1.1. This report sets out the results of myinvestigation into complaints about the securityof final salary occupational pension schemes andalleged delays in the winding-up of certain suchschemes.

1.2. My report has eight chapters. This chapterexplains my role and jurisdiction and thebackground to my investigation. The secondchapter sets out in detail the nature of thecomplaints that I have investigated and theGovernment’s initial response to thosecomplaints, before explaining the approach Ihave adopted to determine whether thecomplaints are justified.

1.3. The third chapter sets out the results of thefurther enquiries I made as part of myinvestigation to help me to better understandthe context of the complaints. The fourthchapter sets out the evidence that myinvestigation has disclosed through considerationof departmental files, official publications andother documentary sources. The fifth chaptercontains my findings and the sixth chaptercontains the recommendations arising fromthose findings. The seventh chapter sets out myassessment of the Government’s response to myreport – and the eighth is my conclusion.

1.4. There are also five annexes to this report –the first of which sets out elements of therelevant statutory, regulatory and administrativeframeworks within which final salaryoccupational pension provision operates. Thesecond annex sets out the technical scope of theactuarial advice I have received to help me toinvestigate whether the complaints made to medisclose maladministration causing injustice. Thethird annex deals with certain submissions madeby the Government during the investigation tosupport its case.

1.5. The fourth annex sets out the Government’sformal response to my report and the fifth setsout the response made to it on behalf ofcomplainants.

My role and jurisdiction1.6. My role is determined by the ParliamentaryCommissioner Act 1967 (the 1967 Act), assubsequently amended. As provided for in the1967 Act, I investigate complaints referred to meby a Member of the House of Commons that anindividual has suffered an unremedied injustice inconsequence of maladministration by a body inmy jurisdiction.

1.7. The actions or inaction of bodies in myjurisdiction that I may investigate do not includeaction taken in relation to their judicial orlegislative functions but are limited to theexercise of administrative functions by such abody which are not of a prescribed nature.

1.8. Schedule 2 and Schedule 4 to the 1967 Actlist the bodies within my jurisdiction. Schedule 3prescribes the types of administrative actionsthat I may not investigate.

1.9. Section 5(2) of the 1967 Act provides that Imay not conduct an investigation of a complaintwhere the person aggrieved has or had a remedybefore either a court of law or a statutorytribunal, unless I am satisfied that, in thecircumstances of the case, it would not bereasonable to expect that person to exercisesuch a remedy. Where such a remedy has alreadybeen exercised, I no longer have discretion toinvestigate such a complaint.

1.10. Section 7(2) of the 1967 Act requires thatany investigation I undertake must be conductedin private. The same section also provides that,except for this requirement, the procedure forconducting an investigation shall be such as Iconsider appropriate in the circumstances of thecase. It also provides that I may obtain

1. Introduction and background | 1

1. Introduction and background

information from any source – whether from abody in my jurisdiction or not – that I considerappropriate, with the exception of Cabinetpapers or material from bodies not in myjurisdiction which is covered by legal professionalprivilege.

1.11. Section 12(3) of the 1967 Act also providesthat I may not question the merits ofdiscretionary decisions taken by bodies in myjurisdiction where those decisions were takenwithout maladministration.

Pension provision in the UK1.12. This investigation relates to certain aspectsof pension provision. Annex A to this report setsout the context in which the subject matter ofthis investigation is placed and explains in moredetail many of the more complex or technicalaspects of this report.

1.13. There are five principal categories of pensionprovision in the UK:

(i) state retirement pensions – which have botha basic and additional component;

(ii) retirement annuity contracts – which haveceased to be entered into since July 1988;

(iii) personal pensions (from July 1988 to date)and stakeholder pensions (from April 2001to date);

(iv) public sector occupational pension schemes,including those for current members (andveterans) of the armed forces; and

(v) private sector occupational pensions.

1.14. This report is concerned with pensionprovision obtained through membership ofcertain private sector final salary occupationalpension schemes.

1.15. This is because the complaints that I havereceived relate to certain alleged actions (orinaction) by those responsible for the legislative

framework governing private sector occupationalschemes – and because the injustice claimed bythose making these complaints stems from thefailure by certain final salary schemes to pay thefull pension rights and other benefits promisedto their members.

1.16. The subject matter of this report primarilyrelates to the statutory arrangements for thefunding of such schemes, to the process ofwinding-up those schemes where that happens,and to the actions of public bodies in relationto both.

1.17. The key aspects of the statutoryarrangements for scheme funding that arerelevant to this report relate, first, to thepurpose, design and operation of the MinimumFunding Requirement (MFR), which prescribedthe level of contributions that a scheme had tohold. Secondly, it is concerned with the way inwhich the law required that the assets ofschemes should be realised and the liabilitiesof schemes should be discharged when theywind up.

1.18. However, this report also touches on theinteraction – through the contracting-outprocess – between pension provision throughfinal salary occupational pension schemes andstate retirement pension provision.

1.19. This is because the injustice claimed by thosewho have complained to me does not relate onlyto the loss of the pension and other benefitsderived from the contributions made by themand their employer to their scheme. It alsorelates to the loss of part or all of the‘Guaranteed Minimum Pension’ (GMP) orequivalent, which was to be provided in respectof national insurance contributions made by boththe employer and employee and paid to thescheme if the relevant employment wascontracted out of the State additional pensionscheme.

2 | Trusting in the pensions promise

Government and occupational pensions1.20. Occupational pension provision is currentlya topic of considerable public interest. It is alsoan area in which complaints are often made.

1.21. However, as outlined above, I may onlyinvestigate certain complaints within theframework provided by the 1967 Act. I thus turnto consider which public bodies have a role toplay in the subject matter of this report.

DWP/DSS1.22. Responsibility in Government foroccupational pensions policy and for theframework of law and regulation that relates tofinal salary schemes has, at all times relevant tothe subject matter of this investigation, lain withthe Department for Work and Pensions (DWP) orits predecessor, the Department of SocialSecurity (DSS). Both published generalinformation leaflets and other material relatedto occupational pensions.

1.23. DWP has developed internal guidance, whichis supplemented by a departmental PublicInformation Strategy and by policy frameworksto support the strategy within each of DWP’sbusiness units and executive agencies.

1.24. DWP and its predecessor have, since January1997, published a guide, entitled FinancialRedress for Maladministration, which sets outthe approach it takes when considering remediesfor justified complaints. This guide describes thespecial payments scheme operated by DWP andprovides advice on the consideration of financialredress in respect of maladministration. It alsoprovides examples of what, in DWP’s view,constitutes maladministration and sets a contextin which to consider official error, thecircumstances when financial redress shouldbe considered, and the redress that DWPconsiders is appropriate for each type of case.

A revision of this guide in April 2003 containednew definitions of information and advice.

1.25. DWP has also defined the categories ofinformation and advice that it might be asked toprovide. Its internal guidance, agreed in March2002, specifies that officials:

...should ensure that customers are given:

l full and accurate information (that is, generalfactual data which is not customer specific);

l general advice (for example, the promotion ofGovernment policy – work is the best form ofwelfare; people should save for theirretirement) to enable them to make their owndecisions;

l specific advice where it is appropriate to doso (for example, information tailored to acustomer’s individual circumstances andrequirements, which may identify a numberof options but does not indicate the official’sview of the best course of action). The specificadvice provided should be full and accurate toenable the customer to make his or her owndecisions; and

l recommendations where specific business areasof the Department have specified that it isappropriate to do so (for example, a statementto a customer suggesting his or her best courseof action). Under such specific circumstances,the member of staff may provide his or herview (as an official of the Department) of thebest option for the customer. Care must betaken when providing specific advice or (whereappropriate) a recommendation, to ensure thatthe customer’s personal circumstances are fullytaken into account.

1.26. Since April 2000, the Social SecurityAdvisory Committee, an advisory non-departmental public body appointed by theSecretary of State, has scrutinised a selection of


DWP’s information leaflets aimed at the public,with a view to ensuring their accuracy andcompleteness. The Committee’s remit, however,does not extend to information provided byDWP about occupational or personal pensions.

Her Majesty’s Revenue and Customs1.27. The Inland Revenue was – and its successor,Her Majesty’s Revenue and Customs, is –responsible for the authorisation of pensionschemes and for ensuring that they satisfy theconditions to make them eligible for tax reliefand to be able to contract out of the stateadditional pension scheme.

1.28. The Savings, Pensions and Share Schemessection of what is now Her Majesty’s Revenueand Customs considers elections from employerswho wish to contract out of the additional statepension and it issues relevant contracting-outand tax certificates if an election is approved.When a scheme ceases to contract out andbegins wind-up, it will cancel the appropriatecertificates on behalf of Her Majesty’s Revenueand Customs and notify the National InsuranceContributions Office (NICO), which triggerscessation action.

1.29. NICO’s National Insurance Services toPensions Industry group (as it is now known) wasformed in 1978 and its role is to ensure that therights of people contracted-out of the additionalstate pension through an occupational orpersonal pension scheme are accuratelyrecorded, maintained and secured. In order todo this, it liaises with other public bodies oncontracted-out related issues, it approves ascheme’s arrangements, it manages individuals’national insurance records, and it deals withNotices of Termination of contracted-outemployment – and other correspondence andtelephone enquiries on related matters.

The Financial Services Authority (FSA)1.30. The FSA and its predecessor have been since1988, among other matters, responsible for theregulation of the sale and marketing of personalpensions. The FSA is not in my jurisdiction forthe purposes of this investigation (see paragraph1.50 below).

The Occupational Pensions Regulatory Authority(OPRA)1.31. From April 1997 for eight years, OPRA wasresponsible for the regulation of occupationalpensions. It also had responsibility for collectingthe levies from schemes to fund its activities andto finance a compensation scheme for situationswhere fraud or other unlawful activity hadoccurred. It was also responsible for the PensionSchemes Registry, which kept records related tooccupational schemes. OPRA was replaced inApril 2005 by a new Pensions Regulator, which,while being an entirely separate body, hasresidual responsibility for OPRA’s affairs. ThePensions Regulator is also responsible for thePension Schemes Registry.

The Government Actuary 1.32. The Government Actuary and hisDepartment (GAD) provide actuarial advice to arange of clients. These include managers ofpension schemes throughout the public sector;trustees of funded pension schemes in both thepublic and private sectors; various Governmentdepartments and sponsoring employers; and theTreasury in relation to general pensions policy insituations where Government is either theemployer or has a financial interest. GAD is notin my jurisdiction for the purposes of thisinvestigation (see paragraph 1.51 below).

Background to the complaints1.33. According to statistics produced by OPRA’sPension Schemes Registry, in March 2004 therewere 94,535 ‘live’ occupational schemes – ofwhich 9,834 were private sector final salary


schemes. The latter figure reflected a sustaineddownward trend in the number of such schemes.

1.34. Earlier, in December 2002, the Governmenthad recognised, in the Green Paper setting out itsproposals for pension reform that were tobecome the Pensions Act 2004, that there weregrowing political, social and economic concernsabout the effectiveness and sustainability of thesystem of pension provision in the UK.

1.35. In relation to the private sector, theseconcerns included the effects of increasedlongevity and other demographic trends, signs ofa decline in work-based pension provision, thecomplexity of pension products, the cost offinancial advice, the legacy of personal pensionsmis-selling, and a trend towards earlierretirement.

1.36. The Green Paper also referred to the factthat ‘employee confidence has also suffered dueto the action of a few companies, who have lettheir employees down when they have becomeinsolvent with an under-funded pension scheme’.

1.37. The Government’s proposals to remedy thisposition included the replacement of OPRA by anew regulatory body and the establishment of aPension Protection Fund (PPF) to protectmembers of private sector final salary schemes.

1.38. On 6 April 2005, the PPF becameoperational as a result of the commencement ofthe relevant provisions of the Pensions Act 2004.The PPF will pay compensation to members ofeligible occupational pension schemes, whenthere is a qualifying insolvency event in relationto the employer which sponsors a scheme andwhere there are insufficient assets available tothe scheme to provide to its members the levelof compensation set out in the legislationgoverning the PPF.

1.39. The pension schemes whose members maybe eligible for compensation from the PPF arelimited to those which began winding-up on orafter 6 April 2005 and the PPF does not extendto those schemes where a sponsoring employerremains solvent.

1.40. The Government also established a FinancialAssistance Scheme (FAS) to provide ‘assistance’to those whose schemes would not be coveredby the PPF because their scheme had begunwinding-up prior to 6 April 2005. Like the PPF,the FAS will not cover those who were membersof a final salary occupational pension schemewhere the sponsoring employer is not insolvent.

1.41. This fact – and early indications that‘assistance’ from the FAS was to be limited in anumber of significant ways and would not coverthe whole of the losses that had been or wouldbe incurred by scheme members – led to acampaign to persuade the Government to acceptliability for (and to pay compensation to remedy)the whole of the losses incurred due to schemefailure, which it was alleged was caused bymaladministration on the part of public bodies.

1.42. In addition, legal action in relation to thealleged incompatibility of the domestic legalregime for the protection of pension rights withEuropean law was initiated by trades unionsrepresenting some of the affected workers. Iunderstand that this legal action is continuing.

1.43. I now turn to summarise the complaints Ireceived about these matters.

The complaints received1.44. I have received more than 200 complaintsreferred to me by Members of Parliament of allpolitical parties and from all parts of the UK –and I have also received more than 500 furtherdirect representations about the same matters.


1.45. The complaints which formed the basis ofthis investigation had four elements:

(i) first, it was alleged that the legislativeframework during the relevant period (thatis, from commencement of the Pensions Act1995 to commencement of the Pensions Act2004) had afforded inadequate protectionof the pension rights of members of finalsalary occupational pension schemes;

(ii) secondly, it was alleged that, on a number ofoccasions, Ministers and officials hadignored relevant evidence when takingpolicy and other decisions related to theprotection of pension rights accrued in suchschemes;

(iii) thirdly, it was alleged that the informationand advice provided by a number ofGovernment departments and other publicbodies about the degree of protection thatthe law provided to accrued pension rightshad been inaccurate to the extent that ithad amounted to the misdirection of themembers and trustees of such schemes; and

(iv) fourthly, it was alleged that public bodieswere responsible for unreasonable delays inthe process of winding-up schemes.

Assessing the complaints1.46. There are four aspects of my jurisdictionthat I have outlined above that were relevant tomy consideration of the complaints I receivedfrom members and trustees of occupationalpension schemes and to my decision to conductan investigation into some of those complaints.

1.47. First, it is not for me to question theadequacy of legislation enacted by Parliament orof European law. While, in any investigation, I willhave regard to the relevant legislative frameworkand – at its end – may draw Parliament’sattention to situations where I consider that therelevant legislation has had a direct bearing on

the injustice claimed by complainants, I do nothave the power to investigate complaints thatlegislation itself is inadequate, unfair or hascaused injustice to an individual.

1.48. Thus I was not able to investigate the firstelement of the complaints I had received –namely, that the law related to occupationalpension schemes was, in the relevant period,inadequate to protect the pension rights ofmembers of schemes that wound-up withinsufficient assets to cover the scheme’sliabilities.

1.49. Secondly, I am only able to investigate theadministrative actions of bodies in myjurisdiction. The complaints I had received wereprimarily directed at DWP and its predecessor,DSS, at Her Majesty’s Treasury (the Treasury), atOPRA, and at NICO. Those are all bodies withinmy jurisdiction and I was able to investigate theirrelevant actions.

1.50. However, the complaints also related to theactions of the FSA, which is a body that is notin my jurisdiction, except to the extent that itacts or acted on behalf of a body in myjurisdiction. Having determined that the actionsof the FSA about which complaints were maderelated to the FSA’s own functions, I was thus notable to consider complaints about those actions.In the rest of this report, therefore, theinformation and advice provided to pensionscheme members by the FSA under section 206of the Financial Services Act 1986 is referred toonly to help place my investigation in context.The FSA has developed its own standard for theproduction of promotional material issued byfirms that it regulates. This standard, to whichthe FSA subscribes for its own consumerpublications, requires that such material shouldbe ‘clear, fair and not misleading’.

1.51. Similarly, this report sometimes makesreference to GAD. GAD is only in my jurisdiction


in relation to complaints about its actions inproviding advice to the prudential regulator oflife insurance companies in the period prior to 26April 2001 – and so reference to the actions oradvice of GAD in relation to the subject matterof this report is also only made to place theevents recounted in context.

1.52. In addition, the actions, advice orpublications of the professional bodies of theactuarial profession, which, in England and Wales,is the Institute of Actuaries and, in Scotland, theFaculty of Actuaries – neither of which is in myjurisdiction – are referred to only insofar as theyhelp to place the actions of the bodies underinvestigation in context.

1.53. Moreover, those who administer or advisepension schemes are not in my jurisdiction – nordo I have the power to investigate complaintsabout pension scheme trustees.

1.54. Thirdly, as mentioned above, trades unionsrepresenting some of the individuals who havelost part or all of their pension rights inconsequence of the winding-up of their schemehave initiated legal action in the European courts.That action relates to obligations placed onmember states of the European Union by Article8 of the EC Insolvency Directive to protect therights of members of occupational pensionschemes.

1.55. I considered whether the existence of thislitigation constituted the exercise of analternative remedy which would preclude mefrom conducting an investigation. I establishedthat this action related to a complaint that UKdomestic law is or was incompatible withEuropean law, which, as I have explained above, isnot one that I could investigate. Therefore Iconcluded that this litigation, on differentmatters and with a different focus, did notpreclude me from undertaking an investigation.Furthermore, at no time during my investigation

did the Government suggest in their responses tomy enquiries that the existence of this litigationhad introduced any difficulties in relation to myjurisdiction.

1.56. Moreover, insofar as complainants mighthave another remedy in the courts for the otherspecific complaints they made to me, I did notconsider it reasonable to expect individuals toresort to expensive and uncertain litigationbefore the courts and, in any case, I was advisedthat no such remedy for most of the specificadministrative complaints existed.

1.57. Finally, as also explained above, I may notquestion the merits of discretionary decisionstaken without maladministration. Therefore,insofar as the complaints related to policydecisions made by Government Ministers orofficials, my investigation was limited toestablishing whether such decisions were takenwith maladministration.

My decision to investigate1.58. I had been shown indications thatmaladministration might have caused injustice tothose who had complained to me – and to thosein a similar position as those complainants. I alsobelieved that my ability to access evidence whichwas not available to complainants meant that aninvestigation by me would achieve a worthwhileoutcome, whatever its result. I therefore decidedto conduct an investigation.

1.59. My decision was announced on 16November 2004 through a letter to all who werethen Members of Parliament, which was also sentto all those people who had by then complainedto me.

1.60. My investigation was limited to thosematters and bodies over which I have jurisdictionand was undertaken using four individual schememembers who made complaints representativeof all those I had received. In addition, while I


understood why individuals might direct theircomplaints at the Treasury, I investigated onlythose departments or other bodies which hadpolicy responsibilities relevant to the subjectmatter of the complaints.

Other observations1.61. Before turning to consider in detail theposition of those who have complained to me,I wish to make three preliminary observations.

1.62. First, my jurisdiction covers the whole of theUnited Kingdom. One of the four representativecomplainants in this investigation lives inNorthern Ireland, with the others living in thenorth-east of England, the East Midlands, and thesouth-west of England. The other complaints Ihave received on these matters have come fromevery part of the UK – and with some of thosemaking complaints living overseas.

1.63. The statutory framework relevant to thematters I have investigated differed in detail –but largely not in substantive terms so far as thekey focus of this report is concerned – betweenthe different parts of the UK. For example,Northern Ireland had (and has) its own system ofpension law – which, while its provisions weredirectly equivalent to those which existed inBritain, was established in the main by separateprimary and secondary legislation. Similarly,in Scotland there were and are some relevantdifferences with the law as it stood in the rest ofthe UK – primarily in the fields of trust law,divorce and insolvency – as well as the existenceof a distinct system of courts and otherinstitutions.

1.64. Therefore, I have not concentrated in thisreport on spelling out in each case from whichstatute or from which piece of subordinatelegislation any specific provision has beenderived. I have also sought to use the broadestterms to describe legislative provisions, concepts,procedures and specific actions – which I

acknowledge may sometimes differ in detail inthe different parts of the UK.

1.65. Secondly, reference is sometimes madein this report to the revised legal frameworkcreated by the Pensions Act 2004, whichreceived Royal Assent on 18 November 2004 –especially in relation to the pension protectionand financial assistance measures it established.However, the primary focus of my investigationhas been on the period between the firstparliamentary discussion of the Bill whichbecame the Pensions Act 1995 (that is, whencitizens may first have become aware of theintent behind and content of those proposals)and the commencement of the 2004 Act’sprincipal and relevant provisions, which replacedthe earlier regime.

1.66. Thus, the key period that is relevant to whatfollows is the approximately ten year periodfrom 24 January 1995 to 6 April 2005.

1.67. Finally, the subject matter of this report isgenerally recognised as being complex andsometimes highly technical. To cover everyaspect of the landscape of occupational pensionprovision and regulation over more than adecade – and all the issues related to thatprovision – would be a considerable challengeand one that would have made this report muchlonger, had I undertaken to do so.

1.68. I have also been deeply aware that thepeople most affected by the events covered bymy investigation continue to encounter anuncertain financial future and that they haveexpressed a wish that I should do everythingpossible to present my report as soon aspossible, while recognising that I must considerthoroughly the relevant issues. They also havesought clarity and an explanation of what hashappened to them.


1.69. This report therefore is not an exhaustivestudy of all of the issues currently relevant tofinal salary pension schemes, nor does it set outevery detail that I or my staff have consideredand investigated. It is focused on the specificcomplaints that have been made to me inrelation to the particular injustices claimed.

1.70. That said, I am satisfied that nothing ofsignificance has been omitted from my report.I have also attempted to keep the languageused as simple as possible and the degree oftechnical detail to the minimum necessary toensure that my assessment is authoritative –yet still, I hope, clear.


Introduction2.1. This chapter sets out in detail the complaintsI have investigated – and the position of thosewho have complained to me – and also theGovernment’s initial response to thosecomplaints.

2.2. It also explains the approach I have adoptedto help me to decide whether maladministrationhas caused injustice to those who havecomplained to me – and to those in a similarposition to those complainants.

The representative complainants 2.3. In line with my usual practice where I receivemany complaints from people in similarsituations who all claim to have suffered injusticedue to the same administrative actions, I decidedto conduct one investigation. On this occasion,I have used four complainants as representativeof all those who had complained to me. I nowturn to the position of those four complainants.

The representative complainants – Mr J2.4. The first representative complainant is Mr J.He lives in Northern Ireland and is at the timeof writing 62, having been born in June 1943.He worked for an agricultural company as amechanical engineer from August 1974 toNovember 2002, being a member of its pensionscheme and making additional voluntarycontributions for the same period. He wasoriginally compelled to join the scheme as acondition of employment and he has not workedsince being made redundant.

2.5. He is married with three sons, the middleof whom also worked for the same firm. Thecompany was placed in voluntary liquidation byits two principal shareholders, one of which wasa major multinational company and the otherthe Government of another EU member state.Over 70% of those made redundant had givenmore than 25 years service to the company atthe time of liquidation.

2.6. The scheme is still being wound up but thetrustees estimate that Mr J might receive only14.9% of his expected benefits when the schemeis finally wound up, as there is a shortfall of£21 million on the statutory basis. He has alsobeen told that even this proportion is not‘guaranteed’. In August 2000, Mr J had applied forearly retirement (the scheme’s usual retirementage was 62) but his company did not respond tohis application. This did not unduly worry him ashe believed his pension to be both guaranteedand safe.

2.7. In April 2004, Mr J suffered a serious heartattack which required surgery and he is still beingtreated for heart failure, for which he continuesto take medication on a daily basis. He told methat ‘it is certain that the stress and worryregarding all of these issues have caused thisillness’.

2.8. Mr J showed me some of the material thathad been issued to members by his scheme. Theprincipal explanatory booklet for the schemeissued in 1998 had said that ‘the plan must haveadequate resources which satisfy the minimumfunding requirement of the [1995] Act, which isdesigned to make sure that the benefits areprotected whatever happens to the company’ andalso that ‘the plan is designed to provide you witha guaranteed pension related to your earnings –and therefore to your standard of living – close toretirement’. It had also used the term ‘guaranteed’on other occasions.

2.9. He told me:

The initial relief which information about the FASgave has now given way to despondency. I do notknow if I will be covered by it... No-one from anyof the government bodies ever warned me thatthere could be potential problems with mypension. All of the information coming over the


2. The complaints and the Government’s response

years from public bodies had convinced me thatmy pension was safe and that I could rely on it inretirement.

2.10. He continued:

It is the government’s responsibility to restore mypension in full to that promised and I also feelthat I am entitled to some compensation for allthe stress and suffering which this pensionproblem has caused.

The representative complainants – Mr G2.11. The second representative complainant is MrG. He is currently 54, having been born inSeptember 1951. He is married with children andlives on the border between Warwickshire andLeicestershire.

2.12. He worked from August 1976 to June 2003for the same distribution company, althoughover this time the company was subject to anumber of mergers and takeovers. He began asan assistant depot manager, subsequentlybecame a depot manager and then a contractsmanager. From 1997 to 2003, he was the firm’srates and contracts manager.

2.13. His employer decided to wind up thepension scheme in February 2002. It was 101%funded on the MFR basis at that time. He wassubsequently advised that, as the scheme wasnot able to meet its liabilities in full, he would belikely to receive a pension that was only about24% of his accrued rights and that this wouldreflect only approximately 75% of hisGuaranteed Minimum Pension.

2.14. Mr G, being disillusioned with the actions ofhis employer and the effects that the wind-up ofhis scheme was likely to have on his pensionentitlements, decided to look for newemployment and he has, since June 2003, been awarehouse and distribution manager for anotherfirm, based much further from his home.

2.15. Mr G told me that he had believed that hispension was guaranteed and provided copies ofmaterial, including of debates and press cuttingsrelated to the passage of the 1995 Pensions Act,which he said had helped to give him this belief.

2.16. He said:

No information warning members of the level ofrisk has ever been issued by DWP or other publicbodies. Nor did the Government see fit to insistthat scheme trustees were required to informdeferred members of their perilous situation.If I had had any inkling that my “Certificate ofEntitlement to Benefits” was not worth the paperit was written on or that my “benefit” could bereduced in such a substantial fashion, then Iwould have taken a cash transfer when thatcertificate was issued in September 2000.

2.17. He continued:

No financial product would be sold bearing thislevel of risk without the level of risk beingemblazoned on it. Why not here? I have workedfor 27 years on the basis that I was entitled to apension as part of that employment. Loyalty isnow seen as a weakness and “more fool you” forthinking that you would actually get what youhad earned. My pension entitlement has beenstolen and should be restored in full.

The representative complainants – Mr D2.18. The third representative complainant is MrD. He is currently 62 years old, having been bornin November 1943. He is married with two sonsin their thirties and lives in Devon.

2.19. He has worked for his current employer, anelectrical instrument and fibre optics company –currently as an engineering draughtsman – since1961 and he joined the pension scheme on 1 April1965, as soon as he was allowed to do so, afterhaving been assured by the company and byofficial leaflets that it was in his best intereststo do so.

2. The complaints and the Government’s response | 11

2.20. Mr D had made a number of requests forpension forecasts – including in 1988 and 1995 –and had always kept a keen eye on his pensionrights. After the previous owners decided to‘freeze’ the scheme in 1999 and before thecommencement of wind-up, he was given anestimate of what transfer value he might receiveif he were to leave the scheme, but was advisedby the scheme actuaries not to leave the schemeas he would suffer financial loss if he did so.

2.21. After a change in ownership in 2000, thecompany – whose current owners are stilltrading – decided to close the pension schemeand commence wind-up. The scheme was under-funded and trustees had obtained a court orderto establish that the sponsoring employer had topay to the scheme approximately £2.5 millionover no more than ten years.

2.22. Mr D told me:

My complaint is that the Government failed intheir duty to ensure that my pension wasprotected in the way that the Government hadtold me that it was. The Government failed towarn me of any risks to my contributions as aresult of my scheme winding up... TheGovernment failed to place any risk warnings onits own assurances about the security of schemeslike mine...

The loss to myself and family is almostincalculable. My retirement is now completelyunknown and in tatters. After paying into apension scheme all my working life and providingfor my retirement as the Government told me todo, I shall receive very little if anything of myentitlement.

2.23. He continued:

I feel that the Government should be responsiblefor making good the damage done by its actions

and restore my pension in full. Had I ever beenwarned of the risks involved, I would never havecontinued my contributions to the scheme...

If the law had done what the Governmentassured people like me it would do, I would nothave suffered these losses.

2.24. Mr D told me that the effects of the pastfive years, since he was informed that his pensionwas unlikely to be paid, despite officialassurances that it was protected and guaranteed,had had a serious effect on his health and hadcaused severe stress to his wife and himself.

2.25. He concluded by telling me that ‘webelieved Government when they said ourpensions were safe and there was no mention ofrisks. We have been robbed of our pensions andonly full compensation will correct this injusticeand restore faith in pension schemes’.

The representative complainants – Mr B2.26. The fourth representative complainant isMr B, who lives in Tyne and Wear, although thefirm for which he worked was based in the EastMidlands. He is currently 63, having been born inMay 1942.

2.27. He worked for his former employer, a shoemanufacturer, for 36 years. The firm is nowinsolvent. Mr B, who is married with adultchildren, also made additional voluntarycontributions to his scheme totalling £25,000.

2.28. He had been for many years a trade unionactivist and had been the union convenor forsome time prior to losing his job. The union hadkept an information desk on the shop floor, whichhad included information about the companyscheme from the scheme itself but also fromofficial Government sources. The trade union hadactively encouraged membership of the pensionscheme. Mr B had become a member nominatedtrustee of the scheme in 1999.


2.29. Following redundancy, Mr B had had to sellhis house and move to a smaller propertyelsewhere in the country and also had had totake on part-time and then night work, some ofit of a heavy manual kind, in order to keepsufficient income coming into the household.

2.30. In his original complaint, Mr B told me:

Along with other trustees of the scheme, I hadbeen given an OPRA booklet, ‘A Guide for PensionScheme Trustees’ – reference PST/SAC/COI/7.97.I read this book thoroughly: as both a trustee andthe [union] convenor, it was my duty to do so, soI could advise members appropriately. Itconvinced me that my pension and those of mycolleagues was quite safe so long as the schemewas funded to the legal requirement...

The booklet said that “the MFR refers to theminimum amount of funds that should be in thescheme at any one time in order to meet thescheme’s liabilities if it were to be discontinued”.Nothing could have been more convincing. Thissingle line alone gave me what I thought wasjustified confidence in the scheme.

Unfortunately, it was also totally wrong. It couldand should have warned that if the scheme werewound up our assets would be used to payexisting pensions. I understand that later editionsof the booklet have made this clear but far toolate for me to be able to warn my colleagues.

2.31. He continued:

In our case, the company had made little or noprofit for several years and insolvency was widelyexpected. Our scheme was, however, funded tothe required level. None of the deferredpensioners would have risked their most preciousassets on the unlikely financial survival of theirformer employer without the misleadingassurances such as those given to us by OPRAand other Government organisations.

2.32. Mr B has now been told that he is likely tolose approximately 90% of his pension benefits.He told me that the ‘only fair solution’ to thissituation would be ‘the full restoration of thepensions of myself and my colleagues’.

Comments by other complainants2.33. The comments made by the representativecomplainants were similar to the many othersI have received, all of which I have reviewed.

2.34. Some of the more typical of these –in relation to the security provided by theMinimum Funding Requirement (MFR), which wasthe statutory mechanism against which pensionschemes had to fund – include:

l Due to my age I was very interested in pensionsand I had submitted an application for earlyretirement prior to the demise of the companybut it went into receivership prior to themapproving my application. It was commonknowledge through government publicationsthat, with the MFR, final salary schemes wereguaranteed... The Trustees told me that I was oneof the lucky ones to be left in a final salaryscheme as there was no risk involved due to themeasures the Government had put in place sincethe Maxwell scandal [male, active member atwind-up, insolvent employer scheme];

l When I asked our trustees what would happenif my company was not taken over but insteadwent bust, I was told that the law put in placeafter the Maxwell scandal would safeguard andprotect our pensions [female, deferred memberat wind-up, insolvent employer scheme];

l Although obviously not a pensions expert,I was aware that pension funds were keptseparate from company funds and that thelevel of funding had to be maintained to meeta minimum level set by the Government.I naturally thought that this was to ensure thatschemes were always adequately funded, a


belief that was reinforced by the leaflets I readwhich did not mention any risk. My schemewound up fully funded to the Government’slevel but I will still lose at least half mypension rights [male, deferred member atwind-up, solvent employer scheme]; and

l We received both scheme documentation andofficial leaflets, including ‘A Guide to YourPension Options’ (copy enclosed). The schemematerial said that the law protected ourpensions and the official material said it wassafe, guaranteed and protected. It also stronglyrecommended that people join their employer’sscheme but without informing us that therewas a risk to doing so or that we needed toknow about the financial strength of thecompany. The situation we now find ourselvesin was a complete surprise. At no time did theGovernment indicate, let alone tell us, that oursavings might be at risk [couple, both activemembers of an insolvent employer scheme].

2.35. Other points made by many complainantsincluded:

(i) that official literature had led people tobelieve that only certain questions neededto be asked about their scheme: ‘I askedevery year whether my scheme was fundedto the legal requirement. I was told everyyear it was and sometimes more than that...From what I had read, that meant to me thatthe scheme had enough money to meet itsliabilities to pay us our pensions’;

(ii) that many respondents feel bitter thatpublic sector final salary schemes are‘guaranteed’ where theirs proved not to be:‘it seems to me now that the only pensionthat is safe and secure is the one governmentofficials provide for themselves. Thoseresponsible for the leaflets which misled meand for the law and policy which created this

mess still have their pensions intact andguaranteed – is this right?’

Another said: ‘I have paid for not only mypension but at least two others for all of myworking life... the Civil Service, MPs and Judgespensions, who all have a guaranteed pensionpaid out of my wage packet via taxes... [and]the local authority workers pensions... paid forfrom the rates which I pay. In total contrast,there is my own pension now not worth thepaper the promises were made on – promisedto me as safe, secure and guaranteed by thevery people who take their pensions from thetaxes I pay’;

(iii) that, had individuals known that all of theirpension was not safe, they would have madeother arrangements: ‘I made voluntarycontributions without knowing that it wouldbe safer to use that additional money todiversify my savings and spread the risk’; and

(iv) that the ‘political’ message had been that theMaxwell ‘scandal’ had been due toinsufficient statutory protection and that thenew laws had been introduced to end thepossibility of ‘another Maxwell’: ‘The wholethrust of the material I saw was that the roleof Government and the law was to protectour pension rights against employers who didnot fulfil their obligations. Now I am toldthat it is not the role of Government toensure that my employer, who chose to closethe scheme, should make good his promise’.

The representative complaints –the maladministration alleged2.36. Speaking on behalf of all those whocomplained to me, the four representativecomplainants alleged:

(i) that DWP and OPRA did not take propercare when informing the trustees andmembers of defined benefit occupational


pension schemes about the degree ofsecurity of the pension rights accrued bymembers of a scheme. In particular, bothbodies failed to warn of the risks to non-pensioner members of such schemes in theevent that a scheme was wound-up. Instead,the publications and other statements ofsuch bodies appeared to provide unqualifiedassurance that such rights were protected bylaw and guaranteed. As a consequence,members and trustees of schemes were ledto believe that their pensions were safewhen this was not necessarily the case;

(ii) that DWP and the Treasury failed to takeaction to draw the limitations of theprotection provided by the law to theattention of scheme members even thoughthey had been warned by the Faculty andInstitute of Actuaries in May 2000 thatmembers of occupational pension schemeswere unaware of the risks to their pensionrights. Instead, official publications andstatements continued to provide reassurancewithout the mention of such risks;

(iii) that DWP Ministers approved relaxations inthe actuarial calculations underpinning thestatutory requirement for minimum schemefunding in 1998 and 2002, without havingdue regard to the effect that theserelaxations would have on the security ofpension scheme rights should a scheme bewound-up with insufficient assets and alsowithout ensuring that scheme members andtrustees were made aware that the effect ofthese changes was a further reduction in thesecurity of their rights; and

(iv) that NICO was responsible for delays inreconciling pension entitlements in respectof the members of schemes which were inthe process of winding-up, which had had asignificant effect on keeping such schemes

in wind-up for longer than necessary. Thesedelays had led to further financial loss toscheme members arising from additionaladministrative costs and in consequence ofreducing annuity rates during the period ofdelay.

2.37. The representative complainants consideredthat all of the above constitutedmaladministration which had caused them, andpeople in a similar position to them, injustice.

The representative complaints – the injusticeclaimed2.38. The representative complainantscomplained that members of schemes had notbeen able to make informed decisions aboutwhether to diversify their pension and savingsprovision, about whether to remain in schemeswhen they left the employment of thesponsoring company, and when making otherchoices such as seeking new employment with amore secure employer, taking early retirement,or agreeing to stay at work beyond normalscheme retirement age.

2.39. They also complained that scheme trusteeshad been prevented from fulfilling theirobligations to scheme members and that theirprofessional reputation had suffered as a result.

2.40. Others who have complained to me havetold me of the significant losses they havesuffered, of the outrage they feel that this hasbeen allowed to happen, and of the effects thatthese events have had on their health, theirfinancial security, their future plans, and on theother members of their families. They have alsotold me of their loss of faith – in Government, intheir employer, and in the wider pension system.

2.41. I am told that two scheme members havecommitted suicide since learning that they wouldnot receive their full pension. I am also awarethat at least two of the individuals who


complained to me have passed away since myinvestigation began.

2.42. One of these was receiving a pension ofapproximately £10 per week – when he shouldhave been entitled to a full ill-health earlyretirement pension – in the period before hedied. A member of his scheme for more thanthirty years, he should have received onretirement an annual pension of more than£10,000, plus a substantial lump sum; his schemeshould also have provided a widow’s pension.

2.43. The other was a member of his scheme for29 years and, similarly, would have been entitledto an annual pension of more than £10,000 andalso a widow’s pension. Even if he had survivedand qualified for the FAS, on current criteria hiswidow will not receive any pension at all fromhis scheme – and I understand that she may notqualify for a full state pension in her own right.

2.44. It is impossible to recite here all of thepersonal stories that I have been told. Someexamples of the cases that I have seen include:

l that of a former manager of a small firm, who,when leaving the firm a few years prior to hisscheme retirement age, decided to leave hispension within the scheme, believing it to besafe. He has since lost more than two-thirdsof his expected pension and will not beeligible for FAS ‘assistance’;

l that of a man with 38 years’ service with thesame company, who has lost approximately80% of an expected annual pension of£20,000. He is now working beyond hisexpected retirement age. His wife told me:

It is very likely now that, should my husbandever be able to retire, we will not be able tostay in our home. This is doubly sad as wepurchased it as security for my very elderlymother. I dread the thought of forcing her tomove at this stage of her life;

l that of a woman who worked for the samecompany for 27 years and who had been amember nominated trustee of her scheme.She has lost all of her pension. She told me:

I was always told that my pension was safe,but now I can see that I would have beenbetter off never putting money into it, becausethe law says that my money has to be used topay other people’s pensions and not mine. Idon’t know what I am going to do for thefuture. I have lost so much and nobody everwarned me that this could happen; and

l that of a man who worked for the samecompany for 43 years, who had expected toretire on an annual pension of £34,000 butwho has been told that, due to the severeunder-funding of the scheme, he will onlyreceive an unknown proportion of hisGuaranteed Minimum Pension and nothing atall from all of his contributions to the scheme.

2.45. However, complainants have told me thatthe injustice they feel is not ‘merely’ suchfinancial loss, enormous though such financialloss is in most cases. There are three otheraspects of the injustice they claim.

2.46. The first is a deep sense of outrage at theway that their pensions, in words that have beenused to me on many occasions, ‘have beenstolen’. A common theme among the manyletters and other communications I havereceived was anger, directed both at Governmentand at employers, that the pension system hadfailed scheme members.

2.47. Many individuals drew my attention to theassurances given by Government when theregime created by the Pensions Act 1995 wasestablished. They told me that this regime –which it had been said aimed to provideprotection for individual pension schememembers – had been introduced as a result of


the Maxwell scandal in order to prevent pensionscheme assets being plundered by unscrupulousemployers but also to provide security forindividuals. That regime had demonstrably andcomprehensively failed, they said.

2.48. The second additional aspect of theinjustice claimed relates to a sense thatindividual members of final salary schemes hadbeen prevented from making informed choicesabout their provision for retirement and abouttheir other financial planning.

2.49. Many individuals told me that, in a contextin which Government, employers, and thepensions industry were all promotingmembership of occupational pension schemesand where those responsible for the legal,regulatory and administrative frameworks thatunderpinned the security of such schemes wereencouraging membership without mention of risk,they had been misled into making extremelycritical financial decisions without any knowledgeof the right questions to ask. This, in the view ofcomplainants, amounted to misdirection and adereliction of a duty on public bodies to providebalanced information about the statutory regimefor pensions protection which they hadintroduced, which they operated and for whichthey were wholly responsible.

2.50. The final additional aspect of the injusticeclaimed by individuals was the profound effectsthat the loss of their pension rights had had ontheir self-respect and their family life.

2.51. Many individuals told me that theuncertainty and distress that they had sufferedwas compounded by a sense that they asindividuals had failed their families by havingbeen lulled into a sense of false security byofficial statements about their pensions. Thisalso had been reinforced by the effects that theloss of their pension had had on other membersof their families, many of whom had had to make

a larger financial contribution to family incomethan expected, had had their own plans ruined,or who had had to deal with the stress andanxiety caused to the scheme member.

2.52. All of the above constitutes the injusticeclaimed by complainants.

Representative complaints – the remedy sought2.53. The representative complainants consideredthat the FAS does not constitute an adequateremedy for the injustice that they claim to havesuffered due to maladministration by the publicbodies responsible for occupational pensionspolicy and regulation.

2.54. They consider that this is the case becausethe FAS will not cover schemes where theemployer is still solvent; nor will it cover manymembers of schemes even where the employer isinsolvent. Furthermore, such ‘assistance’ as may beprovided by the FAS will not cover the whole losssuffered by even the minority covered by its terms.

2.55. They thus seek for themselves – and forothers in a similar position to them – therestoration of their full pension and associatedbenefits (such as life cover) – and also financialrecognition of the distress, inconvenience anduncertainty caused to them by themaladministration they allege.

The Government’s initial response to thecomplaints2.56. Where I propose to conduct aninvestigation into any complaint, I am required,by section 7(1) of the 1967 Act, to afford to theprincipal officer of the department or publicbody whose actions form the subject matter ofthe complaint an opportunity to comment onthe allegations contained in that complaint.

2.57. I received responses to the representativecomplaints from the Treasury, the DWP, OPRAand what was then the Inland Revenue on 20December 2004.


Treasury response2.58. The then Permanent Secretary of theTreasury noted that the complaints related tomatters which were not the policy responsibilityof the Treasury. Policy responsibility foroccupational pension schemes and the MFR laynot with it but with DWP. He said that theTreasury takes an interest in issues such as thesewhich might have an impact on those policyareas for which it is responsible, but that its solefocus was on monitoring such impact.

2.59. In the case of the MFR, the Treasury’sinvolvement had been in assessing the impact ofthe MFR on institutional investment and theeffects that the various options for reform of theMFR might have had on financial markets.

2.60. The Treasury had worked jointly with DWPon a series of consultation documents and publicstatements on these issues, but that had notmeant that at any time responsibility for thematters under investigation were the policyresponsibility of the Treasury; still less had itundertaken any administrative actions in relationto the matters complained about that might besubject to an investigation by me.

2.61. The Permanent Secretary said that theTreasury had never advised scheme trusteesand/or scheme members directly on any matterrelated to occupational pensions and that thiswould not have been appropriate as anotherGovernment department had policyresponsibility for such matters.

2.62. That being the case, the investigation wasmore properly directed at DWP, although theTreasury had contributed to the DWP response. AsI have said above, I accepted that this investigationis properly directed at DWP, OPRA and NICO.

DWP response2.63. The then Permanent Secretary of DWP saidthat the Government did not accept that any of

the complaints were well-founded or that thefacts supported the allegations ofmaladministration made by complainants. Hesaid that it believed that the complaints werebased on a substantive misconception of the roleof Government in relation to individual privatepension schemes and their members.

2.64. He said that neither DWP nor the Treasuryhad a legal duty to provide information topension scheme members, generally or inrelation specifically to the MFR, and that thiswas the role of scheme trustees.Notwithstanding this, DWP had to a limitedextent provided generic information to thegeneral public about the various methods ofsaving for retirement, including occupationalpension schemes, through its leaflets.

2.65. The DWP leaflets cited by complainants hadtherefore been public information leaflets whichhad provided a general introduction tooccupational pension schemes. They had notbeen intended – as they had made clear – toprovide comprehensive advice or a legallycomplete statement about final salary schemes.Rather they were intended to be a general guideto encourage people to think about saving fortheir retirement. The leaflets had been intendedonly to give an outline explanation of suchschemes and as such could not have constitutedindividual advice to members about theirpension choices, or their rights and liabilitiesthrough membership of a scheme.

2.66. The then Permanent Secretary said that,despite this, the information provided in themhad been accurate and – in the context of ageneral, introductory leaflet – appropriate.

2.67. Given their essentially ‘introductory’ nature,they were also not misleading. The leaflets hadnot indicated that the benefits of anoccupational pension scheme were assured or


that an occupational pension would necessarilybe the most suitable arrangement for everyone.

2.68. The then Permanent Secretary said that itwould not have been responsible or appropriatefor general leaflets of this kind to have coveredwhat were accepted to be complex aspects offunding and investment risk which might differsignificantly from one scheme to another.

2.69. In addition, while such leaflets wereavailable to the general public through DWP’spension information order line, through itswebsites, and from its Pension Centres, DWP didnot target the distribution of such leafletsdirectly or through the pensions industry toindividuals or to schemes.

2.70. The then Permanent Secretary said that hedid not think it appropriate for individuals to beencouraged to take important decisionsdepending on differing assessments of financialrisk on the basis of general public information ofthis sort. He said that the degree of risk andwhether that risk may justify an individual takingaction which itself incurs a different risk isparticularly complicated and difficult to explain.

2.71. Such general leaflets did not seek – norcould they reasonably do so – to detail thedifferent sort of risks, such as the longevity riskassociated with deciding when to purchase anannuity or such as stock market investment risks,that exist in relation to personal investmentdecisions such as those related to privatepension provision.

2.72. The then Permanent Secretary said thatanyone reading the leaflets could not havereasonably thought that they were getting acomplete picture of the issues surrounding thesecurity of occupational pension schemes and, inparticular, the security of their own scheme byso doing.

2.73. However, he said that DWP leaflets didsometimes refer to matters where theGovernment was aware of current publicconcerns and where it was taking or had takenspecific action to address such concern. ThePermanent Secretary explained that that waswhy the April 2004 edition of OccupationalPensions: Your Guide had included a newstatement about the problems being caused byinsolvent wind-ups and the intendedestablishment of the PPF, which at that time hadrecently been introduced to Parliament in thePensions Bill.

2.74. The then Permanent Secretary said that hisDepartment had recognised widespread concernsfrom a number of groups about the way the MFRwas working and in March 1999 it hadcommissioned a report on the MFR from theFaculty and Institute of Actuaries. While mainlyconcerned with the technical working of theMFR, the report also considered the question ofdisclosure of information on the level of securityprovided by the MFR to scheme members.It recommended that there should be full andclear disclosure of the limitations of the MFR testand of the consequences for accrued rights if ascheme should be wound up. However, thePermanent Secretary pointed out that the reporthad itself recognised that full and clear disclosureneeded to be carefully handled and that it hadalso said that further work on the form andmanner of any disclosure was still necessary.

2.75. He said that, even were the Government toaccept that it had a responsibility tocommunicate directly with scheme members(which it did not), it would have beeninappropriate and possibly injurious to schememembers to have attempted to havecommunicated specific warnings until thisfurther work had been completed.


2.76. The then Permanent Secretary said thatDWP had taken forward consideration of thedisclosure issue in parallel to its work onreviewing and developing proposals for thereplacement of the MFR itself, which had been inpart undertaken by a Consultation Panel. He saidthat the Government had been open about thiswork and had recognised publicly the concernsthat people had raised about the MFR.

2.77. He said that at no time had anyone involvedin the formal consultation on this reform worksuggested that DWP should issue informationdirect to scheme members (or indeed the generalpublic) about the limitations of the MFR as amethod of securing scheme benefits.The Consultation Panel, set up by theDepartment to assist it in the review of the MFRand consisting of experts from different parts ofthe pensions industry, had recognised thatcommunication with scheme members onfunding issues was a complicated and importantissue. However, there had been no consensus asto how, in what form, or at which level of detailcommunication with scheme members couldbest be achieved. Research on this issue hadbeen commissioned by DWP in August 2002.

2.78. That research, published in February 2003,had clearly borne out concerns about unwittinglycausing unnecessary alarm and possiblyinappropriate responses by scheme members as aresult of full disclosure.

2.79. The then Permanent Secretary said that, bythe time the research had been received andconsidered by DWP, planning for thereplacement of the MFR had been well advancedand it had been decided that, in this context, thespecific issue of communication needed to besubsumed within the broader issue of howtrustees should communicate information aboutthe level of funding in a scheme once the MFR –

which was widely recognised as being in need ofwholesale reform – was replaced.

2.80. In relation to the changes to the MFR basis,the then Permanent Secretary said that therewas a strong case for maintaining that thesechanges were a matter of policy notadministration and that the relevant policydecisions had been taken reasonably and withoutmaladministration.

2.81. He said that the changes to the actuarialbasis underpinning the MFR calculation had beenmade following recommendations to do so bythe Faculty and Institute of Actuaries and hadbeen implemented through amendment of theirGuidance Note (GN27). He also said that it was amisconception to state that the two changesmade were designed to weaken the MFR from itsoriginal level, which had only intended toprovide a limited degree of security for non-pensioner members.

2.82. The amendments had been made to ensurethat the original MFR level was maintained in thelight of economic and demographic trends andhad been approved by Ministers on therecommendation of officials after the technicalaspects of the changes had been checkedwith GAD.

2.83. These changes accordingly had notamounted to a weakening of the MFR from itsdesigned level. Therefore, the then PermanentSecretary said that the concept of needing to‘warn’ scheme members that the MFR ‘had beenweakened’ had not arisen.

OPRA response2.84. The then Chairman of OPRA said that, whileOPRA accepted that their publication hadcontained the phrases quoted by complainants,that particular guide – and others – had madethe full position clear when read as a whole andin context.


2.85. She said that OPRA had had noresponsibility for communicating direct withscheme members – the responsibility for keepingthem informed and up-to-date about theposition of their scheme had always lain with thetrustees of each scheme and OPRA had notthought it appropriate – or even possible – tobypass them in an attempt to deal directly withscheme members.

2.86. The Chairman also said that trustees ofpension schemes had a responsibility to appointprofessional advisers and had a duty to considertheir advice on, among other matters, the technicalaspects of the funding of their scheme. Moreover,trustees were under a duty to obtain actuarialvaluation reports and a schedule of contributionsfrom the scheme actuary. Regulations required thatthese reports had to include a statement to theeffect that they did not reflect the costs ofsecuring the liabilities by the purchase of annuities,if the scheme were wound up.

2.87. OPRA publications, including the July 1997edition, had made clear that they were not adefinitive statement of the law and that theywere not a substitute for taking professionaladvice, which was emphasised in a number ofplaces in each guide. The 1997 edition had beenissued to those scheme trustees for whom OPRAhad contact addresses, following a print run of200,000.

2.88. The Chairman explained that, as the impactof the MFR would be gradual, as schemes had upto four years from April 1997 to prepare for theirfirst MFR valuation, OPRA had issued a furtherguide in May 1999. This went into more detailabout the implications of the MFR, including anexplicit reference to the fact that the MFR wouldnot ensure that all the scheme’s liabilities couldbe met in the event of the scheme winding up. Ithad also emphasised again that the guide was nosubstitute for getting professional advice. This

guide, like all others, had been placed on theOPRA website. In addition, 40,000 copies hadbeen printed and sent out to the trustees of allschemes to which the MFR applied.

2.89. The Chairman said that, at the time that theguides in question had first been issued, schemesurpluses rather than deficits had been thebiggest issue for final salary schemes. It had beenonly following the collapse of the stock marketand the realisation of the implications ofincreased longevity for the assets and liabilitiesof pension funds that funding deficits hadbecome a real issue, the implications of whichwere still being worked through.

NICO response2.90. The Chairman of what was then the Boardof the Inland Revenue said that he accepted thatthe process for reconciling the entitlements ofscheme members and securing their accruedrights on wind-up could take some time tocomplete. However, he said that he believed thatthis was attributable to the nature of the processrather than to any maladministration by NICO.

2.91. The time taken to reconcile the records heldby schemes with national insurance records and,where appropriate, calculating GuaranteedMinimum Pension (GMP) amounts depended on anumber of factors. These included the number ofmembers, both past and present, in a scheme;the state of the records held by the scheme; andhow quickly scheme administrators replied toqueries from NICO.

2.92. There was, the Chairman said, considerablepotential for differences between NICO’s recordsand those held by a scheme, especially inrelation to the earnings recorded for eachmember. He said that employers had to notifyboth the scheme administrator and NICO of theearnings for each employee but often wouldchange the amount recorded following enquiriesfrom, or errors identified by, NICO – without


informing the pension scheme of the revisedfigures. Such discrepancies were often onlyidentified on retirement, transfer or wind-up,when GMP figures were calculated.

2.93. The Chairman explained that, in the late1990s, NICO had experienced difficulties in thechangeover to their new computer system –known as NIRS2. This had had an effect on thereconciliation process, as NICO had been unableto provide computer-generated scheme lists andentitlements. However, NICO had introducedalternative arrangements where schemeadministrators and/or trustees could ask forclerically prepared calculations in what theschemes considered to be priority cases.

2.94. He said that the problems with NIRS2 andthe availability of the alternative service hadbeen publicised widely throughout the pensionsindustry and that he therefore did not believethat they had had any significant impact on thereconciliation process.

2.95. The Chairman recognised that annuityrates had reduced in the early 1990s, and thattherefore, where two schemes started thewind-up process on the same day, a scheme thatcompleted wind-up in the 1980s would have got abetter rate than one that completed in the 1990s.

2.96. However, he said that the reasons for delayin winding-up were due to many factors beyondthe control of NICO. These included the needsometimes for trustees to take legal actionagainst a creditor, such as the sponsoringemployer, so as to realise all a scheme’s assets.

2.97. The Chairman said that he was satisfied thatNICO had done everything possible it could havedone, including the introduction of a number oflocal initiatives designed to progress winding-upcases within reasonable timescales.

Launch of investigation2.98. Having received responses from the bodiesunder investigation, and not being satisfied thatthose responses had resolved the complaints orprovided an explanation of the relevant factsthat cleared up the issues, I decided to continuemy investigation.

2.99. The next three chapters of this report setout the results of my investigation. They focus,first, on the results of the further enquiries Imade as part of my investigation; secondly, onthe facts my investigation uncovered throughconsideration of the relevant documentary andother related evidence; and, finally, on myfindings in relation to the complaints.

2.100. Before dealing with these matters, I willset out the approach I have used to assist me todetermine whether to uphold the complaints Ihave investigated.

My approach to maladministration2.101. No definition of maladministration wasprovided in the 1967 Act, from which I derive mypowers. Indeed, my predecessors have largelyresisted attempts to ‘define’ rigidly the concept,as they considered that this might lead to anoverly restrictive view of the types of complaintthat my Office might consider – and also tosituations in which rigid definitions becameeasily outdated.

2.102. However, in the Second Reading debate onthe Bill that became the 1967 Act on 18 October1966, Richard Crossman (the then Leader of theHouse of Commons) said that an attempt to listthe qualities that might constitutemaladministration would include bias, neglect,inattention, delay, incompetence, inaptitude,perversity, turpitude, arbitrariness and, in hiswords, ‘and so on’.

2.103. One of my predecessors also added to thislist in what he said was more ‘modern’ language –


in his Annual Report to Parliament for the year1993. He added the following traits: rudeness; anunwillingness to treat an individual as a personwith rights; a refusal to answer reasonablequestions; neglecting to inform an individual onrequest of his or her rights or entitlement;knowingly giving advice which is misleading orinadequate; ignoring valid advice or overrulingconsiderations which would produce anuncomfortable result for the person overruling;offering no redress or manifestlydisproportionate redress; showing bias whetherbecause of colour, sex, or any other grounds; anomission to notify those who thereby lost a rightof appeal; a refusal to inform adequately of theright of appeal; faulty procedures; the failure tomonitor compliance with adequate procedures;cavalier disregard of guidance which wasintended to be followed in the interest of theequitable treatment of those who use a service;partiality; and failure to mitigate the effects ofrigid adherence to the letter of the law wherethat produces manifestly inequitable treatment.

2.104. However, it has been a commonly heldprecept of all Ombudsmen that thedetermination of whether maladministration hasoccurred is always related to the specificcircumstances of each case.

2.105. The focus of the complaints within myjurisdiction that I have investigated is threefoldand is related, first, to whether the bodies underinvestigation misled or misdirected complainantsas to the security of their pension through theinformation provided by those bodies to thepublic. A second focus is whether those publicbodies took various decisions that reduced suchsecurity without informing those affected of theconsequences of those decisions; and the finalfocus is on whether public bodies have beenresponsible for unreasonable delays in resolvingthe winding-up of certain pension schemes.

2.106. Having considered the nature of thecomplaints within the context I have describedabove, my approach to determining whethermaladministration occurred will be to establishthe following:

(i) whether information provided by the bodiesunder investigation was clear, complete,consistent and accurate;

(ii) whether the bodies under investigation tookthe disputed decisions about the MFR andthe disclosure of risk to scheme memberswithout maladministration – that is,reasonably and with due regard to allrelevant considerations; and

(iii) whether the bodies under investigationundertook their responsibilities in relationto the process of winding-up certaincontracted-out final salary pension schemesappropriately – that is, without undue delayor other administrative error.

2.107. I now turn to consider the evidenceuncovered by my investigation and on which Iwill base my assessment of the above questions.


Introduction3.1. This chapter sets out the results of thefurther enquiries I made as part of myinvestigation, to assist me to gain a betterunderstanding of the complaints.

3.2. Before describing that work, I should explainthat, as the matters which formed the subject ofthis investigation are complex and were oftentechnical, I have treated Dr Ros Altmann – aninvestment expert, investment banker andeconomist, adviser to the pensions industry, andGovernor of the London School of Economics –as the advocate for complainants. Complainantshad requested that I do so and she had also beenmandated to act on behalf of the action grouprepresenting a large number of individualsaffected by the wind-up of their schemes.

3.3. The further enquiries I made as part of thisinvestigation had the following key elements:

(i) we conducted a survey of every individualcomplainant registered with us to establishwhat their detailed position was, how thewind-up of their scheme had affected them,and the degree to which the FAS mightremedy their losses. I received 198 responsesto that survey and the key results fromthose responses are set out below;

(ii) Dr Ros Altmann submitted a considerableamount of evidence on behalf ofcomplainants and provided comments onthe main aspects of the response to theircomplaints by the bodies underinvestigation;

(iii) my investigator interviewed the fourrepresentative complainants, who providedvaluable insight into their complaints. Theresults of these interviews are incorporatedinto the material set out in other chaptersof this report;

(iv) we asked the bodies under investigation forfurther evidence and for their views onsome of the more detailed allegations madeby Dr Altmann and complainants during theinvestigation, which the Governmentprovided on several occasions;

(v) we scrutinised the other written submissionsof complainants which were held on ourfiles, which have informed other chaptersof this report, especially chapter 2;

(vi) my investigator also visited NICO on site,scrutinised a random sample of their files,and obtained detailed reports on actiontaken by NICO on the pension schemes ofwhich the four representative complainantshad been members – and also on a randomselection of other schemes with whichother complainants were associated;

(vii) in addition, my investigator interviewedindependent trustees responsible forwinding-up pension schemes to obtain aninsight into their experience;

(viii) we met office-bearers of the all-partygroups on Occupational Pensions and onInsurance and Financial Services andscrutinised many submissions by otherMembers of Parliament made on behalf oftheir constituents – these have been helpfulin establishing the wider context in whichthe complaints are placed;

(ix) I sought the comments of the Association ofBritish Insurers and of the NationalAssociation of Pension Funds, some ofwhose members administer occupationalpension schemes, on matters related to thealleged delays in winding-up final salaryschemes – those comments are set out inchapter 5 of the report;


3. Further enquiries

(x) I sought actuarial advice on some of theissues raised by the complaints, thetechnical scope of which is set out in annexB to the report; and

(xi) finally, I also sought the comments of theactuarial profession on the same matters,which were provided by the Faculty andInstitute of Actuaries.

3.4. In addition to the above, we scrutinised aconsiderable number of Government files,official publications and other documentarysources to establish the factual context in whichthe complaints were placed. The results of thisscrutiny are set out in chapter 4 of the report.

3.5. I am extremely grateful to all those whoassisted my investigation and for the helpful andcomprehensive manner in which they did so.

3.6. The rest of this chapter sets out the keyresults of the survey I conducted, Dr Altmann’sfirst submission on behalf of complainants, theGovernment’s responses to my further enquiries(including the results of my investigator’s visit toNICO), further comments made by Dr Altmann,the main points made by independent trusteeswhen my investigator interviewed them, and anoutline of the actuarial advice I have received –and the actuarial profession’s comments on thatadvice.

Key results of survey of complainants3.7. During late March, April and early May 2005, Iconducted a survey, by means of a questionnaire,of all those whose complaints had been referredto me or who otherwise had contacted meabout their complaint. I received 198 responsesto that survey.

3.8. Of those respondents:

(i) 113 were male and 85 female;

(ii) 95 had been members of a scheme wherethe sponsoring employer was still solvent,

89 were members of an insolvent employerscheme, with 14 being unsure as to thestatus of the employer;

(iii) at the time that wind-up began, 79 had beenactive members of the scheme, 81 had beendeferred members, 27 had been existingpensioners, 8 had been the qualifying spouseof a deceased member and 3 did not answerthis question;

(iv) in relation to whether their scheme wouldbe covered by the FAS, 45 said that it was onthe indicative list of eligible schemes, 102said that it was not on that list, and 51 saidthat they did not know whether theirscheme might be eligible;

(v) in relation to whether they mightindividually be covered by the FAS, 19 saidthat they thought that they would qualify,110 said that they would not qualify, and 69did not know whether they would qualify;

(vi) 62 said that they had originally joined theirscheme when membership had been acondition of employment and a further 9said that they had been required to transferback into their occupational scheme,following a review of their decision to buy apersonal pension which had been found tobe due to mis-selling; and

(vii) 63 could demonstrate that they had soughtout and been provided with officialliterature about pensions (42 of these sentme photocopies or the originals of suchmaterial in response to my survey; another21 had provided such with their originalcomplaint). A further 12 could not producean information leaflet now but could showthrough earlier copy correspondence thatthey had at one time possessed suchmaterial. 29 said that their scheme oranother person had informed them that the

3. Further enquiries | 25

Government guaranteed their pension andthat they had not as a result sought outother confirmation of this. 119 of the totalsaid that they had read in one place oranother that being funded to the MFR levelmeant that their scheme would have enoughmoney to meet its liabilities on wind-up.

Submission by Dr Altmann3.9. Dr Ros Altmann made a submission to me onbehalf of complainants following my decision toconduct an investigation.

3.10. She said that the bodies under investigationhad not taken proper care when informing thepublic and members of final salary occupationalschemes about the security of their pensions intheir employer’s plan. They had not checkedcarefully enough what the true situation was andhad told members that their pensions were safe,guaranteed or protected when, for many groupsof people, this had not been correct.

3.11. She said that, if the law did not protect themand their contributions were not actually safe,the Government should not have carelessly‘lulled’ members of final salary pension schemesinto a ‘false sense of security’. Members hadthereby been denied any opportunity to protecttheir pensions and had had no chance toconsider other courses of action which may havediversified or otherwise secured their retirementincome.

3.12. Dr Altmann argued that this had beencaused by the careless decisions of Ministers andofficials, their inaction in the face of warningsthat members had no idea about the reality ofthe MFR, and inaccurate and woolly statementsby Government agencies in their publications andelsewhere. Government had failed to warn of therisks individuals were taking when contributing totheir employer’s pension plan or when leavingretained benefits in the scheme after leaving theservice of the sponsoring employer.

3.13. Dr Altmann said that Government had aresponsibility to put matters right, as it hadpromoted and encouraged individuals to jointheir employer’s scheme; as many members hadbeen originally compelled to join, which was arequirement enabled by the law; and becausethen, once in a scheme, Inland Revenue rules hadprevented them from contributing to any otherpension at the same time.

3.14. The members had subsequently lost most orall of the retirement income which they werepromised by their employer’s scheme. She saidthat these losses could have been avoided ifmembers had been warned that their money wasnot safe:

(i) those who could have retired under therules of their scheme would never havestayed on at the request of their company –if they had known that they could lose theirpension – but would have taken the pensionstraight away;

(ii) some members had left employmentbecause of ill-health, but had not takenbenefits because they had been assured thattheir pensions were safe;

(iii) others who had transferred money in fromother employers’ schemes (for example,from the schemes of public sector bodieslike the former National Coal Board) wouldhave left their money in the previousschemes if they had known that they couldlose it all on wind-up;

(iv) individuals who had transferred money intoemployer schemes from money purchasearrangements might have chosen not to dothis, if they had thought that their entiremoney could be lost; and

(v) members who had been in their 50s, whowere worried about the financial health oftheir employer (and in some cases had then


checked with Government agencies to findout if their pensions were safe in thescheme) could have transferred their moneyout if they had known that they could losemost of their expected pensions.

3.15. Dr Altmann said that the Government haddenied all these people the chance to protecttheir retirement income, by encouraging them tojoin their employer’s pension scheme – and bycarelessly telling them that their pensions weresafe and that their accrued rights were protectedby law.

3.16. In relation to the specific heads ofcomplaint:

(i) Dr Altmann pointed to the statement onpage 28 of the 1997 OPRA guide for trustees,which had said ‘the MFR refers to theminimum amount of funds that should be inthe scheme at any one time in order to meetthe schemes liabilities if it were to bediscontinued’. She explained that thisstatement was untrue and the carelesswording of these booklets, sent to trusteeswho would naturally expect the informationfrom OPRA, the regulatory body, to bereliable, amounted to maladministration –as the MFR had never been designed toensure that the assets of the scheme wouldbe sufficient to meet liabilities ondiscontinuance. It had only been designed tobe adequate for meeting the liabilities ofpensioners and to have an even chance ofmeeting the accrued pension liabilities ofthose not yet retired. Thus, the regulatorsent out a booklet to scheme trustees,which the trustees would have beenreasonably expected to rely upon as beingcorrect, and which led the trustees tobelieve 100% MFR funding meant adequatefunds to meet all liabilities on wind-up;

(ii) She also said that the impact of statutorypriority orders and the costs of buy-out hadnot been mentioned in the OPRA booklet,yet they were significant in terms ofmembers’ benefits on discontinuance. Thetrustees, who would have been unaware thatthe information from the regulator was notcomplete, relied on this and passed onincorrect information to members;

(iii) Dr Altmann also pointed to the wording ofvarious DWP leaflets, including pre-2004editions of ‘Occupational Pensions: YourGuide’, which she said had containedmisleading statements about the protectionand security afforded by the law and theMFR to accrued pension rights in final salaryschemes. She said that, even though DWPwas encouraging and promoting theseschemes, it did not take enough care toensure that its booklets werecomprehensive or accurate. She said thatDWP had not sufficiently considered theimpact of these incorrect assurances ofsafety on all the various classes of memberand had failed to ensure members wereproperly informed of what were the risks totheir accrued rights; and

(iv) She also pointed to the report of theactuarial profession, which had highlightedthat scheme members and trustees generallybelieved that the MFR offered them fullprotection and its recommendation that theGovernment should disclose to memberswhat would happen to their pensions if theirscheme wound up under-funded. She saidthat the Government had said that itwanted to help people understand theirpension rights. However, if that were so andif there was no guarantee that these rightswould be delivered by their scheme, she saidthat it would have been in accordance withgood administrative practice had DWP been


as careful as possible to ensure that schememembers were properly consulted andsubsequently informed about the possiblelack of security of their pensions. However,the Government’s consultation process hadnot included meetings or discussions withmembers of schemes themselves and it hadfailed properly to consider the true effectsin all different possible circumstances of theimplications of failing to warn members.

3.17. In relation to the remedy sought, Dr Altmannsaid that, while the Government had agreed toset up the FAS with £400 million funding(approximately £20 million a year) to offer‘assistance’ to some of those who had lost out,this fund was not designed to fully compensatemembers for the losses they have suffered. It wasdesigned to exclude several groups of members,even those who had lost as much as 90% of theirpension, which was unfair in her view.

3.18. Dr Altmann said that the FAS only plannedto restore some of the pensions to some of thevictims. Therefore, in her view the Governmenthad offered insufficient remedy to compensatefor the damage done by its careless actions andits inexcusable inaction.

3.19. She said that instead it was her contentionon behalf of complainants that the Governmentmust compensate the victims ofmaladministration in full. Consideration shouldalso be given to the financial recognition of theuncertainty, distress and adverse impact on theirhealth which the stress of this situation hadcaused to the victims and their families.

The Government’s further comments3.20. Following receipt on 20 December 2004 ofthe Government’s response to the complaintsmade by the representative complainants, andhaving considered the Government’s responseand Dr Altmann’s submission on behalf of

complainants, I asked both DWP and NICO forfurther information on 28 January 2005.

DWP3.21. In order to further consider the complaintsrelated to the actions or inaction of DWP, I askedto see the relevant DWP policy and any otherfiles related to the production of theirinformation leaflets (such as ‘OccupationalPensions: Your Guide’), their files related toconsideration of the actuaries’ report, and theirfiles concerning other work done in relationto the communication of information to schememembers.

3.22. In addition to this request for documentaryevidence, I asked DWP three additional, specificquestions.

3.23. First, I asked whether DWP considered that,as the Government’s acknowledged policyappeared to have been to promote membershipof occupational pension schemes, it had aresponsibility to provide clear and completeinformation about the principal risks to suchschemes, including the risk of employerinsolvency and/or scheme wind-up.

3.24. Secondly, I also asked for DWP’s commentson letters sent by Ministers to pension schememembers whose schemes had wound up under-funded in which it was said that, despite theproblems suffered by members of someschemes, the Government would continue toencourage membership of occupational pensionschemes.

3.25. Thirdly, I asked whether DWP consideredthat individuals had been entitled to rely onofficial publications as part of the process ofmaking choices to opt out of (an element of)state pension provision by contracting out of thestate additional pension and joining anoccupational pension scheme.


3.26. The files I had requested were provided tome promptly and the results of my considerationof them (and other documentary evidence) areset out in chapter 4 of this report. In addition, Ireceived the answers to the above additionalquestions, which combined the answers to thefirst and second questions, on 11 March 2005.

DWP response to first and second questions3.27. In relation to the first question I had posed,DWP told me that the Government’s policythroughout the relevant period had been (as itremained), to encourage people to save for theirretirement.

3.28. The Government believed that privatepension arrangements, which were structured tooffer a reliable source of income for life andwhich were tax-favoured in various ways toprovide incentives, were one of the best ways tosave for retirement.

3.29. DWP said that, while all forms of privatepensions could be advantageous savings vehicles,the Government believed that what was likely tobe the best arrangement, for those employees towhom it is available, was a pension – whether inthe form of an occupational pension or a GroupPersonal Pension – to which the employer alsomade a contribution.

3.30. Within occupational pensions, DWP saidthat the Government did not have a particularpreference for final salary or money purchaseschemes: each might be more suitable fordifferent employees, depending on theirdifferent types of job and career patterns.

3.31. To this extent, DWP said that theGovernment had encouraged membership ofoccupational pension schemes. However, thisencouragement had had its limits. DWP said thatGovernment policy had been – and continued tobe – in the words of a Ministerial letter to which

I had referred them, to ‘promote the generalbenefits of occupational pension provision’.

3.32. DWP said that the Ministerial letters hadalso made it clear that the Government saw this‘general’ promotion of the benefits of suchschemes as significantly different from theprovision of advice to individuals as to theirpension options.

3.33. Thus, it was DWP’s view that theGovernment’s policy of promoting the generalbenefits of occupational pensions could not beequated with, for example, a recommendationthat an individual should join a particularoccupational pension scheme or the promotionof a particular personal pension by anindependent financial adviser.

3.34. Whilst it was the Government’s broad policyto encourage the take-up of private pensions,and particularly those with an employercontribution where this was available, theGovernment was not in a position to provideadvice to individuals, whose circumstanceswould inevitably vary enormously.

3.35. DWP also said that there were particularreasons why it did not see the provision of ‘clearand comprehensive information about theprincipal risks’ of membership of occupationalpension schemes as a concomitant responsibilityof its policy of promoting the general benefits ofsuch schemes.

3.36. This was especially so, DWP said, in relationto general leaflets like ‘Occupational Pensions:Your Guide’. DWP argued that to seek to providesuch information would have been neitherappropriate nor practicable in the sort of generalpublic information material which it issued.

3.37. DWP said that all types of saving, whichincluded all types of pension provision, weresubject to a variety of potential risks. No pensionarrangement, whether funded or pay-as-you-go,


could therefore offer an unconditional guaranteeof specific levels of benefit many years hence.

3.38. However, DWP argued that not all risksapplied, or applied to the same extent, to alltypes of pension arrangement. Moreover, whilesome risks did apply to all types of pensionarrangement, their consequences might differsignificantly depending on the type ofarrangement. Any attempt to explaincomprehensively and in a balanced way all thevarious risks, and the extent to which theyapplied to different types of pension, wouldhave required detailed, complex and lengthyanalysis of a sort which would be wholly out ofplace in a general information leaflet.

3.39. Furthermore, DWP said that an attempt toset this sort of material out comprehensively ingeneral official literature about pensions wouldin practice create a misleadingly off-puttingimpression of the security of occupationalpension schemes because attempting to set outall the risks relating to occupational pensionswithout putting them in the context of thevarious risks that apply to any sort of savingwould in practice tend to discourage peoplefrom joining occupational pension schemes – adecision likely to be to their detriment in mostcases.

3.40. In addition, DWP said that it would havebeen extremely difficult to describe inproportionate terms a range of risks whichstatistically were very unlikely to affect anyindividual scheme member, albeit that theymight have had significant consequences forthose that they did affect. Nor would theresulting document any longer resemble ageneral public information statement.

3.41. DWP acknowledged that its ‘PublicInformation Policy Statement’ included therequirement that information which DWP issued‘must be timely, complete and correct. The

Department may be held responsible if we giveadvice and someone relies on this to theirdetriment’.

3.42. However, DWP said that such timely,complete and correct information about therisks involved in pension savings in occupationalpension schemes would be all but impossible inthe context of general public informationleaflets, as the purpose of such leaflets isprimarily to provide a very general introductionto the subject of occupational pensions and toencourage individuals to obtain furtherinformation.

3.43. DWP said that it had been for this reasonthat its introductory leaflets had frequentlyreferred the reader to other sources ofinformation and, where appropriate, toindependent advice.

3.44. Given their leaflets’ explicitly modestobjectives and the issues about risk mentionedabove, DWP said that it would have beeninappropriate to seek to provide completeinformation about the principal risks in relationto occupational pension schemes.

DWP response to third question3.45. DWP, in response to my third enquiry, toldme that anyone contracting-out of the additionalstate pension must necessarily requireinformation about state pension rules andpotential entitlement as part of the backgroundto such a decision, and it accepted that DWP hadbeen a key source of such information during therelevant period and since then.

3.46. However, DWP said that official publicationscould only play a limited role in the process ofdeciding whether to contract-out.

3.47. In the case of occupational pensionschemes, DWP’s view was that the decision oncontracting-out was necessarily interlinked withthe decision as to whether to join a pension


scheme. To make such a decision, any individualwould need to rely on advice and informationfrom the trustees, or from an independentfinancial or other adviser.

3.48. DWP said that, while the act of contracting-out may be relatively straightforward, the rulesgoverning contracted-out as opposed tocontracted-in provision – and hence any ‘betteroff’ calculation, particularly across the longer-term – were complex.

3.49. Government leaflets (or equivalent internetinformation) intended for the general publiccould not act, in DWP’s view, as a full legal orfinancial statement of an individual’s position, orcover every circumstance which might affecttheir decision.

3.50. DWP said that, at most, such leaflets couldact as a starting point, designed to encourageindividuals to start thinking about saving for theirretirement and pointing them in the direction ofsources of further information. These werelimitations which such leaflets and relatedmaterial made clear.

3.51. Given this complex set of issues, DWP saidthat the Government believed that it wasreasonable to expect people to take furtheraction, beyond reading a general leaflet, beforetaking financial decisions with potentiallysignificant long-term consequences forthemselves.

3.52. DWP reiterated its acceptance that theinformation contained in its official publicationsshould be accurate. However, it said that it did notfollow that it would be reasonable for members ofthe public to treat such publications as beingcomprehensive or as providing individual advice.

3.53. DWP was firmly of the view that it would beunreasonable for the Government to beexpected to take responsibility for financialdecisions made (or not made) by individuals on

the basis of their assumptions aboutcircumstances not mentioned in officialliterature they had read:

(i) where they had relied exclusively on suchliterature; and

(ii) had taken no steps to obtain financial adviceon the issue; nor even

(iii) confirmed their understanding of theposition with DWP.

3.54. DWP said that it followed that, while it wasaccepted that official publications may provide aconvenient starting point for individuals whenconsidering whether to opt out of an element ofstate pension provision, general informationleaflets could provide no more than such astarting point.

3.55. DWP said that it did not believe that itwould be reasonable for an individual to relyupon general public information leaflets inisolation when making such a decision.

NICO3.56. At the same time, I asked NICO for furtherinformation. Specifically, I asked them to provideme with a list of all of the wound-up schemesthat NICO had worked on (or was still workingon) to reconcile GMP entitlements during therelevant period; the dates at which each schemehad wound up (and the date when NICO hadbeen informed that each had wound up); thetotal number, if known, and categorisation ofscheme members covered by this work; thenumber of schemes and individuals affected bysituations where the reconciliation process hadbeen completed and the number where suchwork had not been completed; and a detailedreport on the work done to date by NICO inrelation to each of the four schemes relevant tothe four representative complainants for thisinvestigation – and an indication of the currentposition on each scheme.


3.57. NICO said that not all the statisticalinformation I had asked for was available in theformat in which I had requested it. However, theyprovided me with some statistics to help meunderstand the context for their handling ofschemes winding-up and also offered myinvestigator the opportunity to visit NICO andto have access to their files and systems.

3.58. My investigator visited NICO on 3 March2005. He was provided with access to NICO staffand their files and was able to read a randomselection of case files and to interrogate theircomputer system freely.

3.59. As follow-up to that visit, in addition to thedetailed scrutiny of the files of the four schemesof which the representative complainants weremembers, I asked for a report on NICO’s handlingof a random selection of 22 schemes of whichother complainants were members and also forfurther statistical information.

NICO’s handling of the four representativeschemes3.60. In relation to NICO’s handling of thescheme of which Mr J was a member – whichhad approximately 500 members – NICO hadnot been informed that the scheme had ceasedfor approximately twelve months after it hadstarted wind-up.

3.61. In addition, I saw from the file that thescheme administrators had requested that NICOonly take action on cases which the administratorsidentified as a priority to NICO – and then onlyonce they were in a position to ask detailedquestions about scheme members’ entitlements.This did not happen for a further nine months.

3.62. Once the administrators sent in queries forresolution by NICO in relation to 22 members,NICO took action to resolve nine of those casesand asked for further information about theremainder in order for it to be able to resolve

the queries. This took NICO sixteen workingdays to complete.

3.63. Similarly, the process of resolving otherqueries involved ongoing dialogue between theadministrators and NICO but I saw that in allcases NICO responded to enquiries withinreasonable timescales.

3.64. With Mr G’s scheme – which had just over1,000 members – it took the administrators justover nine months to inform NICO that thescheme was winding up. It also was a complexscheme, which had had more than onesponsoring employer and had involved bothfinal salary and mixed benefit pensions in it.

3.65. Through consideration of NICO’s file, Iidentified two stages to the process ofreconciliation – the first, initial stageencountered problems in relation to NICO’scomputer system. However, those appeared tobe resolved quickly.

3.66. Furthermore, the principal delay in theinitial stage of NICO’s handling of this caserelated to a history of incorrect payments ofnational insurance contributions since April 1997by one of the sponsoring employers, which hadmeant that age related rebates had not beenproperly recorded by the scheme for everymember. This took NICO just over six months torectify, which, given the circumstances, did notappear to be unreasonable.

3.67. Once this had been resolved, NICOresponded, in the second stage of its handling, toeach query from the scheme administratorswithin five working days.

3.68. In relation to the scheme of which Mr Dwas a member – which had approximately 400members – the administrators took just over tenmonths to inform NICO that the scheme hadcommenced wind-up.


3.69. I saw from the file that the explanationprovided for this delay was that there had been achange in scheme actuary and that it had takensome time for the relevant files and recordsto be transferred to the new actuary. In addition,the original notification did not give NICOenough information to take immediate actionand further information had to be sought.

3.70. The information provided to NICO in duecourse raised more questions about whether thescheme had provided the correct information,including an accurate reference number. It wasalso clear from the volume and nature of theenquiries made by the scheme administrator ofNICO that considerable discrepancies existedbetween the records of the scheme and thoseheld by NICO.

3.71. Methods of preservation of pension rightshave now been secured for those members aboutwhom sufficient and consistent information isheld and those were provided within reasonabletimescales, given the administrative problemsoutlined above. However, I note that workcontinues to resolve the problems in reconcilingrecords for other individuals.

3.72. Finally, with regard to the scheme of whichMr B was a member – which had approximately800 members – the first notice that NICO hadthat the scheme had ceased and was in wind-upwas provided in a telephone call from thescheme actuary more than ten months after thathad happened. Three weeks later, NICO receiveda letter from the official receiver which advisedthat the employer had gone into receivership atapproximately the same time. NICO was theninformed formally by letter two weeks later thatwind-up had commenced.

3.73. It soon became apparent that thesponsoring employer, which had been formedfrom a number of mergers, had not notifiedeither the scheme or NICO of the transfer of

certain members from one scheme to another.In addition, NICO identified revaluationdiscrepancies between the scheme’s records andits own.

3.74. Over the next year, correspondence andinformation was exchanged to rectify thediscrepancies and to establish exactly whichindividuals of which former components of thecompany were members of the scheme.

3.75. I note that work continues to resolve theseissues and also to explore deemed buy-back.However, the scheme was removed from NICO’spriority list on 18 August 2004 at the request ofthe scheme administrators and was replaced onthat list by another scheme for which thoseadministrators were responsible.

NICO’s handling of the random sample of otherschemes3.76. Having examined the handling of the othersample schemes, a similar pattern emerged.Many of the schemes whose members havecomplained to me were not notified to NICOas being in wind-up until well over one year hadelapsed.

3.77. Similarly, the reconciliation process inrelation to many of the schemes suffered fromthe existence of inconsistent records and fromhistorical mistakes made by the personneldepartments of the sponsoring employers.

3.78. While NICO computer problems did appearto figure in some of the delays, in all cases I haveseen those problems were ameliorated byalternative clerical arrangements put in place byNICO or by other solutions. In the one casewhere it appears that such computer issues wereserious, other factors meant that no progresswould have been able to have been made on thatscheme even had no computer issues emerged.

3.79. In many of the cases, the different partiesresponded relatively quickly to each others’


enquiries or requests for information. However,that was not always the case, despite attempts,usually by NICO, to establish closer liaisonarrangements between NICO and the schemeadministrators, their advisers, or thoseresponsible for the affairs of insolventemployers.

3.80. None of the schemes I have observed werewound-up quickly and none of the schemecessations I examined were notified to NICOparticularly promptly, which led to delay fromthe outset.

Statistical information obtained from NICO files3.81. In order to satisfy myself that the delays incompleting wind-up and securing the benefits ofscheme members were not wholly or mainlyattributable to unreasonable delay or othermaladministration by NICO on a wider orsystemic basis, I asked NICO to provide me withadditional information about their totalworkload – concerning the time taken byscheme administrators or independent trusteesto inform NICO that a scheme was in wind-up.

3.82. The information we obtained from theircomputerised records showed that, at 22 March2005, of the 8,513 schemes on which they werethen working:

l in only 1,478 cases had the scheme notifiedNICO that it was winding-up, thus initiatingthe reconciliation process, within threemonths of scheme cessation;

l those notifying NICO within six monthstotalled 3,453 – with those within one yearcoming to 4,925; and

l in 1,646 cases it had taken more than twoyears from scheme cessation to notification.

3.83. The average time taken to notify NICO –thus launching the reconciliation process – wasjust over 14 months and more than 40% of

schemes took longer than one year to providenotification.

3.84. In relation to NICO’s more recent workload,the position as at 18 October 2005 showed thatthe average taken was 14.19 months, with exactly40% taking more than one year to notify NICO.At 15 January 2006, the position was,respectively, 15 months and 40%.

Further submissions by Dr Altmann3.85. I asked Dr Altmann for her observations onthe Government’s response to the complaintsand on DWP’s further comments. She madefurther submissions to me on 18 March 2005 andon 2 August 2005.

3.86. She said that the individuals who had losttheir pension rights through scheme wind-upboth had been encouraged by public bodies tojoin their occupational scheme and had had theschemes promoted to them through officialpublications.

3.87. Dr Altmann argued that this encouragementand promotion constituted more than theprovision of general and introductory information.In addition, when giving such encouragement andpromotion, the Government had a duty to bebalanced and fair in the information provided,even if it were of a general nature.

3.88. While noting that DWP in their response –and also in their publications – had made muchof the fact that occupational schemes were notsuitable for everyone, she said that the examplesgiven – people who changed jobs often or whohad low incomes – had been insufficient and hadbeen focused on the individual circumstances ofa potential member of an occupational pensionscheme.

3.89. Dr Altmann argued that that was not thesubstance of the complaints. The issueunderlying them was not whether individuals hadbeen told to join a scheme that was unsuitable


for their needs due to their own circumstances,but rather that no warning at all of the risks totheir pensions – based on the circumstances ofthe sponsoring employer of the scheme theywere being encouraged to join – had been made.Indeed, they had never been told that factorsbeyond their control could take their pensionsaway and instead had been told to join schemesthat had been promoted as being safe,guaranteed and protected by law.

3.90. She argued that, even where Government isonly generally promoting the advantages ofprivate pension provision, it still had aresponsibility to refer, even briefly, to any majorrisks to an individual’s investment and not just toemphasise the benefits of belonging to a scheme.

3.91. Dr Altmann noted that even introductorymaterial might have included one sentence whichsaid something like ‘of course, no pensionarrangement can offer an unconditionalguarantee and there could be circumstances, suchas if your scheme winds up, when you may notreceive the full pension you are expecting’.

3.92. In any case, she said, the ‘generalintroductory’ leaflets had dealt with a number ofother issues of detail, including the effects ofmoving abroad in future and the pension sharingprovisions for divorced people. To have not dealtat all with the most significant risk of all – thatan occupational final salary pension was only asgood as the sponsoring employer who hadpromised to pay it on retirement – was not inaccordance with good administration.

3.93. Dr Altmann accepted that it was forindividuals to ask questions and to seekappropriate advice before making financialdecisions. However, she said that the effect ofofficial publicity, ministerial announcements andother Government policy had been to provideassurance that pensions were safe and that theonly question that a member needed to ask was

whether their scheme was funded to the MFRlevel. That led to a position in which peoplecould not make informed decisions as they hadnot been told the correct questions to ask.

3.94. Dr Altmann said that she did not suggestthat all members would have been dissuadedfrom joining a final salary scheme had theyknown the true risks – but they would have beenable to take extremely important financialdecisions in the light of all the information thatthey needed to have to make such informedchoices. Some may have diversified theirprovision rather than make additional voluntarycontributions to schemes; others may havemonitored the financial strength of theiremployer more closely and taken action withtheir fellow workers to seek increasedcontributions from the employer.

3.95. She continued by emphasising theimportance of Government decisions and theterminology that Government had used. She saidthat, as regards to contracted out schemes, thevery name of the entitlement left little room forany doubt about the security of the pensionreceived from the rebates, having been called byGovernment a ‘Guaranteed Minimum Pension’.

3.96. Dr Altmann said that this reinforced thefeeling among members that their pensions weresafe and protected by laws devised and overseenby Government. They had never been told bythat Government that such pension rights mightnot actually be guaranteed nor even a minimum.

3.97. She continued by saying that theGovernment had also failed to carefully considerthe effect that weakening the MFR would haveon the security for members of schemes where asolvent employer simply chose to wind-up thepension plan, even if the employer could affordto meet the full buyout costs of providing thepromised pensions.


3.98. In conclusion, she said that each part ofGovernment had reinforced the message of theother and, even if each public body, on its own,felt that its actions were not so bad, ‘incombination the net effect was like encouragingpeople to bet their entire retirement income onthe shares of just one company on the stockmarket’.

Interviews with independent trustees3.99. My investigator met three independenttrustees, each responsible for overseeing thewinding-up of a large number of schemes and alloperating principally within different parts of theUK. One of the trustees had discussed the issuesprior to meeting my investigator with hercolleagues on the representative group forindependent trustees and some of her viewswere provided on behalf of those colleagues.

3.100. The topics covered in the interviewsrevolved around five questions:

l what the independent trustees consideredfrom their experience that scheme members,trustees, administrators and professionaladvisers knew about the role and purposeof the MFR;

l what they considered was known by theabove groups in relation to the security ofpension rights on scheme wind-up and onwhat basis or source such knowledge hadbeen gained;

l what the independent trustees consideredhad been the key challenges in resolving thewind-up of the schemes with which they hadbeen involved;

l what their experience had been of dealingwith NICO; and

l what their view of the key factors that madethe process of winding-up a scheme andpreserving members’ pension rights such aprotracted business.

3.101. I will now describe what the independenttrustees told me in relation to each questionabove.

The MFR3.102. The trustees agreed that, while schemeactuaries, lawyers, the trustees who wereappointed by the sponsoring employer, andother pensions professionals were generallyaware of the MFR – or had access to adviceabout its role, purpose and effects on theirscheme – neither the member nominatedtrustees nor the generality of the members hadany developed understanding or awareness ofthe role and purpose of the MFR.

3.103. One trustee said that he had attended ameeting of members not long after appointmentto oversee the winding up of the scheme, andhad had to explain that, although the schemewas funded to the MFR level, this did notnecessarily mean that it would be able to meetall of its liabilities to them. He reportedincomprehension and bemusement frommembers, as they understood that their pensionswere guaranteed so long as the scheme was‘properly funded in law’.

3.104. One trustee referred to the commonmisconceptions – ‘even within the industry’ –about the MFR that had persisted up untilapproximately 2000, which had equated theMFR with a solvency standard. This he said waspatently not the case, especially after 2000,by which time the MFR had become ‘anexceptionally weak standard’ – even thoughmany companies were only funding – legally –to that standard.


Security of pension rights3.105. The trustees agreed that the schememembers they had encountered had had little ifany idea before the wind-up of their scheme thatthere was any chance that the ‘pensions promise’would not be met in their case.

3.106. One said that many members believed thatthey had an ‘individual pot’ which no-one elsecould touch and which would fund theirretirement on the basis of the final salaryformula – the years spent contributing to thescheme and their final earnings beforeretirement or leaving the relevant employment.

3.107. Another said that the MFR had never beenexplained to members properly and that theexistence of a statutory funding mechanism had‘given the illusion of safety and security’. Having afunding basis established by and determined withthe approval of Government seemed to give theimpression that the Government was satisfiedthat the level prescribed was sufficient to meetthe ‘pensions promise’.

Key challenges in winding-up schemes3.108. In winding-up the schemes that they hadbeen involved with, the trustees said that the keychallenges they had faced were managingdistressed people when coping with the ‘cliff-edge’ effects of the statutory priority orders onscheme members under retirement age, whileensuring that assets were realised and properlyallocated to the pensioners and the members,and doing all this as speedily and with as littlecost to scheme assets as possible.

Dealing with NICO3.109. All three trustees said that they believedthat NICO provided a satisfactory service withinthe statutory, technological and administrativeconfines within which it had to operate.However, these confines were substantial and ledto long delays and extra costs which were notappreciated by trustees or members.

3.110. A key theme in their experience had beenthat NICO was not enabled within the legalframework to be flexible as regards thereconciliation of contracted-out entitlementsand that this had led to long and often involvednegotiations and exchanges of correspondence inrelation to quite small sums of money. This hadhad a serious impact on the amount of time ittook to wind up a scheme. One described thisas leading to an ‘intransigent’ attitude and to a‘rigid’ system. However, another said that NICOhad ‘vastly improved’ its service in recent yearsand had tried to be as ‘transparent’ and ‘helpful’as possible within an ‘outdated’, ‘overly complex’and ‘totally inflexible’ legal regime. The third saidthat the introduction of face-to-face meetingsbetween NICO and independent trustees to helpresolve problems had been a ‘significant’improvement.

3.111. Another common factor experienced by thetrustees was that NICO’s computer infrastructurehad not been all that it might in the past andthat this had had a detrimental impact on thetime taken to deal with even some of the lesscomplex schemes. The problems with NIRS2 hadtaken ‘many more months’ to resolve than had atfirst been expected. However, it was recognisedboth that this was matched by the often poortechnology supporting scheme administrationand also that advanced technology was nosubstitute for timely and accurate reporting toNICO of the data they needed, which trusteesrecognised had not always been forthcoming.

3.112. In relation to administration issues, thetrustees recognised that the work NICO could dowas heavily dependent on the quality ofadministration within schemes and the degree towhich the records of each scheme had integrityand were kept up-to-date. It was agreed that, onappointment as independent trustee, they hadfound the state of scheme records to be in avariable state. One of the key factors identified


by the trustees was that, where a schemeadministrator had been changed during the life ofa scheme, often there had been little attempt bythe old administrator to keep records up-to-dateonce they knew that they were to lose thebusiness – and also the handover from old to newadministrators often left much to be desired.

Factors of delay in winding-up3.113. All the trustees agreed that a number of keyfactors contributed to the delay in winding-upsome schemes. Such factors identified included:the need to pursue from the employer shortfallsin the funding of a scheme, as required in law;the variable state of the scheme’s records andthe time taken to agree entitlements with NICO;where an employer was insolvent, the inability ofindependent trustees to secure a portion of theassets owed as the scheme was an unsecuredcreditor; delays on both sides in thereconciliation process; and the complexity ofpensions law.

3.114. The trustees all recognised that these factorshad contributed to the position for many years.

Other matters3.115. The independent trustees made a numberof other points of relevance to my investigation,not covered above. These included:

(i) that the pensions system, especially inrelation to the involvement of public andregulatory bodies, was insufficiently ‘joined-up’ and that as a result many issues were notapproached in a consistent and effectivemanner;

(ii) that words like ‘guaranteed’ should neverhave been used in relation to pensions orany other form of investment activity – andthat the limits to the security of final salaryschemes had been obscured by the regularuse of such language by Government andothers in the past;

(iii) that many scheme administrators had usedofficial publications as the basis for theirpractice manuals and other schemedocumentation and, while there was a dutyto seek advice, many administrators sawpublic bodies as a source of information andadvice at least as authoritative as eithertheir lawyers or actuaries;

(iv) that it was not clear that the Governmenthad learnt from the lessons of the past inensuring that the limitations of theprotection afforded by the new PPF arebeing made clear to scheme members andthe general public;

(v) that it was not clear how the amountprovided to fund the FAS could deliveranything other than minimal support orsupport to only a few – and that many ofthe potential recipients of ‘assistance’ fromthe FAS were extremely upset by theterminology used and the amount of moneyavailable;

(vi) that the changes over time to the MFR didnot appear to have been consistent with thepublic’s perceptions of those changes, asthey had not strengthened the MFR test butindeed had weakened it;

(vii) that the removal of Advance CorporationTax relief had not only cost the pensionschemes significant amounts of money, buthad also invalidated the rationale behind theMFR (which in part led to the subsequentchanges to it);

(viii) that there remained a fundamental tensionbetween the need to ensure that employerswere not dissuaded from starting orcontinuing to sponsor schemes and theincreased costs of ensuring that a reasonablelevel of security was provided to schememembers – and that in the past Government


initiatives had tended to portray moves torelieve the burden on employers as being ameans of strengthening member protection.This had often been misunderstood;

(ix) that it had never been clear to many in thepensions industry whether the Governmentor the actuarial profession were responsiblefor the MFR; and

(x) that – even with the advent of the PPF – aprogramme of education is still necessary tounderline the fact that employers providepensions on a voluntary basis and that anyoccupational final salary scheme is only assecure as the employer standing behind it.

Observations by the FSA3.116. The Chairman of the FSA told me that hedid not agree with the view expressed by theindependent trustees we had interviewed thatthe term ‘guaranteed’ should not be used, or onlyused with a clear qualification, in circumstanceswhere the insolvency of the giver of theguarantee would result in the beneficiary notreceiving all the benefits to which they wereentitled. He said that ‘guaranteed’ did and doeshave a lay meaning – namely, that the consumeris being told what return they can expect when afinancial product pays out on maturity in normalcircumstances.

3.117. The Chairman said that the FSA has for anumber of years had rules governing howfinancial products are promoted. Subject to thepromotion overall being ‘clear, fair and notmisleading’, those rules allow banks and lifeinsurance companies to describe, in the case ofthe former, deposits as having a ‘guaranteed’ rateof return and, in the case of the latter, a policy(including a pension) as having ‘guaranteed’benefits. In neither case does the FSA regard theconsumer as being given a promise about thecontinued solvency of the firm providing theproduct. In the context of the schemes with

which my investigation is concerned, the FSAhas noted that it used the word ‘guarantee’ as asimple way of distinguishing between personalpensions, where the consumer bears theinvestment risk, and defined benefitoccupational pension schemes, where themember is able to predict the level of benefit hecould expect to receive on retirement and so it isthe employer which bears the investment risk.

3.118. The Chairman told me that he consideredthat there were good reasons for this. He saidthat, in almost any financial transaction, apromise is only as good as the soundness of thegiver of that promise. It would not help aconsumer if every piece of material promoting aproduct were covered by a solvency warning –over-use would blunt such a warning or wouldcause unjustified concern and confusion. Thiswas of equal relevance to final salary schemes,where the use of the term ‘guaranteed’ was notused by the FSA to indicate the continuedsolvency of the sponsoring employer of ascheme or the indefinite continuation of thescheme itself.

Actuarial advice3.119. In order to assist me to investigate whetherthe decisions – both to change the actuarialbasis of the MFR calculation and also not tosubsequently warn members that these changeshad allegedly had the effect of weakening theprotection afforded by the MFR to their accruedpension rights – were taken withmaladministration, I sought independentactuarial advice.

3.120. The focus of that advice was on whetherthe 1998 and 2002 changes to the formulaunderpinning the MFR were significant; and, if so,whether they implied or involved a reduction inthe protection offered to scheme members.


3.121. I now turn to consider the advice I havereceived. What follows is necessarily only anoutline of that advice.

The design of the MFR3.122. My advisers tell me that the original designof the MFR had a number of limitations in termsof its ability to keep pace with market conditionsand thus to maintain the level of protection itwas intended to provide to members of finalsalary schemes.

3.123. I am advised that these conditions include:

l that the UK was moving into an era ofhistorically low inflation and low real interestrates (as evidenced by the fall in fixed interestgilt yields);

l the removal by Government, in the July 1997Budget, of the ability of UK pension schemes toreclaim the tax credit deducted from UKdividends. There was, however, at the sametime an offsetting reduction in UK corporationtax from 33% to 31%. I am advised that theaggregate impact was nevertheless animmediate step reduction in income for UKpension funds;

l indications that companies were findingdifferent ways of returning value toshareholders, for example through share buybacks, and that fundamental changes in thecommercial environment were causingdividend yields to fall;

l in the late 1990s, the market values of UKequities were at an all-time high and rising –the so-called ‘technology bubble’ in equityprices; and

l the one-off effects of large scale acquisitionsand disposals by companies included in theFTSE Actuaries All-Share Index, which haddistorted the yield on the index as a whole.

3.124. In addition to these contextual factors, myadvisers also tell me that the non-pensioner MFRbasis often placed a lower value on pensionbenefits than the pensioner MFR basis.

3.125. Taking these factors together, I am advisedthat the non-pensioner MFR basis had beenweakened since its inception by the marketeffects highlighted above, such that the chanceof an MFR transfer value being sufficient toprovide the member’s pension, as measured onthe MFR pensioner basis, was significantlyreduced even without the changes to the MFRbasis, which were made in 1998 and 2002.

3.126. Moreover, the long-term assumptions forthe non-pensioner MFR basis did not take intoaccount the falling gilt yields over the period.

3.127. I am also advised that the MFR pensionerbasis did not keep pace with the cost of securingpensions by purchasing annuities because ofimprovements in life expectancy and thestrengthening of other factors in annuity pricingbases.

3.128. These factors led to the MFR being seen asunsatisfactory as the statutory basis for schemefunding and in need of replacement.

Changes to the MFR3.129. The changes made to the MFR basis in 1998and 2002 were principally two changes to theequity market value adjustment. As a result, thechanges did not affect the MFR liabilities forpensions already in payment and only partiallyaffected those of non-pensioners within tenyears of MFR pension age.

3.130. The full effect of the changes was only feltby non-pensioners more than ten years underMFR pension age, because the MFR effectivelyassumed that a member taking a transfer valuefrom a scheme would invest it in full in UKequities until they were ten years from MFR


retirement age. At this point, they were assumedto gradually switch it all into long dated gilts.

3.131. I am advised that, in practice, memberstaking transfer values to personal pensionvehicles have a wide range of investment optionsand often invest much more conservatively thanassumed in the MFR basis. This would typicallyhave reduced the probability of MFR transfervalues being sufficient to provide the deferredbenefits given up. However, what follows is basedon the assumptions underlying the MFR basis as itstood throughout the relevant period in question.

First change3.132. With effect from 15 June 1998, the equitymarket value adjustment changed from beingcalculated as the ratio of 4.25 to the grossdividend yield on the FTSE Actuaries All-ShareIndex to the ratio of 3.25 to the net dividendyield on the FTSE Actuaries All-Share Index.

3.133. My advisers tell me that the reason for thechange from a formula based on the gross yieldto one based on the net yield was that, witheffect from 2 July 1997, tax credits for pensionschemes on UK company dividends wereabolished.

3.134. They advise me, however, that thereasoning for the change in the 4.25 factor to 3.25is not straightforward but that it seems to havebeen a combination of allowing for the stream ofincome payments that might be availablefollowing the removal of tax credits and fallingdividend yields, which reflected the use bycompanies of means other than dividends forreturning value to shareholders.

Additional minor change3.135. With effect from 1 June 1999, changes tothe FTSE Actuaries gilt indices also made a minortechnical change to the gilt index to be used inthe calculation of the gilt market value

adjustment. I am advised that this is not ofsignificance to the issues I have investigated.

Second change3.136. With effect from 7 March 2002, the equitymarket value adjustment became the ratio of3.00 to the actual dividend yield on the FTSEActuaries All-Share Index. I am advised that thestated rationale for this change was set out in aletter from the actuarial profession to DWP on 5September 2001.

3.137. The transitional period of the MFR hadbeen due to end on 5 April 2002, at which pointthe maximum period within which any MFRdeficit had to be eliminated was to have becomefive years.

3.138. At the same time, the Governmentproposed – and Parliament approved – anamendment to the relevant Regulations so that,with effect from 19 March 2002, where anactuary certified a schedule of contributionsfollowing an MFR valuation and the MFR fundinglevel was less than 100%, the period forcorrecting the deficit was extended to amaximum of ten years.

3.139. Furthermore, at the same time, the periodto eliminate serious shortfalls, defined as thedeficit when the MFR funding level was less than90%, was extended to three years by parallelchanges to the relevant Regulations. This periodwas due to have become one year from 6 April2002.

The significance of the changes on MFRcalculations3.140. My advisers analysed MFR liabilities fornon-pensioners aged between 20 and anassumed MFR pension age of 65 – calculated inMarch 2002 on three bases: using the original1997 formula; that in operation after the June1998 change to the formula; and also that inoperation after the March 2002 change.


3.141. They advise me that the 15 June 1998change reduced the value of MFR liabilities formembers more than ten years away from theirMFR pension age by 9.4%.

3.142. I am also advised that the 7 March 2002change to the formula reduced the value of MFRliabilities for members more than ten years awayfrom their MFR pension age by 7.7%.

3.143. Thus, the effect of the combined changes,compared to the original 1997 basis, was aweakening in the MFR basis of approximately17%, although this could only be anapproximation because, by the time of the laterchange, the gross dividend yield had ceased tobe published.

3.144. My advisers also undertook calculationsusing their stochastic model (see annex B) toassess whether the MFR provided to members a‘reasonable expectation’ of achieving equivalentbenefits through a personal pension both beforeand after the changes to the MFR basis. This wasdone by generating sets of possible outcomes atJanuary 1996, April 1997, June 1998 and March 2002according to the basis set out in annex B. Theprobabilities are shown in the table below.

3.145. The Government’s intention was that non-pensioners should have at least a 50% chance ofreceiving their full pensions if their scheme wasfully funded to the MFR level. The two changesto the MFR calculation on this analysis reduced

the probability of meeting that original intentionby between 6% and 9% at ages up to 45. At age55, by which time the member is only ten yearsfrom retirement, the reduction was considerablylarger.

3.146. Consequently, after the March 2002change, I am advised that MFR transfer valuesonly had just above a 35% chance (at ages upto 45) of providing the member’s pension.

3.147. As I have said above, this analysis doesnot reflect the further falls in probabilities thatwould be seen if improvements in lifeexpectancy and other loadings in annuity terms(which my advisers estimate could have reducedthe probabilities to less than 30%) or thesignificantly reduced probabilities for under-funded schemes were also taken into account.

3.148. The advice to me is that both changes tothe MFR basis resulted in a significant reductionin the liabilities which any scheme was deemedto have and, assuming no additional fundingwas forthcoming, a scheme’s disclosed fundingposition against the MFR level improved acrossthe board.

Protection afforded by MFR and the policyrationale3.149. What of the protection afforded topension scheme members and their accruedrights by the MFR?


Probability of sufficient Before equity MVA After equity MVAassets to provide changes changesaccrued pension Age transfer taken Age transfer takenDate Age 25 Age 35 Age 45 Age 55 Age 25 Age 35 Age 45 Age 55January 1996 50% 51% 52% 48% 50% 51% 52% 48%April 1997 51% 52% 54% 53% 51% 52% 54% 53%June 1998 47% 50% 51% 61% 44% 46% 47% 52%March 2002 43% 44% 45% 43% 37% 37% 36% 26%

3.150. My advisers tell me that the weakening ofthe MFR basis through the changes to the equitymarket value adjustment outlined aboveaccounted for about half of the reduction inprotection from the original policy intention,with the rest being in consequence of thechanged economic and policy context.

3.151. They also tell me that such changes went inthe wrong direction if the intention had been torectify an already weakened MFR and return it toits original strength. Instead the changes reliedon an assumption that more of the return topension schemes would come from capitalgrowth, instead of dividend income, than hadbeen the case historically.

3.152. I am advised that the 2002 change to theequity market value adjustment was the only oneof the three earlier proposals for interim reformof the MFR proposed by the actuarial professionin May 2000 that would have had the effect ofweakening the MFR.

3.153. In their response to my enquiries on thismatter, DWP has stated that the intended effectof both the 1998 and 2002 changes was torealign the MFR more closely with the strengththat was originally intended. In support of thisassertion, DWP noted that, regarding the 1998change, the Institute and Faculty of Actuarieshad said that it was required because changeshad ‘called into question the continuingconsistency of the MFR basis with theGovernment’s original intentions’ and, regardingthe 2002 change, that it was stated in a lettersent on behalf of the actuarial profession toDWP in September 2001, that the further changeto the MFR was ‘aimed at bringing its strengthback to that originally intended’. That is, thatdeveloping economic trends had caused the MFRto operate at a stronger level than originallyintended and that a weakening of it wouldrealign it with its original strength.

3.154. DWP also told me that these changes wererecommended to Ministers in the light of theactuarial profession’s advice, and after seekingindependent confirmation from GAD that whatthe profession was proposing was reasonable inthe circumstances; that the changes werewelcomed publicly by the actuarial profession(in a press release of June 1998, the Faculty andInstitute of Actuaries welcomed the changesbecause they ‘correct a distortion in the resultswhich was causing increasing concern toemployers and their advisors’ ); and that noconcerns about the actuarial effect of thechanges were drawn to DWP’s attention at orafter the time the changes were promulgated.

3.155. However, I am advised that it is impossibleto reconcile these submissions about the effectsof the changes to the MFR basis with the originalpolicy intention behind the MFR.

3.156. This is because the MFR had, by the time ofthe changes, already been weakened from itsoriginal level; and the effects of the changesimplemented by the Government involved asignificant further weakening (on top of the 1998change) of the protection afforded to schememembers by measurement against funding levelson an MFR basis.

Comments of actuarial profession3.157. I asked the governing bodies of the actuarialprofession to comment on the advice I hadreceived, which is set out above. I received theircomments on 13 January 2006.

3.158. The profession stressed that it was ‘notcriticising the work carried out by [my] actuarialadviser’ but rather they felt that ‘those of us whowere involved in recommending the changes inMFR to the Government can contributeadditional insights to assist in a fullerunderstanding of the circumstances’.


3.159. Without setting out some ‘legitimate widerconsiderations that were important at the time’,the profession thought that the analysis andconclusions set out above would fail to provide asufficiently balanced view of what was a verycomplex matter.

3.160. The profession then set out suchconsiderations in relation to both the 1998 and2002 changes to the MFR basis.

1998 change3.161. The profession told me that, immediatelyprior to the June 1998 change to the MFR, theequity market value adjustment (MVA) had risento such an extent that some schemes were indanger of breaching the Surplus Regulations andbecoming liable to a tax charge. In other words,they said that the minimum funding ‘test’ wascausing some schemes to exceed the maximumfunding allowed with full tax privileges.

3.162. An even more powerful concern, widelyfelt by employers, scheme trustees and actuariesat that time, had been that it was possible atmost ages for a member of a final salary schemeto take a minimum transfer value, calculated onthe MFR basis, and to invest that transfer valuein a gilt based personal pension such that theycould be virtually 100% certain (subject to futureannuity rates) of obtaining a greater pension thanthey were giving up by taking the transfer value.

3.163. The profession said that this meant that theMFR test had become very much tougher thanthe Government’s specification of ‘at least aneven chance’ of replicating the scheme’s benefits.

3.164. The profession told me that the high equityMVA prior to June 1998 enabled members to bevirtually certain of getting better benefits. Thissupported their contention at the time that theMFR had become tougher than the Governmenthad originally intended. Consequently, theprofession’s recommendation in May 1998 that

the Government agree to change the equity MVAwas aimed at returning the MFR to the strengthGovernment had originally intended it should be.

2002 change3.165. In relation to the 2002 change to theequity MVA, the profession told me that this hadbeen driven by a need to reflect changes incompanies’ behaviour in relation to buying backshares as an alternative to the payment ofconventional dividends.

3.166. The profession said that at the time therehad also been strong criticisms of the arbitrarynature of the MFR formula, such as evidenced bythe impact of corporate activity, which theprofession had referred to in its May 2000 reportof its review of the MFR for Government.

3.167. The profession told me that contemporaryanalysis had shown that a scheme which hadbeen 100% funded on the MFR basis immediatelyafter the June 1998 change to the equity MVAand which had adopted a ‘neutral’ passiveinvestment strategy would have become lessthan 90% funded over a period of less than twoyears. In other words, the profession said thatthis demonstrated that the MFR had beenbecoming a progressively tougher test than hadbeen originally intended and that action wasrequired to return it to its original strength.

3.168. It was in this context that the profession’srecommendation had been made. Moreover, therecommended adjustment had been morecomplicated than it had appeared on the surface,as it was made to reflect two competing trends– improved mortality and a higher than intendedequity MVA – which would in addition have adifferential impact on individual schemes. Thishad been explained clearly in their letter of 5September 2001 to DWP in which theirrecommendation had been made.


Further comments3.169. In addition to its comments on the twochanges to the MFR basis, the profession told methat all final salary pensions regulation in the UKhas always been (and still is) a balance betweenproviding security for members’ benefits whilenot increasing costs to employers by so muchthat they cease to provide, on a voluntary basis,such pensions for their employees.

3.170. The profession said that it was notpossible, at one and the same time, to meet allof the following three conditions:

l investment of pension scheme assets inequities;

l stable employer contributions over time; and

l stable levels of member security over time.

3.171. The profession said that, by way ofexample, to achieve stable protection ofmembers’ benefits and stable employercontributions, it would be necessary to requireschemes to invest all their assets in gilts(assuming insurance company buy-out ratesfollowed gilt prices). Alternatively, if investmentwas in equities, then in order to achieve stableprotection of members’ benefits, it would benecessary to require companies to pay additionalcontributions whenever the equity market fellrelative to the gilts market.

3.172. The profession told me that, given thoseimperatives, it was not surprising that the level ofmember security provided by the MFR wasvolatile. They said that this had been known byGovernment at the time of the March 2002change to the MFR basis, as it had been clearlyillustrated in the profession’s May 2000 reporton their review of the MFR that DWP’spredecessor had commissioned.

3.173. The profession said that ‘therefore,decisions about reacting to short term changes in

the level of protection afforded by the MFR testwere far from straightforward, given the desire,from the employers’ and ultimately the members’perspective, for a stable environment for planningemployers’ financial obligations to their schemes’.

My assessment3.174. I am grateful to the actuarial profession fortheir comments, which gave me useful insightinto the context in which their recommendationsin May 1998 and in September 2001 were made.I would make two further observations on theircomments.

3.175. My first observation is that I do not doubtthat the other contextual factors to which theprofession drew my attention – including theneed to consider the interests of employers bynot increasing costs – might have beenimportant considerations for the profession orfor Government at the time.

3.176. However, my concern in seeking actuarialadvice on the economic and demographiccontext in which the DWP’s decisions to amendthe MFR basis in 1998 and 2002 were taken waslimited to consideration of whether the MFR atthe relevant times met the original policyintention that Government had set for the MFR.

3.177. In response to the complaints made aboutthose decisions, the Government said that therationale for agreeing to amend the MFR basis onboth occasions was that the changes wouldrealign the strength of the MFR with its originalpolicy intention. While there may well have beenother concerns of which the decision-makerswithin DWP might have been aware, the evidenceset out in chapter 4 of my report makes it clearthat the stated rationale for their decision onboth occasions was realignment with this policyintention.

3.178. Thus, the advice I have received wasproperly restricted to an assessment of whether


the MFR was, at the relevant times, able todeliver an even chance for non-pensioners thatthey would receive their pensions followinginvestment of the transfer value provided. I amsatisfied that the advice I have received on thisquestion is robust.

3.179. Secondly, while many of the broadercomments made by the profession have beenechoed by my advisers, they have advised methat some of the observations made by theprofession are surprising.

3.180. My advisers tell me that the SurplusRegulations did not make a significantcontribution to a position in which schemesbecame ‘under-funded’ on the MFR basis. Myadvisers tell me that it can be shown that, evenallowing for quite different scheme profiles,MFR funding levels would have to have beenwell in excess of 150% to run the risk ofbreaching the Surplus Regulations at the timeof the 1998 change. I have seen no evidencewhatsoever that any of the schemes whosemembers have complained to me were everfunded to such levels.

3.181. Moreover, I do not see how the minimumfunding requirement for all schemes – and thusthe protection of all scheme members’ pensions– could be weakened merely because someschemes were very well funded. Sponsoringemployers of such schemes were allowed to take‘contribution holidays’. I therefore do notunderstand the suggestion that there was noalternative to weakening the MFR test for allschemes because of the position of the bestfunded schemes.

3.182. In any case, even if concerns about theeffects of the Surplus Regulations were part ofthe context in which the MFR changes weremade, these concerns formed no part of thestated reasons given by DWP for making thosechanges. The same is true for any concerns that,

when the 1998 change was made, it was possibleat most ages for a member of a scheme who wasprovided with a transfer value to invest it in a giltbased personal pension so that they could bevirtually 100% certain of obtaining a greaterpension than that given up by taking the transfervalue.

3.183. In considering complaints about thedecisions in both 1998 and 2002 to amend theMFR basis, I will assess those decisions havingregard both to the reasons given by the decision-makers at the time – alignment with an intentionthat would enable non-pensioners to have aneven chance of receiving their pensions followinginvestment of a cash equivalent transfer value –and to the way in which those decisions weretaken.

3.184. Having set out the enquiries I made duringmy investigation, I now turn to set out the resultsof my scrutiny of various documentary sourcesof evidence relevant to the complaints I haveinvestigated.


Introduction4.1. This chapter sets out the evidence that myinvestigation has uncovered throughconsideration of departmental files, officialpublications, and other documentary sources.

The Maxwell affair4.2. In December 1991, after the death of RobertMaxwell, a shortfall of £450 million came to lightin the Maxwell companies’ pension schemes. Itwas discovered that, as a result of missing funds– which became the subject of subsequentlitigation – the schemes were not able to meet infull their financial commitments. This includedbeing unable to meet their liabilities to pay outemployees’ pensions or to enable non-pensioners to transfer their accrued pensionrights to another pension scheme or otherapproved savings facility.

The Pensions Law Review Committee4.3. In the light of the issues raised by thecollapse of the Maxwell business empire and thesignificant shortfall in its associated pensionschemes, the then Secretary of State for SocialSecurity, Peter Lilley, put in place a rescuepackage for the Maxwell pension funds.

4.4. In June 1992, he also asked Professor RoyGoode to chair a committee of inquiry, whoseterms of reference were:

To review the framework of law and regulationwithin which occupational pension schemesoperate, taking into account the rights andinterests of scheme members, pensioners andemployers; to consider in particular the statusand ownership of occupational pension funds andthe accountability and roles of trustees, fundmanagers, 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 on30 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 wasconsiderably complex but lacked structure andorganisation. The law also allowed such widepowers and discretion to be left in the hands ofthe sponsoring employer and the schemetrustees that the interests of scheme memberswere not always sufficiently protected. In theCommittee’s view, there was also an undesirableabsence of a compensation scheme when thingswent wrong, in contrast to the position inrelation to other investment activity, and therewas no regulatory body with the jurisdiction andpowers to monitor and enforce proper standardsin the administration of occupational pensionschemes.

4.7. The Report contained 218 specificrecommendations, but, by way of summary, setout six ‘key recommendations’, namely:

(i) that Trust law should continue to providethe foundation for interests, rights andduties arising in connection withoccupational pension schemes but shouldbe reinforced by a Pensions Actadministered by a pensions regulator;

(ii) that the freedom of action trustees hadshould be limited so as to ensure the realityof the pensions promise, to protect rightsaccrued in respect of past service, and toallow members to make appointments tothe trustee board;

(iii) that the provision of information tomembers by their pension scheme should beimproved both in content and in clarity andpresentation;

(iv) that the security of members’ entitlementsshould be strengthened by minimumsolvency requirements and by monitoringboth by a pensions regulator and by scheme

4. The documentary evidence | 47

4. The documentary evidence

auditors and actuaries, coupled withrestrictions on withdrawals by employersof surplus funds from schemes where suchexisted and also, as a last resort, theestablishment of a compensation schemeto cover deficits arising from fraud, theftor other misappropriations;

(v) that, on establishing a scheme, thesponsoring employer should be free toreserve the right to close, freeze or windup their scheme, to approve or to refuseincreases in benefit and to reduce or tostop contributions, subject to the minimumsolvency requirements; and

(vi) that the administrative burdens onemployers and scheme administratorsshould be reduced wherever possible, andflexibility increased, through simplificationof the relevant law and its administration.

The Government’s response 4.8. The Pension Schemes Act 1993 receivedRoyal Assent on 5 November 1993. Itconsolidated the existing law relating to pensionsschemes with the aim of making that law moretransparent and better understood.

4.9. The Government also announced that itaccepted the main thrust of the Report’srecommendations, which it noted had beenwidely welcomed, and published a two-volumeWhite Paper, ‘Security, Equality, Choice: TheFuture for Pensions’, in June 1994.

4.10. The White Paper set out the Government’sproposals, on which views were sought, toimplement the key recommendations of theGoode Report that it was inclined to accept.

4.11. In relation to the security of pension schememembers’ accrued rights, the White Paperproposed that a minimum solvency requirement

would be introduced for defined benefitschemes. It went on:

The Government agrees with the PLRC proposalsthat a minimum solvency requirement should beintroduced. This is not only to reinforceconfidence that accrued rights will be protectedbut also to provide a basis and yardstick forsetting a schedule of contributions to maintain anappropriate funding level – thus providing a keymeasure for trustees in maintaining and managingthe scheme and for giving clear information tomembers on the health of the scheme...

4.12. The White Paper went on to describe whichschemes would be subject to the solvencyrequirement, how minimum solvency would becalculated, the transitional arrangements for itsphasing in, mechanisms for regular ‘health checks’on each scheme, and the relationship betweenthe solvency requirement and the indexationprovisions set out elsewhere in the Government’sproposals.

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

Further discussions on detailed legislativeproposals4.14. On 11 October 1994, while the consultationprocess and preparations for the introduction ofthe Bill were undertaken, the chairman of thePensions Board of the actuarial profession wroteto DSS concerning the basis of calculation forthe proposed Minimum Solvency Requirement(MSR).

4.15. The letter specifically discussed proposals tointroduce an equity element for pension liabilitiesin the case of large pension funds. This followedearlier discussions about a letter from DSS on 26September 1994, which had set out theGovernment’s thinking in suggesting this.


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

I explained that the views we discussed wereprovisional ones and that I would seek input fromother members of the Pensions Board. The ideashave since been discussed in the Current IssuesCommittee, and generally supported, as long as itis clear that responsibility for the basis isaccepted by the Government – i.e. theintroduction of an equity element will increasethe probability to some extent of schemes beingunable to deliver the winding up liabilities and itis for the Government to decide where to strikethe balance between security for the membersand financial consequences for scheme sponsors.

4.17. The then Secretary of State for SocialSecurity, Peter Lilley, wrote to Sir John ButterfillMP (as he is now) on 8 December 1994.Publication of this letter was the thenGovernment’s chosen mechanism for publicisingthe changes to the basis for the proposedsolvency requirement that had been agreed by it.

4.18. The letter said that ‘on the basis of furtherdetailed analysis, and in response to commentsmade on the proposals set out in the White Paper,the Government has decided to... authorise abasis for calculating statutory minimum solvencywhich would allow the larger defined benefitoccupational schemes to value a proportion oftheir pensioner liabilities by reference to equityreturns’. It also set out other changes – to theproposed time limits for restoring schemefunding levels to the statutory minimum leveland to enable the calculation of the statutoryminimum solvency requirement to be based onmarket values over a period of months.

4.19. Mr Lilley continued (with original emphasis):

The basic rationale for a minimum solvencyrequirement is clear and is set out forcibly in thereport of the Pension Law Review Committee. In

the modern world, no employee can make thecomfortable assumption that his employer will bearound 20, 40, 60 years hence to pay pensionbenefits as they fall due. If an employer makes adefined benefit pension promise, the pension fundshould therefore be adequate to secure thatpromise, irrespective of what may happen to theemployer over the period before the final pensionpayment is made.

4.20. The letter continued:

The proposed statutory minimum solvencyrequirement will provide an important, objectivemeasure of the adequacy of a pension fund;something which members and trustees will beable to monitor and against which theperformance of the fund and other importantmatters can be measured.

4.21. After setting out the rationale for theintroduction of an equity element, which it wassaid would have the effect of ‘not weakening thesecurity of members to any significant extent’, theletter then stated that ‘this adjusted package ofmeasures should ensure that the statutory MSRwill deliver an appropriate level of security formembers, without imposing unnecessary burdenson business’.

4.22. The letter then set out ‘solid gains insecurity from the introduction of an MSR’ forscheme members. These included the following:

(i) that there would be ‘a consistent basis formeasuring the adequacy of a fund in termsof its ability to deliver at least the cashequivalent of its members accrued rights’;and

(ii) that ‘the valuation basis should ensure thatschemes have sufficient assets either to buyout their pension liabilities with annuitycontracts or to deliver pension benefits asthey fall due, and to pay a fair transfer valueto non-pensioner members in respect of their


accrued rights’. It was said that ‘thisrepresents a fair and practical basis forassessing the adequacy of pension funds tomeet their minimum liabilities’.

4.23. The letter, while noting that this wouldinvolve additional costs to schemes, stated thatsuch a ‘price is worth paying to produce greaterconfidence that defined benefit promises willactually 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 actuarialprofession issued a press statement about itscontents. While welcoming the Government’sdecisions as to the basis for the proposedminimum solvency requirement, the professionsaid that it was:

...concerned that the significance of the word“solvency” in describing the proposed test for verylarge schemes could give a false impression of thewinding up position to ordinary members. Wetherefore see the need for a major effort byGovernment and those involved in pensionprovision to educate members of schemes as tothe extent of the security for their benefits whichthe Minimum Solvency Requirement can beexpected to provide.

4.25. On 20 January 1995, the actuarial professionwrote to the Secretary of State to express itsview that ‘the term solvency was aninappropriate description of the test and waslikely to mislead scheme members and others intobelieving that their benefits would be fully secureif their pension scheme wound up’. The professionsuggested that a more appropriate term for theGovernment’s proposed scheme fundingstandard was a ‘Minimum Funding Requirement’.

4.26. On 15 February 1995, Mr Lilley replied to theactuarial profession. After setting out thebackground to the Government’s thinking, he said‘as to the term “minimum solvency requirement”

it could be argued that if minimum solvency istaken to be an absolute guarantee of solvency atall times then it could never be achieved’. Hecontinued by saying that ‘the MSR calculationproposed by the PLRC already accepted thenecessity of using the cash equivalent approach inrespect of non-pensioner liabilities – which Ibelieve is reasonable and realistic, but which wehave to accept is not a guarantee’. He concludedby saying that he believed that ‘it is importanthow the MSR is explained to members – butwhether or not public perceptions might changeby using a different name is perhaps debatable’.

4.27. On 20 March 1995, the actuarial professionwrote to DSS officials to express its concernabout the clarity of the intention behind someof the legislative proposals then being discussedin Parliament. After discussion of other matters,the profession said that it was ‘very concerned atthe misleading impression that a signed minimumfunding certificate may give to ordinary schememembers’.

Second Reading of the Pensions Bill in theLords4.28. In the meantime, and following itsintroduction into the Lords, that House gave theresulting Pensions Bill a Second Reading after adebate on 24 January 1995.

4.29. The late Lord Mackay of Ardbrecknish, thenthe Minister of State at the Department ofSocial Security, in moving the Second Readingsaid that:

There are four major principles underlying thislegislation. First, confidence in the security ofoccupational pension schemes was underminedby the Maxwell affair and we intend to restorethat confidence by improving security. Secondly,equal pension rights for men and women arerequired by the European Court of Justice rulings.The Bill will bring domestic legislation into linewith European law and will make it easier for


contracted-out salary schemes to equalisebenefits for men and women in the future.Thirdly, in order to ensure a fair and sustainablebasis for state pensions in the next century, weintend to phase in equalisation of state pensionage at 65. Finally, we are committed to makingpersonal pensions attractive across a broader agerange, introducing age-related rebates for thoseinvesting in personal and money purchasepension schemes.

4.30. In setting out the purpose of the provisionsof the Bill related to improving the security ofoccupational pension schemes, the Ministercontinued:

Pensions are for many people the most significantsingle investment they will ever make. They must beconfident that the pensions promise of today willindeed be matched by the pension of tomorrow.

4.31. After setting out the specific proposals thatwere contained in the Bill to deliver thisobjective, the Minister continued:

No system can offer a total guarantee againstfraud. However, we will do everything possible toeliminate the likelihood of fraud or otherwrongdoing by strengthening the framework ofpension provision.

4.32. In addition to proposals to give schememembers rights to clear and relevantinformation, to nominate trustees, and to haveaccess to a dispute resolution mechanism for anycomplaints, the Minister then described the Bill’sprovisions insofar as they related to the roles ofscheme trustees and of their professionaladvisors – principally actuaries and auditors.

4.33. In relation to proposals for a statutoryminimum solvency requirement to ‘underpin theemployer’s pension promise’, he said:

This requirement will reinforce trustees’ andemployers’ responsibility for ensuring that

schemes are properly funded, thus enhancingsecurity for scheme members. This will provide anobjective benchmark for assessing the adequacyof the fund, setting contribution levels andmonitoring the fund’s performance. It will act as amechanism for ensuring that schemes haveadequate funds to meet contracted-out benefits.Finally, it will provide the measure against whichthe amount of compensation will be calculatedwhen a successful claim for compensation ismade.

We have consulted widely on how such arequirement should be defined in order tobalance the concerns of employers... againstimproving security for scheme members.We believe that we have struck the right balanceto give scheme members the security they musthave if occupational pensions are to prosper andto encourage employers to run good schemes.

4.34. In the debate, in addition to considerationof the other measures proposed in the Bill,criticism was levelled at the proposed solvencystandard as not being consistent with therecommendations of the Goode report and asconstituting a ‘watering down’ of the measureson which the Government had consulted throughits White Paper. It was also suggested that thename proposed for the requirement wasmisleading, as the requirement related to schemefunding rather than constituting a solvency test.

4.35. In summing-up and responding to thedebate on the proposed measures for increasedsecurity, Lord Mackay said:

Our concern has been to devise a consistent basisfor valuing scheme liabilities as a measure of theadequacy of pension funds to meet theirliabilities, and as a basis for assessing matterssuch as minimum contributions. In consideringwhat should be the appropriate valuation basis,we have borne in mind the need to define anappropriate level of security for members’


pensions, and for an entitlement, withoutactually imposing unnecessarily high costs onemployers, which might have led to a significantreduction in the level of occupational pensionprovision.

Consideration of the Bill by the Lords inCommittee4.36. Following approval of the Bill on SecondReading, the House of Lords resolved itself intoCommittee on 7 February 1995 to consider theBill in detail.

4.37. In discussion about the proposed minimumsolvency requirement and, specifically, in relationto the then Opposition’s attempts to amend theBill to provide for a minimum contributionrequirement instead, Lord Mackay said:

I am convinced that a measure of solvency thatdoes not address the position of the scheme ondiscontinuance in some way will not be providingmembers with adequate security in the event ofthe scheme being wound up.

The overwhelming argument in favour of aminimum solvency requirement is that if anemployer undertakes to provide a pensionpromise the scheme should be able to secure thatpromise at all times, especially in the event of ascheme winding up. It is at that time that themembers’ position is most vulnerable. A minimumsolvency requirement should ensure that,irrespective of what happens to the sponsoringemployer, the fund will have enough money tomeet the value of members’ accrued rights whichwill therefore be protected.

But security has a price... It is simply not possible,either practically or economically, to requireongoing pension schemes to fund at a level thatwill enable them to buy out all the liabilities withnon-profit annuities. For many schemes the costwould be prohibitive...

We are introducing a new power to enabletrustees to secure benefits on wind-up byproviding members with a cash value of accruedrights. Where a scheme is only funded at the levelof [the] minimum solvency requirement, thecalculation for this will be that used forcalculating liabilities for the minimum solvencyrequirement.

4.38. In asking the Committee to reject theOpposition amendments and to support theGovernment’s proposal, the Minister said:

We believe that our provisions, together withthe proper operation of the minimum solvencyrequirement, will substantially reduce thelikelihood of schemes winding-up in deficit.

4.39. A central discontinuance fund, which wouldprovide support to members of schemes whichcould not meet their liabilities in full, was not inhis view necessary and, moreover:

...there would be a real temptation for schemes tosail close to the wire... because they would knowthat they had a back-up if they wobbled on tothe wrong side. I remind the Committee thatthere is a pension promise to each scheme. Thereis a promise with regard to the contributors and apromise for when members of the schemebecome pensioners.

Consideration of the Bill at Report Stage in theLords4.40. Consideration of the relevant provisions ofthe Bill continued on 13 March 1995, when theHouse of Lords considered the Report of theCommittee. During this debate, Oppositionmembers continued to press for an ongoingfunding requirement in contrast to theGovernment’s proposal.


4.41. Lord Mackay, in countering the Opposition’sarguments, said:

During Committee, I said that the centralweakness of an ongoing funding requirement isthat it does not aim to provide any level ofprotection in the event of a scheme winding-up. Iknow that some noble Lords may want to arguethat the bulk of employers do not becomeinsolvent and that it is therefore unreasonable torequire schemes, at all times, to have sufficientassets to meet their accrued liabilities. I do notaccept that argument. On the contrary, I believethat scheme members have the right to a clearlydefined measure of protection...

Members who have had their benefits reduced ona wind-up are unlikely to take much comfort fromthe fact that they would have been secure hadtheir employer remained in business. To put itanother way, it is quite unacceptable thatemployers should be able to continue trading atthe risk of leaving their employees’ legitimatepension expectations unfulfilled.

4.42. The Minister went on to ‘repeat the meritsof the minimum funding approach and what it isintended to deliver’:

It will require schemes to hold sufficient assets tobe able to secure pensions already in payment,either by buying annuities or paying benefits asthey fall due, and provide younger members witha sum of money to be invested further. Thepensions they eventually draw will obviouslydepend on how the money is invested and therates of return on the investment, but there isevery chance of it producing a pension at least asgood as, and probably better than, that whichwould be paid from a deferred annuity.The minimum funding proposals offer a far bettermeasure of security for all members of definedbenefit schemes than any alternative affordableproposals...

...we need to respond for scheme members whoare unfortunate enough to work for employerswho go out of business and are thus unable tostand behind their pension fund. These memberscould well find that, as the law stands at present,they would receive less than they have a right toexpect. We live in the real world where employersdo go out of business. We believe that schemesmust be funded at a proper level to secure benefitrights if that should happen.

4.43. The Minister then explained why it was nowproposed to rename the minimum solvencyrequirement.

4.44. Lord Mackay explained:

... by changing the name to a ‘minimum fundingrequirement’, there is not the slightest deviationfrom what the requirement will do. It will meanthat members can be confident that the value oftheir accrued rights is secure, especially in theevent of the scheme or the employer companywinding up... true solvency could only mean theability to buy out all benefits with guaranteedinsurance annuities. The PLRC recognised thatsuch a measure of solvency would not bepractical and would be unduly costly. TheGovernment fully accepted this... It is only rightthat the members’ investment, and their accruedpension rights, should be properly protected. Ourproposals are designed to provide that protection.As suggested by the PLRC Report, we had calledthe vehicle for providing that protection a‘minimum solvency requirement’. The change ofname in no way reduces what the requirement isintended to achieve.

Third Reading debate in the House of Lords4.45. The House of Lords considered theamended version of the Bill in a debate on21 March 1995. Disagreement continued on whatthe most appropriate form of funding test wouldbe to provide the best security for members’accrued pension rights.


4.46. Lord Mackay reiterated the Government’sview that:

...our proposal for an MFR will not increase costsfor most schemes. However, what it will do – bycontrast to the [Opposition] amendment – is toprovide a greater degree of certainty for themembers of schemes that the rights they haveaccrued at any point in time will be adequatelysecured.

4.47. In response to a proposed amendment toprotect the position of the indexation of existingpensioners’ payments in relation to the proposednew order of priority for the discharging ofscheme liabilities on wind-up, the Minister said:

The intention is to ensure that when a scheme windsup, all of the members are treated fairly. If thescheme is fully funded to the level of the minimumfunding requirement, all of the members shouldreceive the full actuarial value of their accruedrights, including the right to indexation, should thescheme wind up. But there will be circumstanceswhere schemes wind up less than 100 per centsolvent on the statutory minimum funding basis orare otherwise unable to meet their liabilities in full.

Obviously, we hope that schemes will not windup in a position where they are unable to securethe benefits promised under the scheme. Webelieve that the minimum funding requirementand the wide range of other measures forenhancing scheme security incorporated in theBill will minimise the chances of schemes windingup in this position. But we live in the real world,and we must cater for those cases where thingsdo go wrong despite our best endeavours.

A scheme which does not meet in full thestatutory minimum funding requirement will notbe able to meet all of its liabilities on wind up.That is when the priority order will come intoplay and ensure that there is an equitabledistribution of assets. It is only right that

pensioners should receive some priority overactive members. That is why we propose thatthey should, if possible, suffer no reduction intheir income. That is reflected in the priorityorder we propose.

However, to go further and give priority toindexation for all pensions in payment wouldplace at risk the rights of other members.We have to ensure that the assets are sharedfairly. We believe that this can best be done byprotecting pensions in payment first, thenprotecting the basic pension entitlement of allother scheme members, then sharing outwhatever assets remain for the benefit of allscheme members.

Second Reading debate in the House ofCommons4.48. Following transmission of the Bill from theLords, the House of Commons gave the Bill aSecond Reading on 24 April 1995.

4.49. The then Secretary of State for SocialSecurity, Peter Lilley, reiterated the keyprinciples behind the Bill which, he said, togetherformed ‘lines of defence against fraud and misuseof pension scheme assets’. The MFR wasdescribed as the fourth line of defence.

4.50. The then Minister for Social Security andDisabled People, William Hague, in closing thedebate for the Government, said:

Governments have to calculate the costs andbenefits of their policies. Governments have toarrive at the right balance, which means that wewill have strong, funded occupational pensionprovision in this country, thoroughly regulatedwithout killing the goose that lays the goldeneggs. That is what we are setting about in thismajor piece of legislation. It is the rightlegislation. It will bring security, equality andchoice to pension provision. It deserves thesupport of the House.


Consideration of the Bill by CommonsCommittee4.51. Following approval in principle of the Bill atSecond Reading, Standing Committee D of theHouse of Commons considered the Bill in lateMay 1995 and in early June 1995.

4.52. During the afternoon session on 23 May1995, Mr Hague said:

The key principle underlying the minimumfunding requirement and cited by the PensionsLaw Review Committee to justify the use of adiscontinuance based test was, as the committeeput it:

“where there is a risk, however, small, of theemployer’s insolvency, funding will meet therequirements of benefit security only if at alltimes the assets of the scheme are sufficient tocover its liabilities”.

4.53. He went on:

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

4.54. In dealing with the then Opposition’ssupport for an alternative solvency standardbased on a minimum contributions requirement,Mr Hague said:

The alternative that I advocate is the MinimumFunding Requirement, under which a schemewould have sufficient money on winding up tocover pensions in payment. If it was one hundredper cent funded according to minimum fundingrequirements, it would have sufficient funds tocover pensions in payment and to give a transfervalue – the value of accrued rights – to non-pensioner members.

4.55. Following discussion about the Swan Huntercase, which had then only recently come to light– and specifically about allegations that, even

though the Swan Hunter pension scheme wouldhave been fully funded on an MFR basis had thatbasis been in place at the relevant time, thescheme was now only able to meetapproximately 60% of its pensioner liabilitiesfollowing wind-up and was not able to cover anyof its liabilities towards its non-pensionermembers – the Minister said:

Schemes funded to the minimum fundingrequirement will be able to pay every memberthe cash equivalent of their accrued pensionrights, which they would be able to transfer intoanother pension scheme or into a personalpension.

4.56. When asked by John Denham MP about theposition of people very close to retirement whocould not transfer to another scheme, whowould need to buy an annuity, and who wouldthus be ‘significantly worse off’, the Ministerreplied:

People in that position would have their rightsvalued on a different basis. If they were near toretirement there would be a much larger elementof gilt rather than equity valuation to determinethe appropriate value for them. These peoplewould receive a larger value, which would benearer to what would, in many cases, buy anannuity. That cash equivalent for those who aresome distance from retirement would be mostunlikely to be sufficient to buy an appropriateannuity, but it would be sufficient to transfer intoanother fund.

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

...a target which means that if at any stage thatscheme winds up, it will be able to keep itspensions in payment and give the cash equivalentof approved rights to the non-pensionermembers.


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

After everything that has happened in the pastfew years... we could not be proud of the Bill orof the Act that it will become if we were not inthe end able to say that schemes must havesufficient assets available within a certain time tokeep pensions in payment and give non-pensioners the value of their accrued rights.

Parliament would be in an embarrassing positionand would not have done its job. That is the leastthat we should require of schemes. Without thatrequirement, what on earth would we say topeople who may approach us after the Bill hasbeen enacted and ask whether their pensionfunds will be able to keep their pensions inpayment or give them the value of [their] accruedrights if [the scheme] winds up?

Without the MFR, the answer to such a questionwould be no. What on earth would we haveachieved then?

The Minimum Funding Requirement would meanthat the answer would be yes. That is all we seekwith the MFR.

Royal Assent4.59. Following consideration of technicalamendments suggested by the House ofCommons, and approval of the final version byboth Houses, the Bill received Royal Assent on 19July 1995.

Main effects of the Pensions Act 19954.60. As a result of the enactment of thePensions Act 1995, many changes were made tothe regime governing pension provision in theUK, including in relation to the basic statepension retirement age, to the rules for

contracting out of SERPS, and to sex equalitywithin state and non-state pension provision.

4.61. The principal effects of this new legislationthat are relevant to this investigation were:

(i) that OPRA was established, with the remitof ensuring that occupational pensionschemes complied with pensions law andthe Authority’s other directions;

(ii) that the MFR was imposed on most definedbenefit occupational schemes not in thepublic sector, to ensure that a scheme wasproperly funded;

(iii) that a new statutory priority order for thedischarge of pension scheme liabilities wasintroduced which would over-ride anindividual scheme’s rules; and

(iv) that pension scheme members would beable to nominate one-third of their scheme’sboard of trustees to represent members’interests.

4.62. The Act provided that the detailed methodof calculation to underpin the MFR would be setout in Regulations (and guidance) to bedeveloped with (and by) the actuarial professionand approved by the Secretary of State – andthat these and other provisions of the Act wouldbe commenced at a later date.

Further discussion between DSS and actuarialprofession4.63. On 31 October 1995, the actuarial professionwrote to DSS officials to seek a formal statementof the Department’s position on a number ofmatters, in order to inform the profession’s workon devising the actuarial basis for the MFR.


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

...that the intention underlying the MFR (whichwas clearly expressed by Ministers during thepassage of the Pensions Bill) is to require schemesto have a level of assets which should as aminimum be sufficient, if the scheme were towind up, to enable it to pay in respect of eachnon-pensioner member a sum which if invested inan appropriate alternative pension vehicle couldreasonably be expected to generate a pensionbenefit at least equivalent to that which thescheme would otherwise have paid in respect ofrights accrued up to that point in time. Byreasonable expectation we mean that thereshould be at least an even chance.

Official publicity concerning the Pensions Act19954.65. In January 1996, DSS published a leaflet –The 1995 Pensions Act (PEC 3) – which purportedin its 21 pages to be a ‘brief summary’ of the‘changes to state pensions, occupational pensionsand personal pensions’ introduced by the 1995Act. It said that ‘more detailed information willbe published later’. This edition was a revision ofan earlier leaflet, published in October 1995.

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

4.67. Section 3 of the leaflet dealt with ‘changesto occupational and personal pensions’. Afterexplaining the roles of OPRA, the PensionsOmbudsman, the compensation scheme, theOccupational Pensions Board, and trustees, the

leaflet, under the heading ‘new minimum fundingrequirement for salary related schemes’, said:

The Pensions Act introduced a new rule aimed atmaking sure that salary related schemes haveenough money in them to meet the pension rightsof their members. If the money in the scheme isless than this minimum level, the employer willneed to put in more money within time limits.The minimum funding requirement is intended tomake sure that pensions are protected whateverhappens to the employer. If the pension schemehas to wind up, there should be enough assets forpensions in payment to continue, and to provideall younger members with a cash value of theirpension rights which can be transferred toanother occupational pension scheme or to apersonal pension.

4.68. The leaflet then went on to deal withmembers’ rights to information from theirscheme administrators and trustees, with theAct’s provisions for pensions indexation, with theequalisation of pension rights for men andwomen, with the position of part-time workers,with new arrangements related to pensiontransfers and pension sharing on divorce, andwith the flexible use of personal pension savingson retirement.

Announcement of the MFR Regulations4.69. On 10 June 1996, Peter Lilley, the thenSecretary of State for Social Security, announcedthat proposals for Regulations to give force tothe MFR had been agreed.

4.70. In the press release – entitled ‘new statutoryminimum funding requirement gives pensionscheme members greater protection’ – thataccompanied this announcement, it was said that:

Schemes funded to this minimum level will beable, in the event of an employer going out ofbusiness, to continue paying existing pensions and


provide younger members with a fair value oftheir accrued rights which they can transfer toanother scheme or to a personal pension.

4.71. The press release then quoted the Secretaryof State’s announcement of two changes to theoriginally proposed MFR basis following‘extensive consultation’ – in relation to thevaluation basis of pensioner liabilities of largerschemes and to the decision not to require thesmoothing of MFR calculations.

4.72. He then said:

These two changes will reduce potential costsoverall by some £20 million to £30 million a yearover the period until the MFR comes fully intoeffect. They will make the operation of the MFRmore straightforward. And they will maintain thelevel of security provided to members.

4.73. The ‘package’ of proposals being presentedin relation to the MFR basis would in theMinister’s view ‘carefully balance concerns aboutimposing costs on employers whilst achievingmember security’.

The MFR and Deficiency Regulations4.74. The Occupational Pension Schemes(Minimum Funding Requirement and ActuarialValuations) Regulations 1996 were made by theSecretary of State on 12 June 1996 and were laidbefore Parliament on 18 June 1996. TheseRegulations, which prescribed the method ofcalculation for the MFR that had been agreedwith the actuarial profession and also othermatters, came into force on 6 April 1997.

4.75. On 11 December 1996, the Secretary ofState also made the Occupational PensionSchemes (Deficiency on Winding Up etc.)Regulations 1996. These Regulations prescribedthe method of the realisation and discharge ofthe assets and liabilities of pension schemes onwind-up and also provided for the order ofpriority in which both would be realised and

discharged. They came into force on 19December 1996.

4.76. On the same day, the Occupational PensionSchemes (Winding Up) Regulations 1996 weremade, which came into force on 6 April 1997.

OPRA Chairman’s speech on communication4.77. On 3 June 1997, the then Chairman of OPRAgave a speech on the ‘communications challenge’for all those involved in the pensions industry atan awards ceremony for pensions and investmentjournalists at the House of Commons.

4.78. He argued that the 1995 Act had helpedfocus attention on occupational pensions andthat the roles of trustees, pension professionals,employers and scheme members were ‘nowclearly defined’. He went on to say that moreneeded to be done to stimulate awarenessabout what individuals needed to do to ensurethe best long-term provision for themselves andtheir families.

4.79. He continued:

Communication for OPRA means getting acrossimportant messages to all those involved inworkplace pension schemes, including schememembers... Communication for OPRA alsoinvolves dialogue with the Government where,in the light of operational experience, the lawwe enforce may need amendment, update orclarification. Whatever the level of input required,OPRA stands ready to play a full part in thewidening debate on the future of retirementprovision.

Actuarial Guidance Notes4.80. On 6 April 1997, a new version (4.0) of theactuarial practice standard guidance note,‘Retirement Benefit Schemes – Winding-up andScheme Asset Deficiency’, came into force.In addition, a new guidance note (version 1.0) wasissued, entitled ‘Retirement Benefit Schemes –Minimum Funding Requirement’. Both guidance


notes were issued by the Faculty and Institute ofActuaries.

The Office of Fair Trading report4.81. In early July 1997, the Director-General ofFair Trading published his report of an inquiryinto pensions, which had been launched on 19September 1996, and which had had as its focusthe identification of any practices that mightadversely affect the economic interests ofconsumers.

4.82. In relation to defined benefit schemes, theDirector-General noted that such pensions:

...have provided and will continue to provide acomprehensive range of benefits which meetmany of the needs of consumers. However... longstayers are rewarded at the expense of earlyleavers. 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 theposition of early leavers over the last twodecades, losses for early leavers persist.Furthermore, the transfer values that employeesreceive on leaving DB schemes are subject to alarge degree of actuarial discretion that candramatically reduce their size. The Pensions Act1995 has had the perverse effect of reducingtransfer values for early leavers though it hasreduced the scope for variations.

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

I can confirm also that this Budget will notproceed with the previous Government’s proposalto phase out tax relief on employee pensioncontributions.

This point in the recovery is, however, the righttime to make changes in corporation tax to

encourage more long-term investment. Mychanges in monetary policy were designed to helpcompanies make long-term investment decisionswith confidence. The changes in corporation taxare directed to the same long-term objective...

I want the United Kingdom to be the obvious firstchoice for new investment, so I have decided tocut the main rate of corporation tax by 2 percent, from 33 per cent to 31 per cent, the lowestever rate in the United Kingdom.

4.85. He continued:

Too often, British companies have invested toolittle and too late in the economic cycle...The present system of tax credits encouragescompanies to pay out dividends rather thanreinvest their profits. That cannot be the bestway of encouraging investment for the long term,as was acknowledged by the previousGovernment. Many pension funds are insubstantial surplus and at present manycompanies are enjoying pension holidays, so thisis the right time to undertake a long-neededreform. The previous Government cut tax creditspaid to funds and companies, so with immediateeffect I propose to abolish tax credits paid topension funds and companies.

Exchanges on the Budget changes in the Lords4.86. On 10 July 1997, Lord Burnham asked theGovernment to explain whether they hadcalculated the consequences of the decisions onadvance corporation tax on the MFR and on finalsalary schemes.

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

4.88. The Minister replied by arguing that ‘abouthalf’ of all schemes were in surplus and were


enjoying a partial or full contributions holidayand then defended the reform.

The Government’s Pensions Review4.89. On 17 July 1997, the Government announceda review of pensions and initiated a consultationprocess with a deadline for responses of 31October 1997. The terms of reference for thereview were:

To review the central areas of insecurity forelderly people including all aspects of the basicpension and its value and second pensionsincluding SERPS; to build a sustainable consensusfor the long-term future of pensions; and topublish the Government’s proposals, for furtherconsultation, in the first part of 1998.

4.90. In its press release announcing the review,the then Secretary of State was quoted as sayingthat the review would address ‘nine fundamentalchallenges’. One of these was ‘to get theregulation of pensions right... people need to haveconfidence in pensions and be sure their pensionsare secure. We need to find a balance whichprovides an appropriate level of security,minimises the scope for abuse and does notimpose an undue burden on providers’.

4.91. Another challenge was said to be ‘to raiseawareness of pensions and improve the level offinancial education so that people understand theimportance of saving for retirement and make theright choice about which pension product is bestfor them’.

Revised Actuarial Guidance Notes4.92. On 1 March 1998, the actuarial professionissued a revised version (4.1) of their guidancenote, ‘Retirement Benefit Schemes – Winding-upand Scheme Asset Deficiency’ and also a revisedversion (1.2) of their other guidance note,‘Retirement Benefit Schemes – Minimum FundingRequirement’. These made minor technical

changes to professional guidance which are notof relevance to the heads of complaint.

Parliamentary Questions on the MFR4.93. On 9 March 1998, John Denham, theMinister of State for Social Security, replied to aquestion from Quentin Davies MP which askedwhat plans there were to alter the minimumfunding requirement on pension schemes so asto take into account the lower forecast netdividend yield in consequence of the recentBudget changes.

4.94. His reply was:

The detailed requirement for MFR valuations areset out in regulations and in an actuarialguidance note produced by the Faculty andInstitute of Actuaries and approved by theSecretary of State. The Faculty and Institute haveset up working groups to look at the effects ofthe July budget changes on a number of issues,including the MFR, and officials are in closecontact with the profession.

Although the Faculty and Institute have maderecommendations for changes to the valuationmethod following the Budget changes, they havenow indicated that they wish to do further workon the operation of the MFR generally beforerevising their guidance note. Any changes mustawait their further recommendations.

4.95. On 13 March 1998, Nick Gibb MP asked theMinister to explain what assessment had beenmade of the consequences of the abolition ofdividend tax credits for the MFR in the light ofa recent report on that issue by a firm ofconsulting actuaries.

4.96. Mr Denham replied:

It is for the Pensions Board of the Faculty andInstitute of Actuaries to make recommendationsabout any changes to the MFR. They will nodoubt take account of [the] views in [the


actuaries’] paper. We expect to receive a reportfrom the Pensions Board when they havecompleted their consideration of these issues.

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

4.98. He replied:

The methodology and actuarial assumptions inthe MFR were devised by the Faculty and Instituteof Actuaries. We were informed that they wouldbe carrying out a review following the Julybudget. We fed into that review a report by theGovernment Actuary, whose views we had soughton a number of issues.

4.99. On the same day, the Minister informedHoward Flight MP that the actuarial profession’sproposals for a change to the valuation methodhad been agreed and that their guidance notewas being revised. He also said that there was an‘ongoing review of the minimum fundingrequirement’.

Green Paper on the Welfare State4.100. In the meantime, the Government hadpublished on 26 March 1998 a Green Paper onthe future of the Welfare State, entitled ‘NewAmbitions For Our Country: A New Contract ForWelfare’. This set out in outline (among othermatters) the Government’s plans for pensionreform.

4.101. The then Minister for Welfare Reform,Frank Field, made a statement in the House toannounce the publication of the Green Paper. Inrelation to the Government’s proposals forpension reform, he said that a key principleunderpinning those proposals was that:

...[the] public and private sectors should work inpartnership to ensure that, wherever possible,people are insured against foreseeable risks and

make provision for their retirement... We wanteveryone to benefit from a second pension, ontop of the state pension. It is clear that, unlessthere is more saving towards retirement, we willcontinue to see into the next century far toomany of our pensioners retiring on incomes thatdo not properly reflect the rising prosperity ofthe nation...

Later in the year, we shall publish the GreenPaper on pensions. I can say today that theGovernment [also] plan to bring forwardlegislation later in this Parliament.

DSS research report4.102. In April 1998, DSS published its researchreport number 75, entitled ‘Experiences ofOccupational Pension Scheme Wind-up’.

4.103. The research, which had examined theexperiences of members whose scheme hadbeen frozen, wound up or was in the process ofwinding up, had been commissioned by DSS inJanuary 1996. One of the aims of the researchwas to ‘find out how much members andbeneficiaries know and understand about whathas happened to their scheme and to theirpension rights’. Another aim was to ‘obtain viewson the information scheme members andbeneficiaries received’.

4.104. Among the report’s conclusions werefindings that:

(i) most members had some understandingabout what had happened to their schemeand knew that the scheme was no longeroperating in the way it had been. Themajority knew that contributions had ceasedto the scheme and that it had or would indue course cease to exist. Most also knewthe reason for the changed status of theirscheme, citing as the most commonexplanations the insolvency of their


employer, a company take-over, or thesponsoring employer’s decision that thescheme was too expensive to run;

(ii) members were fairly evenly dividedbetween those who had someunderstanding of what had happened totheir pension rights and those who did not.Those who were not aware were said to beassociated mostly with schemes which werefrozen or those where the winding upprocess was not well advanced; and

(iii) members were evenly divided betweenthose who thought that the informationthey had received about their scheme wasgood and those who thought it was poor. Itwas said that the latter group felt that theyhad not received enough information aboutthe process and that such information asthey had received had been difficult tounderstand, lengthy, and full of jargon andunexplained statistics.

4.105. The report did not deal with the awarenessof the risks to their pensions that those membersthat had been interviewed as part of theresearch had had prior to the change in statusof their scheme.

Actuarial recommendation to amend the MFR4.106. The actuarial profession wrote to DSS on 1May 1998. The letter was headed ‘MinimumFunding Requirement: Effect of Budget Changes’.It began by stating that the purpose of the letterwas to provide the profession’s ‘conclusions onthe changes needed in the short-term, on theassumption that the Government wishes tomaintain the strength of the MFR basis’.

4.107. The profession noted that it had, inDecember 1997, suggested changes to the MFRbasis to ‘maintain the strength of the MFR basisat the level previously decided by the Secretaryof State in light of the changes to ACT credits

introduced in the last year’. These originalsuggestions were: first, that the assumptions inthe MFR basis in relation to equity investmentsshould be reduced from 9% to 8.5% for thosebelow MFR pension age and from 10% to 9.5%for those above MFR pension age; secondly, thatthe equity market value adjustment should bereduced from 4.25% to 3.5%; and, finally, that netdividend yields on the FTSE Actuaries All-ShareIndex should be used in place of gross dividendyields.

4.108. The actuarial profession continued:

However, since writing that letter, it has becomeincreasingly clear that the performance of the UKequity market over the last 12 months or so hasbeen inconsistent with the underlying principleson which the equity MVA is calculated. This is dueto stagnant dividend growth, which appears to bea result of changes in the way companies arerewarding shareholders (for example, due to thetax changes introduced by the July 1997 Budget).What is impossible to tell is whether these aretemporary or permanent features. At the sametime, there have been substantial increases inmarket values, resulting in the dividend yieldbeing at a virtually all time low. The result,however, is that the equity MVA has increased toa much higher figure than expected – 152% as at30 April 1998.

4.109. The letter went on to explain the principaltwo effects of this – increased MFR liabilities andincreased cash equivalent transfer values forthose leaving schemes. It continued by explainingthat ‘[i]n the longer term, it will be essential tofind a more robust method of dealing withchanges in the equity market than the currentMVA’ and that consideration of this would bepart of the forthcoming review of the MFR thatthe actuarial profession would undertake onbehalf of Government.


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

Submission to Minister regarding MFR reform4.111. On 13 May 1998, officials made a submissionto Ministers in which they were invited toapprove the actuarial profession’s proposal forinterim reform of the MFR and also to agreeto officials meeting the profession to discussdetailed proposals for their long-term review ofthe MFR.

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

The short-term changes, which are fairly minor,should cause no difficulty at all for TreasuryMinisters. The MVA adjustment to a net figure hasin any case already been agreed by Helen Liddellas it was part of the earlier recommendationswhich she accepted. The further small change tothe MVA could be said to help ensure that thevalue of liabilities adjusts in line with marketconditions (which is what the MVA is intendedto do).

4.113. The briefing continued:

A long-term review of the MFR basis is likely toattract Treasury interest particularly in view ofspeculation in the Press that the changes inmarket conditions have been as a result of theremoval of the ACT tax credit last July. We willneed to talk to Treasury officials about the longerterm review after we have talked to the F&IoA.

We recommend that these changes are kept fairlylow key and that a press release is notappropriate. Because of the need to notify theirmembers of the changes, which will hopefullycome into effect very soon, the F&IoA are likelyto issue a press release in order to notify theirmembers.

4.114. The submission concluded by noting thatthe actuarial profession were concerned that theMFR valuation method was not sufficientlyrobust to be able to deal with changes in marketconditions and that this would form part of theirreview of the MFR. Officials said that theyexpected the actuarial profession’s suggestionson MFR reform ‘to be fairly wide ranging’.

Report of the Pensions Provision Group4.115. On 4 June 1998, a group of pension expertsknown as the Pensions Provision Group, whichhad been commissioned by the Government toexamine the levels of pension provision in theUK and also to analyse possible future trends inthat provision, published its report, ‘We All NeedPensions: The Prospects for Pension Provision’.

4.116. They concluded that it was:

...even more important that people have goodsecond tier pensions in order to have adequateincomes in retirement and to avoid the need todepend on means-tested benefits, whichthemselves can have adverse effects on people’sincentives to save for retirement.

4.117. In a subsequent answer to a parliamentaryquestion, John Denham, the then PensionsMinister, said on 16 June 1998 that:

The Pension Provision Group report... identifiedthat many people will face an avoidable drop inincome in retirement because they do not makeadequate provision for themselves over andabove the basic State pension. One of the keyissues underlying this problem is the lack offinancial awareness and good information onpensions.

The Pensions Education Working Group4.118. On 16 June 1998, another group, thePensions Education Working Group, which hadbeen commissioned by the Government toconsider the co-ordination, targeting andefficiency of pensions education and to advise


on action needed to improve knowledge ofpension issues, published its report, ‘GettingTo Know About Pensions’.

4.119. The report made three principalrecommendations:

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

(ii) secondly, that any such programmes shouldcover a range of initiatives, includingpersonal finance education within theschool system and annual and automaticinformation to be provided by Governmentand by pensions providers about pensionoptions and entitlements; and

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

4.120. These recommendations were welcomedby the Government, who asked the Group tocontinue to take forward their work.

4.121. In a press notice published to accompanythe report, John Denham, the then PensionsMinister, was quoted as saying ‘people at workand people taking up new jobs need betterpensions information’.

4.122. The notice continued:

The Government will examine ways of stressingthe benefits of joining employers’ pensionschemes and wants to ensure that employees canget good advice about new stakeholder pensionschemes at work.

4.123. It then quoted the Minister’s speech thatday at the TUC Pensions Conference. He hadsaid:

Today’s report... makes clear that people not onlyneed to understand the importance of saving forretirement, but to have the skills to make the

right choice about which pension product is bestfor them. And today I can announce the firststeps in a major campaign to address this.

For the first time, Job Centre staff will stress theimportance of pensions to jobseekers moving intowork... A new series of user-friendly leaflets willreinforce the message. And improvements will bemade to the state pension forecasting system toget the right information to customers.

Revised Actuarial Guidance Note4.124. In the meantime, on 15 June 1998, theactuarial profession had issued a revised version(1.3) of their guidance note, ‘Retirement BenefitSchemes – Minimum Funding Requirement’. Thisincorporated guidance to reflect the change tothe MFR basis.

DSS research report4.125. On 8 October 1998, DSS published researchit had commissioned on public attitudes topension provision.

4.126. The press notice announcing publication ofthe report stated, under a heading ‘reporthighlights lack of public awareness on pensions’,that the research had shown that ‘...people findthe whole area of pensions very confusing andmany 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 pensionsystem is often poorly understood by thepublic’;

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

(iii) that ‘people need more, better and accessibleinformation on pensions, and want theGovernment to make sure the public isproperly informed and advised’; and


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

Briefing for Ministers on MFR4.128. In a briefing note by DSS officials for aMinisterial meeting in October 1998, in relationto the purpose of the MFR it was stated that:

The MFR is intended to provide a reasonable levelof security for members in the event of thesponsoring employer becoming insolvent and nofurther funds being available to pay into thescheme...

The underlying assumptions were shaken by thedecision in the July 1997 Budget to abolish the20% tax credit on UK equity dividends formerlyavailable to occupational pension schemes, whichinvest on average about half their assets in UKequities. Adjustments had to be made to theassumptions in the MFR valuation method in Junethis year to avoid the risk of employers having toput extra funds into their schemes unnecessarily.

4.129. The above formulation was also used inlater briefing for Ministers and officials in bothDSS and the Treasury.

The Pensions Green Paper4.130. The Government published its GreenPaper on pensions on 15 December 1998. Entitled‘A New Contract For Welfare: Partnership inPensions’, the document set out theGovernment’s ‘plans for radical reform of thewhole pension system, to rebuild trust and ensurethat everyone can look forward to a secureretirement’.

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

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

(ii) ‘better information on schemes’;

(iii) ‘better information on people’s own need tosave’, including the development of annualjoint statements of a person’s state and non-state pension provision, ‘so that they can seefor themselves if they should save more forretirement’; and

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

4.132. The Paper argued that the Government’sproposals were fair, affordable, provided securityand would build ‘a new partnership in pensions’.

4.133. After dealing with the position of peoplewho could not afford to save, and under aheading ‘those able to save – a public-privatepartnership’, the introduction to the Paper said:

Those who are able to save for their ownretirement should do so. For this, they need tohave trust in the system; for the right schemes tobe available and affordable; to be able to copewith flexible working and variations in earnings...;and to know how much they should save todeliver the income they want in retirement.

4.134. The introduction went on to say that theGovernment believed that ‘the current systemdoes not meet these needs’. It then describedoccupational pensions as ‘usually good value andsecure and... generally the best choice’. Itcontinued:

Occupational pension schemes are one of thegreat welfare success stories of this century. Theyare run voluntarily by employers, or groups ofemployers for their staff, and provide a pensionon retirement and often other benefits.

4.135. It also noted that ‘some confidence inoccupational schemes has been lost since theMaxwell scandal’. Furthermore, the Paper notedthat while being ‘an excellent means of providingfor retirement... the growth of occupational


pension scheme coverage may have peaked’ –due to a decline in the number of peopleemployed in large companies and the publicsector, changes in the regulation of occupationalschemes, and the move away from final salary tomoney purchase schemes.

4.136. Under a heading, ‘poor information andlack of trust in the pension system’, chapter 3 ofthe Green Paper, which set out ‘the need forchange’, concluded by saying:

Few people really understand pensions. Few knowabout their own pension position and the actionthey need to take to improve it. Added to thislack of understanding, the Maxwell affair and themis-selling of personal pensions has left manypeople lacking confidence and trust in any typeof pension arrangement. People are not surewhere to get advice and who they can trust.Much of the information that is available is ofpoor quality. Because of this, many people runthe risk of making the wrong pension choices,their confidence and trust in pensions may beundermined and they may be put off savingaltogether.

If people do not trust any type of pension schemeit can become a reason to do nothing, eventhough pension savings made early are worth farmore than those made late in a working life.If people do not know their own position theycannot judge whether and how to make betterprovision, or be confident of finding the best wayto improve their position.

To overcome these problems action needs to betaken to educate people about pensions andprovide better, more secure pension schemeswhich give them confidence and restore trust.

4.137. Chapter 8 of the Paper was entitled‘strengthening the framework for occupationalpension schemes’ and was introduced by thestatement that ‘occupational pension schemes

provide a secure pension for millions. We want tobuild on this success by strengthening theframework for occupational pension schemes andencouraging those who can to join them’.

4.138. Notice was given that the Government wasissuing a separate consultation on a package oftechnical measures it proposed would simplifythe contracting-out of schemes and theprocedure for the nomination of membertrustees (see below).

4.139. The Government also said that it wished ‘todo more to encourage people to join occupationalschemes’. In noting the decline in membership ofsuch schemes, the Government said that‘a continuation of this trend would be counter toour objective of increasing occupational pensioncoverage in the future’ and also that theGovernment wanted ‘to reverse this and achievea significant reduction in the numbers ofnon-joiners’.

4.140. The Paper continued:

We expect some increase in the take-up ofoccupational pensions to result fromimprovements to pensions education. We havealready taken steps to ensure that people arebetter informed about pension issues generally,and about the options available to them asindividuals in particular. It is highly desirable thatindividuals are given the clearest possiblestatement of the value to them of joining theiremployer’s occupational pension scheme.

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

We know that one of the areas of concern toemployers is the MFR. The concept behind theMFR is a straightforward one – that is, peoplewho have built up pension rights should be ableto draw their pensions in full, even if theemployer is no longer there to pay extracontributions. But devising a method of securing


pension rights without imposing too much of aburden on employers is not so straightforward.We are asking the actuarial profession to lookagain at the present valuation method, andconsider whether there are different ways ofdelivering the level of security we feel is right.There will need to be full discussions about anyproposals.

We are also considering the viability of a CentralDiscontinuance Fund to which pension rightsmight be transferred when a scheme has to windup because the employer is insolvent. We will belooking at this as part of our review of the MFR.

4.142. Chapter 8 continued with a discussion ofpossible reform to the provisions related toguaranteed minimum pensions and contractingout and the removal of regulatory burdens fromcertain schemes. It ended with a summary of theGovernment’s proposals for strengthening theframework for occupational pensions, two ofwhich were proposals to make ‘improvementsto the compensation scheme’ and to ‘encourageimprovements in transparency andaccountability’.

4.143. In proposing improvements to thearrangements for the protection of members ofoccupational pension schemes where theemployer was insolvent and where the assets ofthe scheme had been lost because of theft orfraud, the Government said:

The present compensation rules could producepotentially very unfair results for members ofsalary-related pension schemes. When such ascheme winds up, pensioners generally havepriority over other members. Therefore in amature scheme, where many of the members arepensioners, active members could receive verylittle of their expected benefits.

It is an important principle that consumers shouldexercise care in the choices they make. This

principle applies to pension scheme memberswho have access to information about how thescheme is run, the ability to nominate trusteesand to complain if they think things are goingwrong so that investigations can be carried out.It would not, therefore, be appropriate to provide100 per cent compensation. But we believe it ispossible to introduce a more equitable schemeconsistent with this principle, which would be ofparticular benefit to members of mature schemes.

4.144. The Paper continued:

For salary-related schemes, we propose that thecalculation of the amount of compensationpayable should be based more closely on the ageprofile of the members. So instead of limitingthe funding to 90 per cent of all the scheme’sliabilities, we will increase it to 100 per cent inrespect of pensioner members and those who arewithin 10 years of the scheme’s pension age (whohave to be identified already for the MFRvaluation). That means that, when the scheme’sassets are allocated to meet individual pensionrights, there would be a greater chance ofproviding younger members with a fair value oftheir basic pension rights, whilst preserving in fullthe level of pensions that are already in payment.

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

...people are confused by the many pensionsoptions and have lost faith in the system. Weneed to help people to understand how they canensure they have the level of income inretirement that they want and which type ofpension is best for them. We need to rebuild trustso that people will save with confidence.

4.146. It continued:

People need better and more accessibleinformation about state and non-state pensions.They need to know where to get information and


advice from sources they can trust. At themoment much of the general and personal advicegiven is of variable quality. People rightly wanttrustworthy, clear and impartial information andwant the Government to facilitate access tosimpler products and better and more meaningfuladvice. That is our challenge.

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

We believe it is necessary to bring about a radicalimprovement in the quality and accessibility ofinformation on pensions, both in general and inthe information people are given about their ownpension position. We will work closely with theFinancial Services Authority to improve thegeneral quality and comparability of pensionsinformation...

The Government and the financial regulatorshave the central role to play in developing thelong-term framework and for driving forward thespecific initiatives needed to improve pensionsinformation. In turn, we believe that the privatesector can provide expertise, ideas andenthusiasm to make a significant contribution inmany areas. In partnership, we can press aheadwith a dynamic and effective programme ofaction to counter lack of awareness, interestand understanding of pensions.

4.148. In describing the work that theGovernment and the FSA would be doing in thewider financial context, the Paper said:

Any improvement in pensions information andpublic awareness will only have maximum effectif individuals have the basic skills to interpretinformation and understand the overall financialcontext in which decisions are made. This will

include promoting awareness of the benefits andrisks associated with different kinds of investmentand providing appropriate information andadvice.

4.149. In setting out the detailed workprogramme to take forward the Government’sagenda, the Paper categorised this as involvingpersonalised pensions information, work-relatedadvice (including the need to emphasise ‘theimportance of occupational schemes’), andgeneral pensions information. In relation to thelatter, the Government proposed to issue newDSS pensions leaflets, complemented by amarketing campaign, to support the promotionof financial education in schools, the piloting ofpension information helplines and also thedevelopment of a Plain English guide to pensionterms.

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

We published a new series of DSS pension leafletsin June 1998 which help to meet the need [forstandardised and simplified pensions informationand a general introductory document issued bythe Government]. The leaflets are concise,accessible and relate information directly todecisions individuals need to take at various lifestages. The leaflets met the Plain English CrystalMark standard and have been awarded theMoney Management Council Quality Mark forproviding clear and unbiased information onmoney matters. We are running a nationwidemarketing campaign to promote the leaflets.

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

The ‘technical’ consultation document4.152. At the same time, the Government issued aconsultation document, entitled ‘strengtheningthe pensions framework’, which set out the more


detailed or technical proposals that werereferred to in the Green Paper.

4.153. In the introduction, the then Minister, JohnDenham, said that the focus of the consultationwas on measures related to contracting-outprocedures and also on some amendmentsto the provisions of the Pensions Act 1995.He continued:

People should be encouraged to join theiremployer’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 theirpension rights are properly protected. Security isof paramount importance. But we must alsoavoid actions which will deter employers fromcontinuing to run occupational pension schemes.So it has been important to allow most of themajor changes introduced by the Pensions Act tosettle in before deciding what further action isnecessary. It is costing schemes and employerssome effort and money to meet the requirementsof the Pensions Act, and we do not want toincrease their costs unnecessarily, or to discourageemployers from sponsoring and supportingoccupational pension schemes.

We already know from those who run and advisepension schemes, that there are somesimplifications which should be made now. Wewant to achieve simplifications where we canreduce the burden on schemes without adverselyaffecting the security of members’ rights.

4.154. The document, in part 4, set out suggestedimprovements to the framework provided by thePensions Act 1995. It explained:

Pension funds can work effectively only if theirmembers can have confidence that the benefitspromised to them when they are working willactually be delivered when they retire. ThePensions Act 1995 and the regulations madeunder it have provided increased security for

members. There remain, however, restrictions andinconsistencies which we believe create orperpetuate unfair treatment.

4.155. The paper then went on to suggest waysto remove these restrictions and inconsistenciesand it sought responses to the proposals by12 February 1999.

Compensation for NIRS2 delays4.156. Alistair Darling, the then Secretary of Statefor Social Security, announced on 1 February1999 that he would be bringing forward measuresto compensate those who had suffered financialloss due to delays in the receipt of socialsecurity benefits that had been caused byproblems with the Government’s NIRS2computer system.

4.157. In the official press release, he was quotedas saying that he had been ‘concerned for sometime about these delays and [was] determinedthat any inconvenience suffered by those whowould otherwise not get anything should beproperly recognised’.

Commons debate on Government pensionspolicy4.158. On 3 February 1999, the Oppositionlaunched a debate on the pensions policy of theGovernment through a motion which arguedthat:

...the Government has failed pensioners andthrown away a unique opportunity for reform...[we deplore] their attack on pensioners throughthe abolition of the [advance corporation tax]dividend tax credit, which will cost pensionersand all future pensioners £5 billion per year;[we believe that] the Government has furtherhurt occupational schemes by increasing theregulatory and cost burden in the pensions GreenPaper; [we reject] the Government’s proposals,which will make pension provision more complexand offer no real security for pensioners in the


future; and [we condemn] the Government fortheir extensions of means-testing in the welfareand pensions system, which will undermine theincentive to save.

4.159. Answering the debate, Mr Darling said:

We firmly believe that everyone who can saveought to save. We want to give people theflexibility, the choice and the incentives to do so.A one-size-fits-all approach to pensions will notdo; everyone has different requirements.

There have been huge labour market changes. Inthe past, many people had access to occupationalpension funds, which are extremely good optionsfor those who are lucky enough to be able to takeadvantage of them. As the House well knows,however, many people do not have that option.Although personal pensions are certainly a goodoption for some, they are not so, as we know onlytoo well, for low-paid people or even for somemoderate earners.

4.160. He continued:

Above all, the Government must ensure thatpeople have a range of options. We must increaseflexibility to ensure that as many people aspossible save. That is our objective: we wantpeople to save more, invest more and to ensurethat they can provide for themselves adequatelyin their retirement... It is very clear: we are tellingpeople to do the best that they can for theirretirement.

Welfare Reform and Pensions Act 19994.161. Following both the consultation exercisesreferred to above, the Government implementedsome of its proposals through secondarylegislation, such as the introduction of a newrequirement that scheme trustees should provideinformation to members about their policy onethical investment.

4.162. Other proposals, which required primarylegislation, were set out in a Welfare Reform andPensions Bill, which received its Second Readingin the House of Commons on 23 February 1999.

4.163. The Bill:

(i) established the framework for theintroduction, sale and regulation ofstakeholder pensions;

(ii) made amendments to the regulatoryframework for other pensions;

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

(iv) made changes to the provision ofbereavement benefits;

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

(vi) introduced a new ‘single work-focusedgateway’ to handle claims forunemployment benefits.

4.164. The changes to the regulatory frameworkfor pensions included provisions related to themonitoring of employers’ payments to personalpension schemes; dealing with late payments byemployers to occupational pension schemes; theeffect of insolvency on unapproved pensionrights; the forfeiture of rights under pensionarrangements; and the compensationarrangements for members of occupationalpension schemes which had lost assets due tofraud or other dishonesty.

4.165. The then Secretary of State for SocialSecurity, Alistair Darling, in moving the SecondReading of the Bill, informed the House that theaim of the pension reform aspects of the Bill was‘to ensure that the system provides security inretirement for future pensioners and allowspension sharing on divorce’.


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

Announcement of MFR review4.167. On 3 March 1999, DSS issued a press noticeannouncing the review of the MFR. The noticeexplained:

The review’s aim is to find the best way tosafeguard the pension rights of those inoccupational pension schemes. The review willfocus on the valuation method, and considerfundamental changes in approach to the existingsystem.

Mr Timms [the Pensions Minister] said:

“The terms of reference of the review arethorough and wide-ranging. The aim is to findways to protect people’s pension rights that arereasonable and affordable. The work will not bestraightforward. The issues that need to beaddressed are complex and will require carefulconsideration. We shall be taking this forward inpartnership and are grateful for the help providedby the profession. The review of the MinimumFunding Requirement is part of the process tostrengthen the framework for occupationalpension schemes.”

The review of the MFR will be carried out by theFaculty and Institute of Actuaries Pensions Boardin conjunction with the Department of SocialSecurity. There will be full discussion of anyproposals.

DSS consultation on a quality accreditationscheme4.168. On 11 March 1999, DSS issued aconsultation document entitled ‘Strengtheningthe Pensions Framework: the Quality in PensionsAccreditation Scheme’.

4.169. The central aim of this initiative, accordingto the Foreword by the Pensions Minister, was to

raise standards and to encourage the spread ofbest practice in all occupational pensionschemes, with a view to reinforcing the role ofemployers in pension provision and of providingemployees with confidence in the quality of thatprovision.

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

4.171. The accreditation scheme was laterdropped.

Parliamentary questions on reform of the MFR4.172. On 19 March 1999, Stephen Timms, thePensions Minister, replied to a question fromNick Gibb MP who had asked for details of whowould be undertaking the review of the MFR.

4.173. The Minister replied:

The Pensions Board of the Faculty and Institute ofActuaries have been asked to carry out the reviewin partnership with this Department. TheDepartment is also advised by the GovernmentActuary. The Pensions Board may decide to set uptechnical working groups to research particularaspects. The Confederation of British Industry,Trade Union Congress, National Association ofPension Funds and the Association of BritishInsurers have been invited to comment on thescope of the review.

4.174. On 29 March 1999, the Minister also repliedto a question from David Heathcoat-Amory MP,who had asked when the review had beenannounced. The Minister replied that the termsof reference for the review had been announcedby means of the press notice issued on 3 March1999 (see above).


OPRA support for plain English and clearcommunication4.175. On 27 April 1999, OPRA issued a pressnotice, to coincide with the launch of the PlainEnglish Campaign’s guide to pension terms, inwhich OPRA recorded its support for theproposition that schemes should ‘treatcommunication as an opportunity, not a chore’.

4.176. It began:

A good company pension scheme is often the bestperk of the job – and sometimes the best keptsecret as well.

4.177. The then Chief Executive of OPRA was thensaid to have ‘urged everyone involved in runningpension schemes to cut through the jargon and toget people as wised up about their pensionbenefits as about their other job perks’, and wasquoted as saying:

The law which OPRA enforces sets out whatcompany pension schemes have to tell theirmembers, but it doesn’t set out the words theyshould use to do this. This means that somepension schemes comply with the law – aimed atinvolving and empowering the members – yet stillproduce information that baffles and excludespeople.

OPRA ‘guide to the MFR’4.178. On 1 May 1999, OPRA published a ‘guide tothe MFR: a summary for pension schememembers’. The Foreword by the then Chairman ofOPRA stated that:

...this is only a guide and is not a definitivestatement of the law. You should always getappropriate legal advice about how the PensionsAct will affect your scheme. You will also needthe advice of the scheme actuary.

4.179. In a section entitled ‘what is the MFR?’, theguide said:

A scheme that complies with the MFR will eitheralready be funded to at least the minimum levelrequired by the law or will be aiming to have thatlevel of funding within certain time limits. Thiswill not necessarily ensure that all of a scheme’sliabilities can be met fully if the scheme were tobe wound up. However, the MFR sets abenchmark against which the trustees mustmeasure the funding level of a scheme. The MFRmeans that any shortfall below that benchmarkmust be corrected.

4.180. After dealing with the types of schemecovered by the MFR, the funding timescales andother corrective action required of schemes thatwere not fully funded, the position of multi-employer schemes, penalties which trusteeswould be liable to incur should they notdischarge their responsibilities appropriately, andthe actuarial methods employed, the guide thenset out the detailed provisions related to – andthe timetable for undertaking – MFR valuationsand other related matters.

4.181. This edition of the Guide did not repeatthe statement in an earlier, 1997, edition of theGuide that ‘the MFR refers to the minimumamount of funds that should be in the scheme atany one time in order to meet the schemesliabilities if it were to be discontinued’.

The winding-up consultation4.182. On 28 May 1999, the DSS launched aconsultation called ‘Winding Up OccupationalPension Schemes: Speeding Up The Process’.

4.183. Stephen Timms, then as now the PensionsMinister, in the Foreword to the document, said:

The process of winding-up occupational pensionschemes has always been problematic... Manymembers of schemes that are being wound-upcannot see why it is taking so many years for


them to get their pensions sorted out – and oftenshow a deep frustration when there appears to benobody to turn to who can make things happen.

We want to do something about that. We realiseschemes which have been contracted-out arefacing added difficulties and delays because thenew NIRS2 computer system is not producingmembership lists and schedules of GuaranteedMinimum Pension liabilities. But that problemwill be tackled later this year. In the meantime,we need to make headway in addressing othercauses of delay.


The winding-up of an occupational pensionscheme can be a very complicated and traumaticprocess, particularly where winding up has beentriggered by the insolvency of the sponsoringemployer. The long time often taken for theprocess to be completed, and the uncertainty formembers during this time, can make members feelparticularly vulnerable.

It is a process which we all would like carried outproperly and as quickly as possible. We want tomake sure that action is taken promptly but alsoallow the trustees enough time to be able tocarry out all that is required of them under trustlaw, scheme rules and legislation, and in the bestinterests of members.

4.185. The focus of the proposals, he said, was tobe the provision of additional powers to OPRAto oversee the winding-up process and to allowit to intervene where it considered that theprocess was being unreasonably delayed.

4.186. After describing the background to theconsultation and the process of winding-up,including the responsibilities of scheme trustees,the document set out the Government’sunderstanding of the ‘causes of delay’ in aprocess where it recognised that six or moreyears to wind up a scheme was not unusual.

4.187. The factors listed by the documentincluded:

(i) poor scheme records which led to delays indetermining who scheme members were andto what they were entitled;

(ii) the time taken to appoint an independenttrustee;

(iii) difficulties in getting access todocumentation from an insolventsponsoring employer’s files or in retrievingsuch from the relevant insolvencypractitioner;

(iv) discrepancies and other difficulties inreconciling contracted-out liabilities;

(v) ambiguities in scheme rules which requiredsubsequent interpretation in the Courts toresolve disputes;

(vi) delays caused by the need for schemetrustees to seek legal advice on howlegislative change over time had affectedthe calculation of members’ benefits; and

(vii) difficulties in tracing scheme members,especially those deferred members who hadnot provided up-to-date contactinformation since leaving the employmentof the sponsoring company.

4.188. The document noted that, with respect tothe problems in the reconciliation of contracted-out liabilities between scheme records and thoseheld in national insurance records, there was noprovision in the relevant legislation for flexibilityin the process, for example on a de minimis basis.It also noted that ‘there is evidence that schemeadministrators contribute to the delay by taking along time to respond or query details’ with theContracted-Out Employment Group of the thenContributions Agency of DSS, which it wassubsequently announced – at the time of the


March 1998 Budget – would become part ofNICO from April 1999.

4.189. The document explained, however, that:

There have always been concerns about thelength of time taken to agree contracted-outliabilities... However, the difficulties areexacerbated by the current NIRS2 computerproblems.

4.190. Part II of the document set out theGovernment’s proposals for legislation and askedfive questions:

(i) in relation to a proposal to require schemeadministrators to notify OPRA where noindependent trustee had been appointedwithin three months of the sponsoringemployer’s insolvency, the Governmentasked whether this requirement should beextended to scheme professionals such asactuaries and auditors and also whether thethree month period was reasonable;

(ii) in relation to a proposal to enable OPRA toamend scheme rules to enable the speedycompletion of the winding-up process, theGovernment asked whether trustees shouldbe required to seek the consent of theirmembers before asking OPRA to do this;

(iii) in relation to a proposal to require trusteesto report to OPRA where a scheme was stillbeing wound up three years after thecommencement of that process, theGovernment asked whether the three yearperiod was appropriate and also whethersuch reports should be provided thereafteron an annual or other basis;

(iv) in relation to a proposal to give OPRA thepower to direct specified action on the partof someone involved in the winding-up

process, the Government asked whether theproposed powers were directed towards allof the appropriate people; and

(v) in relation to a proposal to extend theexisting provisions for the disclosure ofinformation to scheme members and, inparticular, to require trustees to providemembers with an indication of the benefitsthat they might in due course expect oncethree years from the commencement ofwind-up had elapsed, the Government askedwhether there was other information thatmembers should be given at this time.

4.191. The issues were summarised on pages 14and 15 of the document. It stated there that‘poor records is a fact of life – but shouldimprove over time’ and that ‘reconcilingcontracted-out liabilities should be quicker onceNIRS2 is fully operational’.

4.192. Responses to the consultation were soughtby 2 July 1999. In the press notice whichaccompanied publication of the document, theMinister was quoted as saying that ‘theseproposals are the first step in speeding up theprocess by introducing some accountability andenabling action to be directed where needed’.

Revised Actuarial Guidance Note4.193. On 1 June 1999, the actuarial professionissued a revised version (1.4) of their guidancenote, ‘Retirement Benefit Schemes – MinimumFunding Requirement’. These made minortechnical changes to professional guidance whichare not of relevance to the heads of complaint.

FSA guides4.194. In June 1999, the FSA issued a ‘guide to therisks of pension transfers’. It stated, in relation tofinal salary schemes, that ‘you are guaranteed acertain level of pension when you retire, as wellas other benefits’. It also referred, when anindividual received a cash transfer value to


transfer from a final salary scheme to anotherpension vehicle, to such a value as being a sumthat ‘reflects the benefits that were guaranteed’.


If you transfer from a final salary scheme to amoney purchase scheme run by a new employeror to a personal pension, you give up the promiseof a guaranteed pension. What you get instead isa pension whose value depends on how well theinvested money grows. You, rather than theemployer, carry the risk if the investmentsperform badly.

4.196. The guide went on to explain the need toseek proper advice but cautioned, in a positionwhere a financial adviser suggested that thereader transfer out of a final salary scheme, ‘that,with a personal pension, you will give up anyguarantees you had in the former employer’sscheme’.

4.197. In another guide published at the sametime, entitled ‘guide to the risks of opting out ofyour employer’s pension scheme’, the FSA saidthat final salary schemes ‘offer guaranteedbenefits’ and explained that ‘you should not beadvised to opt out of your employer’s pensionscheme unless there is a very good reason to doso... think very carefully before you opt out ofyour employer’s scheme’. It also stated that finalsalary schemes ‘give you a guaranteed pension.The amount of pension you get from a personalpension is unpredictable’.

4.198. Later editions of these guides wereamended to remove the above references.

GAD letter to DSS on MFR4.199. In a letter dated 9 June 1999 from a GADdirecting actuary to a DSS official, whichdiscussed the strength of the MFR in the context

of the ongoing review of it by the actuarialprofession, the directing actuary wrote:

The whole issue of the conflict between the MFRand the benefits which individuals are likely toget from a scheme if it winds up and buys outsome or all of the liabilities is a fundamentalproblem. I am still waiting for the whole edificeto collapse once the first big scheme goes throughthat process and members complain that they didnot get their fully accrued benefits in spite of thisscheme having assets equal to 100% of its MFRliabilities. I think it is likely that this aspect willbe given prominence by many members of theprofession and the particular focus of it inrelation to pensioners will be highlighted,so this particular issue is likely to feature highlyin the radical options.

OPRA press notice about its guide to the MFR 4.200. On 19 July 1999, OPRA issued a pressnotice to advertise the fact that it had publisheda guide to the MFR for pension scheme trustees.

4.201. It said:

...the aim of the booklet is to help give trustees abetter understanding of the issues involved incomplying with the MFR. Much of the technicalwork in this area will be carried out for trusteesby experts such as actuaries. But trustees stillneed a grasp of the subject to be able to ask theright questions and understand fully the advicethey are given.

The Best Practice Guidelines Working Group4.202. On 22 July 1999, DSS announced that ithad established a new working group, withmembers drawn from the pensions industry,industry leaders, and the trade union movementand chaired by the Department.

4.203. Its role would be to advise on thedevelopment and promotion of best practiceguidelines for occupational pension schemes.


FSA factsheet4.204. In July 1999, the FSA published a factsheetentitled ‘joining or rejoining your employer’spension scheme’.

4.205. The factsheet explained that it aimed toprovide general information about why thereader might have been ‘better off in youremployer’s pension scheme’ and to set out themain points that needed to be thought aboutwhen deciding whether to join or rejoin such ascheme. It also indicated other sources ofinformation. The factsheet then defined thetypes of scheme to which it referred andexplained the rationale for taking prompt actionin the context of the personal pensions mis-selling review.

4.206. Under a heading ‘will I be better off if Ijoin or rejoin my employer’s pension scheme?’, itsuggested that ‘you will nearly always be betteroff in your employer’s pension scheme ratherthan in a personal pension scheme’.

4.207. After setting out the key characteristics ofthe benefits provided by occupational pensionschemes, the factsheet contained a sectioncalled ‘is my employer’s pension scheme infinancial difficulties or being “wound up”?’

4.208. This section said:

Occasionally, an employer’s pension scheme mayrun into financial difficulties. This means there isa chance it may not be able to pay benefits in thefuture. And sometimes, even if there are nofinancial difficulties, some employers just decideto close down their pension scheme. The schememay then be ‘wound up’.

These situations don’t happen very often but it isworth checking they don’t apply to youremployer’s pension scheme. You can check this bywriting to your employer (or to the schemetrustees). Ask them to confirm in writing thatthere are no plans to ‘stop benefit accrual in the

pension scheme’. If they cannot confirm this, thenyou are almost certainly better off not joining orrejoining now.

If your employer’s pension scheme is a ‘finalsalary scheme’, you should also ask if ‘the latestactuarial statement (made under the DisclosureRegulations) confirmed that the assets of thescheme fully covered its liabilities as at thevaluation date’. If they cannot confirm this, thenagain you are almost certainly better off notjoining or rejoining now.

If you are in any doubt about your position, youshould contact an authorised financial adviser.

4.209. The factsheet then signposted readerswho wished further information to other FSApublications, including those referred to above. Arevised edition, which reproduced this section,was produced in September 2001.

Consultation on stakeholder pensions4.210. On 2 August 1999, DSS issued aconsultation document as part of its series ofconsultations on the new stakeholder pensions.This document was called ‘regulation, advice andinformation: the Government’s proposals’.

4.211. Paragraph 26 of the document dealt withinformation provided by Government orregulators:

The Government already produces a number ofbasic information leaflets on pensions. The aim ofthese is to provide straightforward explanationsto enable people to understand the main pensionsoptions and the differences between them. TheFSA also produces a number of consumer guidesto pensions... Such information is not, however,intended to be sufficient in itself to enablesomeone to decide about their pension needs, norto choose between different schemes.


Further Ministerial briefing and meeting withactuaries4.212. On 16 November 1999, Jeff Rooker, thethen Minister for Pensions, met representativesof the actuarial profession following submissionto DSS of the preliminary findings of their reviewof the MFR in a draft progress update on thatreview.

4.213. In the briefing for that meeting, DSSofficials suggested that, in the meeting, theMinister should, in relation to the draft findingrelated to what members knew about the realpurpose and strength of the MFR, ask theactuaries to:

...expand on the premise that members believethat the MFR is a solvency guarantee. Is it not upto trustees to ensure that the position iscommunicated to members?

4.214. Additional briefing, which described thebackground to the MFR, was annexed to thenote, and stated that:

The MFR valuation is a discontinuance test... butit is not a guarantee of solvency. Although thevaluation of pensioner liabilities should reflectthe cost of securing those liabilities by annuities,the calculation of non-pensioner liabilities doesnot. Ministers at the time felt that it wouldimpose an unreasonable burden on employers ofongoing schemes to require them to fund on thebasis of being able to fully secure all liabilitieswith guaranteed annuities should the schemewind up.

The objective of the MFR is that a scheme fullyfunded according to the MFR would, if theemployer became insolvent, protect fully thepensions already in payment, and providemembers with a transfer value that would givethem an even chance of replicating scheme

benefits if they transferred to an occupational ora personal pension scheme. It should not imposeunreasonable costs on employers...


The removal of tax credits on UK equity dividendsin the July 1997 Budget reduced the rate of returnon UK equities and had the effect of weakeningthe MFR test as prescribed at that time. In June1998, following recommendations from the[actuarial profession] a short-term change wasmade to the MFR valuation method concerningthe rates of return on investment from equities inorder to try to maintain the intended strength ofthe MFR.

4.216. At the meeting, the actuarial professionalso tabled a ‘briefing note’ for the Minister,which set out some proposals for ‘short-termchanges’ to the MFR.

4.217. After noting that there had been two‘significant changes’ since the establishment ofthe MFR basis – the sharp decline in inflation andin interest rates and improved pensionermortality – the actuaries then set out twoproposals ‘to maintain the basis at the level ofstrength which it had when it was originallyestablished’, namely:

l Making allowance in the valuation of pensionincreases for the possibility that price levelsmay at times fall. In this case, pensions wouldnot actually be reduced. In currentcircumstances this would increase the accruing(future service) MFR liabilities of most schemesby about 3.5%. The increase in the accrued(past service) MFR liabilities depends on thetype of pension increase awarded in paymenton pre-97 accrued pensions. There will be noeffect on this significant part of the accrued(past service) liabilities for schemes which gavea fixed guaranteed increase or no increase atall; and


l Reducing the mortality rates in the MFR basisby two years, producing an increase in theaccrued (past service) and future liabilities ofabout 6.5%.

4.218. The briefing then went on to note that:

...the effect on individual schemes would dependon the mix between pensioners and non-pensioners and the manner in which pre-97accrued pensions are increased in payment.But the combined effect of these two changeswould be an increase in the accrued (past service)MFR liabilities of between 6.5%-10%, i.e. areduction in MFR funding levels of between 6.5%and 10%. This would, in the view of theprofession, provide the same strength of the MFRas that which was intended at the time it wasoriginally established.

4.219. The briefing then said that a transitionperiod or a period of advance warning would beneeded to enable sponsoring employers andschemes to adjust to the new MFR level that wasproposed, which might involve increasedcontributions.

4.220. The briefing note concluded with thestatement that:

...we recognise that the final decision as towhether to make any change to [the GuidanceNote that set out the MFR basis] is forGovernment. Clearly there are politicalimplications arising from any change to [it] whichhas a significant financial impact. On the otherhand, if no change is made to [it] there will beimplications for the degree of security ofmembers’ benefits. The profession’s role, as agreedwith the previous Government when MFR and[the Guidance Note] were first introduced, is tomake recommendations to Government as to howit can best achieve its political objectives.

4.221. On 18 November 1999, a directing actuaryat GAD wrote to the DSS to set out his view on

the actuarial profession’s proposals. He set outarguments for and against both the proposedmortality change and the proposed interest ratechange, and also set out some arguments as towhether any change should be made at all atthat time.

4.222. On 26 November 1999, another DSSofficial wrote to an officer of the actuarialprofession with a suggested draft outline for adiscussion paper that might be issued by theprofession in order to comply with its rule thatany changes to the Guidance Notes it issuedshould be subject to consultation with relevantmembers of the profession. The discussion paperwas later circulated in draft on 6 January 2000,for comment.

4.223. The DSS official offered a draftintroduction to the proposed discussion paper,which set out the purpose of the MFR thus:

The current objective of the MFR is that a schemefully funded according to the MFR would, if theemployer became insolvent, protect fullypensions already in payment, and provideyounger members with a transfer value thatwould give them an even chance of replicatingscheme benefits if they transferred to anoccupational or a personal pension scheme.This objective was decided by Government; thevaluation method to meet the objective wasdevised by the Pensions Board of the Facultyand Institute of Actuaries.

4.224. On the same day, briefing was provided fora lunch meeting that the then PermanentSecretary of DSS would be having on 6December 1999. It included the statement that‘the MFR is intended to provide a reasonable levelof security for members in the event of theemployer becoming insolvent and no furtherfunds being available to pay into the scheme’.


Parliamentary question on GMP delays4.225. Meanwhile, on 24 November 1999, thethen Economic Secretary to the Treasuryanswered a question from Christopher ChopeMP, who had asked how many applications forthe calculation of GMP entitlements had beenawaiting decisions for more than one year, morethan two years, more than three years, and morethan four years.

4.226. She replied that ‘none of the 7,615applications for GMP calculations presentlyawaiting decision are over one year old’.

The Actuaries’ report on communication andthe MFR4.227. Also in November 1999, a research workingparty of the Faculty and Institute of Actuariesproduced a report entitled ‘Communication ofMFR and Solvency’. The working party, which hadbeen established by the profession in 1997, metbetween December 1997 and January 1999 andhad the following as its terms of reference:

...to consider how best to communicate torelevant parties how solvency should be assessed,including the role of the MFR in this process. Thework will therefore extend beyond the MFR toconsider other aspects of communicatingsolvency and other aspects of communication ingeneral.

4.228. The objectives set for the group were toprepare advice to members of the profession onthe importance of communicating clearly topension scheme members, trustees and sponsorsabout pension scheme solvency – especially inrelation to the MFR; to consider what meansshould be used for communicating the solvencyposition of a scheme and solvency issues ingeneral; to consider the terms and languagewhich should be used to describe the solvencyposition of a scheme; to consider whether ageneral communication about the issuessurrounding pension scheme solvency and the

MFR was required and, if it was, to whom itshould be addressed and what it should say; and,in the light of actual or proposed changes in theMFR, to consider what general communicationshould be issued by the profession.

4.229. The report noted that ‘in broad terms...the aim of the MFR test is to ensure a schemehas sufficient funds to keep paying benefits formembers whose benefits are in payment and topay minimum transfer values for other members’.The group also noted that true solvency was onlyachieved if a pension scheme had sufficientassets to secure all of its liabilities with aninsurance company, that the MFR was notdesigned to achieve this, and that this was notwidely understood.

4.230. Under a heading, ‘where are the MFR andsolvency currently confused?’, the report listed anumber of official, professional and otherpublications in which pension fund solvency wasdiscussed. It also set out relevant actuarialguidance on the topic.

4.231. With reference to the OPRA booklet ‘aguide for pension scheme trustees’, the reportsaid that one statement in it was factuallycorrect but misleading. The report also notedthat scheme communications to members ‘donot generally cover solvency’.

4.232. The report continued to express concernthat, for the most part, press comment hadequated funding to 100% on an MFR basis withhaving sufficient assets to meet a scheme’sliabilities in full in the event of a wind-up.

4.233. Section 4 of the report dealt with the‘consequences of changing the strength of theMFR’.

4.234. It began:

The complexity of the MFR test means that fewpeople understand it fully. This means that if


changes go beyond simple adjustments to thespecific actuarial assumptions, the consequencesare likely to be difficult to understand. Evensimple adjustments to the specific actuarialassumptions might mean that the MFR test isstrengthened for some schemes and weakened forothers. If the methodology and actuarialassumptions are altered it may be difficult togeneralise about whether the test is stronger orweaker. There is also the likelihood that in somepossible future conditions a revised MFR test willbe weaker, but in other conditions it will bestronger.

Any changes to the strength of the MFR bring intoquestion the level at which it was previously setand may undermine the public’s (includingtrustees’, employers’ and members’) faith in thosewho set the MFR. In addition, given the lack ofunderstanding of the background to the MFR,some actuaries may be confused by the change.

4.235. The report continued by assessing theimplications both of strengthening the MFR basisand of weakening it. The implications ofweakening the basis were said to include areduction in the value that would be given tothose wishing to transfer their accrued rights toanother scheme. In addition, another implicationwas that:

...a scheme which was winding up and which hada 100% MFR funding level after the weakeningwould be able to provide less by way of deferredannuities than one which had exactly the sameliabilities and which had a 100% MFR fundinglevel before the weakening.

4.236. The report argued that there needed to begreater general understanding of ‘what the MFRis and what it is not’.

4.237. Section 5 of the report was entitled ‘whatneeds to be communicated?’ and started with thestatement that the group believed that ‘there are

fundamental misunderstandings of the MFRthroughout the pensions industry’.

4.238. In order to systematically correct thesemisunderstandings, the report concluded thatthere were four ‘key concepts that need to beaddressed’. These were:

(i) that the MFR did not guarantee solvency;

(ii) the true purpose and nature of the MFR;

(iii) why changes might be made to the MFR andthe consequences of any changes; and

(iv) that the MFR was set by the Governmentafter consultation with interested parties.

4.239. In relation to the first concept, the reportsaid that ‘arguably, the various parties involvedwith the creation and operation of the MFR havefailed to address the confusion that has arisensince the idea was first proposed’.

4.240. The report went on to suggest that,because of the complexity of the MFR, efforts tocommunicate about it should be focused on the‘concept’ rather than on the ‘detail’. It continued:

...irrespective of the reasons for the confusionbetween the MFR and solvency, we believe it isincumbent on the profession who are seen as the‘guardians’ of the MFR to act to correct theconfusion. All parties involved with pensions needto understand that the usual concept of solvencyis not directly addressed by the MFR. A scheme100% funded on the MFR basis does notnecessarily have sufficient assets at any point intime to secure all guaranteed benefits. It istherefore not necessarily “solvent” as most peoplewould understand the concept and as we havepreviously defined it.

4.241. The group continued to suggest that, ifthe confusion between the MFR and schemesolvency could be corrected, then what the MFR


actually constituted should at the same time beaddressed:

We need to ensure that relevant partiesunderstand that the MFR provides no guaranteeson the payment of benefits...; that it is possible tosatisfy the MFR as an ongoing scheme but bemismatched so that there is a deficit on windup...; that it is not definitive and immovable – it issimply a ‘line in the sand’... which attempts tobalance members’ security with the desire ofemployers to avoid tying up working capital in apension scheme; that it is one of a package ofprotections introduced by the Pensions Act 1995,and it cannot do the job on its own; that bytaking a pragmatic approach to improvingsecurity as measured by scheme funding levels,the risk that final salary benefit provision will notbe able to continue as a viable option in the faceof competition from defined contributionalternatives is minimised; and that it is a complexcalculation overseen as a result by the relevantbody of experts – the actuarial profession.

4.242. The report then went on to explain that, ifever the MFR were to be changed, the reasonsfor the change should be clearly explained andquantified, as should the implications for schemesolvency and the fact that responsibility for thechange rested with the Government.

4.243. Section 6 of the report went on to discussthe communication of the above, in terms ofhow such should be achieved and with whom.

4.244. After considering communication with therest of the actuarial profession, the report wenton to suggest redrafting of the OPRA guidereferred to above ‘to avoid any ambiguity aboutthe MFR’ and that the actuarial profession shouldtake the lead in drafting simple factsheets thatscheme trustees could issue to members toexplain the statutory basis of scheme funding.

4.245. In a section dealing with communicationwith pension scheme members, the report notedthat:

...it would be very difficult for the profession tocommunicate directly with scheme members in asystematic manner. Therefore, Scheme Actuariesshould encourage trustees to provide memberswith the information necessary to address anyincorrect perceptions of the MFR. This task is anonerous one for trustees, unless they can beprovided with the material they require. It shouldalways be borne in mind that all parties have aninterest in ensuring that scheme members fullyunderstand and appreciate their pension schemes.The material covered... above should be sufficientfor this purpose if accompanied by clearinstructions on the course recommended by theactuary. Members will also have access to theactuarial valuation, actuarial certificates andAnnual Report as well as their Scheme Booklet.

4.246. The report then dealt with issues relatedto communication with sponsoring employers,trades unions, regulators (OPRA had been sent acopy of the report in draft), other professionsand the press.

4.247. In relation to Government, the report saidthat:

The situation with Government requires sensitivehandling. On the one hand we need to make itclear that the ultimate responsibility for theexistence, shape and strength of the MFR liesquarely with the Government. On the otherhand we want to influence them in order that theMFR works to best effect and to ensure that wecontinue to be consulted by them in advance ofany changes to it. Given the heavy workload ofrelevant Government ministers, and the fact thatthey may not be technical experts in the Pensionsarena, we suggest that regular briefings on


relevant topics are the best approach. Thesecould be built up from the Factsheets referred toearlier.

4.248. The report concluded:

Although there are a number of problems withthe current understanding of solvency vis-à-visthe MFR and funding we do not think that theyare, in any way, insoluble. While Pensions ingeneral, and Final Salary/Defined BenefitPensions in particular, will never be easy tounderstand we do not believe that the situation ishopeless either. If the Recommended Actions [wehave] listed... are followed we feel that thisimportant topic will be clearer to all concernedand the debate about funding of pensions will bea more informed one as a result.

Press comment on MFR reform4.249. On 6 December 1999, in the light of pressinterest in the rumoured changes to the MFR,further briefing was prepared for the DSS pressteam by the same official who had produced theNovember 1999 briefing. It replicated theexplanation provided in earlier briefing (see entryfor 16 November 1999, above) but added afurther sentence. This stated ‘there has beenconcern that the valuation method is not asrobust as originally expected under changingeconomic conditions and that it should be re-examined’. This briefing was also incorporatedinto more detailed briefing, provided on 9December 1999 in response to an article in theFinancial Times about the changes, and was alsoreproduced in later briefings.

Internal discussions on MFR review4.250. On 13 December 1999, the actuarialprofession responded to a DSS request toprovide further explanation of their proposedshort-term changes.

4.251. On 10 January 2000, a tripartite meeting –one of a series of such meetings – to discuss the

MFR review was held between the Treasury, DSSand the Debt Management Office. The fifth itemon the agenda was discussion of the actuarialprofession’s proposals for short-term changes tothe MFR basis.

4.252. According to the note of the meeting, aTreasury official expressed concern that the draftdiscussion paper (see above), circulated by theactuarial profession prior to issue to itsmembers, ‘was recommending a strengthening ofthe underlying objectives of the MFR’.The meeting agreed to inform the actuaries thattheir paper needed ‘to be much cleareron whether a proposal produces a standard thatis the same, stronger or weaker than theobjectives of the current MFR’. This was done on13 January 2000.

4.253. The note of the meeting ended with thestatement that ‘DSS were proposing torecommend to [Ministers] that no changes aremade to the MFR assumptions until the outcomeof the MFR review is known and the review ofcontracted-out rebates has been carried out’. In alater tripartite meeting, it was suggested – inrelation to the statement of the purpose of theMFR to be included in the published version ofthe MFR review – that the phrase ‘reasonableexpectation’ should be avoided, as it had aparticular meaning in the context of theregulation of life insurance.

4.254. On 28 January 2000, the actuarialprofession sent its final version of the progressupdate on the MFR review to DSS (see above).

4.255. On 31 January 2000, a submission wasmade to Jeff Rooker, the then Pensions Minister,by DSS officials. This set out recentdevelopments in the MFR review and it informedthe Minister that the recently received progressreport ‘reiterates the actuarial profession’s viewthat the public’s expectation of the MFR is that itis a solvency test (which it is not) and that in the


light of this expectation there should be a muchclearer disclosure of the true solvency position’.

4.256. When dealing with the proposed short-term changes to the MFR that had beenproposed by the actuarial profession, thesubmission said:

There are strong arguments for incorporatingthese changes to the MFR... These changes aretechnical amendments and are simply restoringthe strength of the MFR level to the levelintended when the requirement was firstintroduced. Though they will not come as asurprise to occupational pension schemes, thereare financial implications.

4.257. The submission then set these out. Itcontinued that ‘if we introduce these changes tothe MFR we are likely to come under pressure tosimilarly change the assumptions used in thecalculations of rebates which would be to makethem more expensive to government. We do nothave Treasury agreement to this’.

4.258. After saying that it would seem sensible toconsider any MFR changes together with theoutcome of their review of contracted-outrebates, the submission then concluded with arecommendation that ‘we do not feel that now isthe time to be introducing these short-termchanges’ and sought the Minister’s approval forsuch a decision.

4.259. On 9 February 2000, the Minister’s PrivateSecretary wrote a minute that set out theMinister’s agreement to the recommendationthat the short-term changes to the MFR basisproposed by the actuarial profession should notbe made at that time.

Announcement of MFR review timetable4.260. On 10 February 2000 in an answer to aquestion from Frank Field MP, the then Secretaryof State, Alistair Darling, announced that the

actuarial profession’s review of the MFR wouldbe published ‘in spring this year’.

Stakeholder meetings4.261. On 13 March 2000, a meeting – one of aseries with key stakeholders – was held betweenofficials of the Treasury, DSS and GAD and theTUC’s pensions officer. A representative of theactuarial profession also attended the meeting.The note of the meeting recorded the view ofthe actuary that he was ‘concerned about people’slack of understanding of what the MFR could beexpected to deliver’. The note continued:

He was concerned that companies could go to thewall, but schemes would be unable to paybenefits in full, when the inference was that theywould be able to do so. He felt there should bemore clarity in communication on the strength ofthe pensions promise. [The TUC officer] agreed,saying that misunderstanding of what the MFRrepresents does give people false expectations.[The actuary] added that before the Pensions Actresponded to the Maxwell affair, schemes couldin effect wind up and walk away.

4.262. The note recorded the response of theGAD official, who:

...pointed out that 100% MFR might, for example,buy only 70% of benefits. There was a trade-offhere of costs as against security. He added thatthe CBI would not be happy with a MFR pitchedat a level to produce 100% benefits (full solvency)– employers would just walk away from schemes.

4.263. On 22 March 2000, a similar meeting washeld with the Confederation of British Industry.The note of the meeting recorded the view of aCBI representative that ‘it was not really clearwhat the MFR was intended to achieve and, tothe extent that it was trying to achievesomething, the current MFR was not doing so’.The CBI also acknowledged that a real solvencytest would not be acceptable to most employers.


Parliamentary debate4.264. On 3 April 2000, in a parliamentary debateon the Child Support, Pensions and SocialSecurity Bill, Jeff Rooker, the then PensionsMinister, said:

A number of measures were introduced in the1995 Act with the aim of promoting security formembers of pension schemes, including theminimum funding requirement. It is important toprotect members and the benefits that they arepromised. There can be no objection to that.

4.265. The Minister continued:

The minimum funding requirement is not aguarantee of solvency. I freely admit that as a layperson I had thought it was. In the past eightmonths, since I have been at the Department ofSocial Security, I have looked at the issue in moredetail. The lay person can get a false impressionfrom the minimum funding requirement. It is notintended to force employers to contribute at ahigher rate than is needed in the long term tomeet the benefits promised.

4.266. He went on:

The minimum funding requirement should lessenthe risk that a scheme is underfunded through, forexample, an over-extended contributionsholiday... the MFR is an on-going requirement onschemes to monitor their funding position and tohave in place a contributions plan to ensure thatthe appropriate funding level is maintained.

4.267. The Minister then stated:

We are aware of the importance of protectingmembers’ rights. That is the bottom line. If wecannot do that, they have no-one else to look to.Where there are gaps in legislation we must blockthem. There is no evidence of major difficulties.Reviews are going on and we will report theresults to the House as early as we possibly can.

Research by the FSA4.268. In April 2000, the FSA published researchit had commissioned in a report called ‘BetterInformed Consumers’.

4.269. One of the findings of the research wasthat:

Most respondents in the... survey who had takenout or considered a [financial] product in the lastfive years were not dissatisfied with theinformation available, claimed that they did notwant more information and were confident thatthey had all the information to make the rightchoice of product. The fact that so manyconsumers had confidence in recent financialdecisions, despite the relatively low levels ofshopping around reported, suggests that manywould benefit from further information but areunaware that they need it. Therefore, a majortask for the FSA is getting consumers to recognisethat they have information needs in the firstplace.

4.270. In urging caution about their findings, thereport’s authors suggested that there wereproblems with information and advice that werecommon across all groups. These were thatconsumers did not know what products wereavailable or appropriate for their needs, that theywere often overwhelmed and confused byinformation in leaflets, that they did not alwaysunderstand the jargon and terminology used inthe information or advice that they did receive,that they were often shocked by the ‘small print’after having taken out a financial product, andthat they were unaware of how to accesscomparative information.

4.271. The report went on to say that only 7% ofthe participants in their survey had mentionedinformation from a financial services regulator asa preferred source of information about financialproducts. However, four out of five respondentswere aware that the FSA was able to provide


generic advice and 45% (erroneously) believedthat it was part of the FSA’s role to giveindividuals specific financial advice.

4.272. The report concluded by suggesting thatthe FSA capitalise on a high level of trust amongconsumers, a common view that independentadvice was important, and that people werehighly interested in the consumer servicesprovided by the FSA – by using outreach (in theform of booklets, a helpline, the use ofbroadcasting and press opportunities, the FSAwebsite, financial education course and publicmeetings) to increase the level of generalfinancial awareness and knowledge.

Cabinet Office report 4.273. Also in April 2000, the Performance andInnovation Unit of the Cabinet Office publisheda report, with a Foreword by the Prime Minister,entitled ‘winning the generation game’. The focusof this report was on ‘improving opportunities forpeople aged 50-65 in work and communityactivity’.

4.274. In a section on occupational pensions, thereport suggested that such opportunities weresometimes distorted in relation to work-basedpension schemes and that this could beremedied by improvements to transparency,information, flexibility and incentives to stayin work.


More transparent arrangements will help improveinformation. Alone, however, they are notsufficient for all parties to make fully-informeddecisions. Pensions suffer from being complex,often thought of as far off, and people tend toplace current consumption high above saving forfuture consumption. DSS are already pursuing anagenda for improving pension information.

4.276. After listing recent initiatives by DSS thatformed part of this agenda, the report went on

to suggest that the Government should promoteinformation about how much an individual wouldneed by way of their pension pot if they wantedto retire with a certain level of income – andthat DSS should try to develop ‘extrainformation’ to make the content of theinformation required to be provided by schemesto their members ‘even more understandable’.

The actuarial profession’s review of the MFR4.277. On 1 May 2000, the actuarial professionsubmitted a report by the Pensions Board of theFaculty and Institute of Actuaries to theSecretary of State for Social Security, entitled‘Review of the Minimum Funding Requirement’.The review appears to have been informed bythe earlier work of the professional workingparty (see above).

4.278. The terms of reference for the review,which had been determined by DSS, first set outthe Government’s policy intention as regards theMFR.

4.279. This stipulated that the MFR was intendedto be:

...a benchmark funding level for salary relatedoccupational pension schemes to protectmembers’ accrued rights in the event of thesponsoring employer becoming insolvent... [whichwould provide] protection at a level to enablepensions in payment to continue in full (excludingfuture discretionary increases) and give nonpensioners a reasonable expectation of receivingbenefits at a level that would have been paid ifthey had become deferred members and thescheme continued as an ongoing scheme... [This]benchmark funding level should be derived froman objective test which is independent of thecircumstances of each scheme (except for giltmatched schemes). In most circumstances,meeting MFR should not require, in the long term,contributions which exceed the contributions


produced by ongoing valuations for a schemewhich is fully funded on the ongoing basis onreasonably prudent actuarial assumptions.

4.280. A ‘reasonable expectation’ was defined asmeaning ‘an “even chance” on transfer to anappropriate alternative pensions vehicle’ and theterms of reference then set out the detailedissues to be covered by the profession as part oftheir review.

4.281. After dealing with concerns that the thencurrent MFR test was arbitrary or perverse in itseffects, the report, in a section headed ‘solvencyand funding’, discussed another concern – ‘thatthe MFR test is an insufficient measure of the costof buying out members’ benefits and is thereforetoo weak in relation to members’ security’.

4.282. The report’s analysis started by saying:

...it was inherent in the design of the original MFRtest that it is not a “solvency test”. This is clearlyreflected in the terms of reference for the currentreview, which refer to giving non pensioners a“reasonable expectation” of receiving theirbenefits. The MFR test is not designed to“guarantee” that members will receive theirpromised benefits. Moreover, the MFR test doesnot cover any benefits provided on adiscretionary basis.

The general consequence of this is that, if ascheme winds up with assets equal to 100% of itsliabilities on the MFR, the money available aftersecuring immediate annuities for the retiredmembers will only be sufficient to secure deferredannuities for the remaining members at less than100% of their accrued benefits.

We have a particular concern that this is notunderstood by scheme members, trustees andemployers, who believe that the benefits from ascheme which meets the MFR are fully secure.

4.283. The report continued:

Looking at the present situation, however, thepicture is of even greater concern. When thecurrent MFR test was originally established, it wasdesigned so that the buy out costs for pensions inpayment would be broadly equal to the value ofthe liabilities for those benefits under the MFRtest. However, under current circumstances thebuy out costs for pensions in payment are of theorder of 10% to 20% higher than the MFRliabilities.

4.284. The report explained that this was due torecent improvements in pensioner mortality andthat the MFR test did not take into account aproper allowance in a lower inflationaryenvironment for pension increases which weresubject to minimum and/or maximumpercentage increases each year.

4.285. The report also said that, for members notyet retired, the buy out costs would also begreater than the MFR liabilities because thevalues of annuities would differ because of thefactors outlined above and also because the MFRhad been designed to deliver only a ‘reasonableexpectation’ (rather than a guarantee) thatbenefits for non-pensioners would be secured.

4.286. Using a model scheme that was funded to100% on the MFR, the report then showed thatnon-pensioners’ benefits in that scheme wouldonly be 69% secure on wind-up and concludedthat, if a scheme were only funded to the MFRlevel, members not yet retired would routinelyreceive ‘significantly less than 100% of theiraccrued benefits’ and that the shortfalls below100% ‘could vary quite sharply over time’.

4.287. The report then went on to analyse theMFR and alternatives (including changed basesfor MFR calculation). In section 4.7.1 of thereport, it was said that the then current MFRtest was:


...therefore a “hybrid” test, being a full securitytest for pensioners but a much weaker, fundingtest for non pensioners. It is our view that theimplications of this are not understood bymembers of schemes, who will almost inevitablyassume that if they know their scheme is at least100% funded on the statutory MFR test, thentheir benefits must be fully secure and protected.We strongly recommend that the new MFR testshould be coupled with much clearer disclosure ofthe real position regarding the security ofmembers’ benefits in the event of the schemewinding up, for each class of member.

It is therefore a key conclusion of the review thatthere should be full and clear disclosure tomembers of the objectives and limitations of theMFR test and the consequences if their schemeshould be wound up. We recognise that thisenhanced disclosure could have majorconsequences, as almost all employers andtrustees have, until now, tended to stress thesecurity aspects of occupational pension schemesin their communications with members.

We believe it will be necessary to create a betterunderstanding amongst members of the public ofthe issues involved. In particular, it will be desirableto gain acceptance that an investment strategythat attempts to eliminate all risks is unlikely to bethe most appropriate for long term savings. Theuncertainties of the future need to be explained,together with the steps being taken to mitigate (butnot eliminate entirely) those risks. The actuarialprofession is keen to work with Government,employers and pensions organisations to promotea greater awareness and understanding of theseissues among scheme members.

4.288. In proposing a basis for disclosure, thereport continued:

As mentioned above, it is important that membersare not misled into thinking that an MFR level of100% will ensure that their benefits are fully

secured on winding up, since the MFR test is notdesigned to deliver this. We therefore distinguishbetween a “security level”, which should bedisclosed to members, and the minimum fundingrequirement, which determines the controls placedon schemes to underpin the extent to which theyare required to meet the full security standard. Werecommend that the scheme actuary should berequired to certify the level of scheme security,broken down by different liability categories, atthe date of the triennial MFR valuation. Thisinformation should be disclosed to schememembers in the trustees’ annual reports.

4.289. The report then considered the ‘debt onthe employer’ provisions – relevant to situationsin which schemes wound up with assets belowthe MFR level – and also issues related to thecalculation of cash equivalent transfer values andother technical matters. It proposed a number oflonger-term changes to the MFR, including longerdeficit correction periods and the abolition ofthe need for annual recertification; a move ininvestments towards the use of a compositeindex of gilts and corporate bonds to amelioratedistortions in the gilts markets; and the removalof the equity market value adjustment as part ofthe MFR test.

4.290. In section 5 of the report, three proposalsfor interim changes to the MFR basis were setout. These were later to be set out in an annex tothe Government’s consultation document(see below).

4.291. Section 6 of the report discussed theframework in which the current – and anyrevised – MFR operated.

4.292. In dealing again with the purpose of theMFR and the degree of security it gave tomembers’ pension rights, the report said:

...the security for members’ benefits rests partlyon the assets built up in their fund, which the


MFR legislation attempts to measure and control,and partly on the continuing financial strength ofthe employer who underwrites the eventual costof the benefits promised to his employees. Thepoint at which members’ security becomes ofvital importance is when the scheme is wound up,particularly if this event is caused by theinsolvency of the employer. It is our contentionthat there may be a widespread misplaced publicperception that a scheme which is 100% fundedon the MFR test would provide full security formembers’ benefits.

Our proposals for clearer disclosure of the trueposition on security of benefits in the event ofthe scheme winding up should lead to a greaterunderstanding of these issues...

4.293. The report then went on to consider therelative merits of three options for reform – theestablishment of a central discontinuance fund,requiring schemes to take out solvencyinsurance, and a redefinition of members’benefits on winding up to become their shares ofthe available assets.

Preparations for publication of MFR review4.294. On 16 May 2000, DWP officials made asubmission to Jeff Rooker, the then PensionsMinister, that provided briefing on the actuarialprofession’s report and set out handling issues.After noting that one of the proposals would bethe ‘disclosure to members’ of the degree ofsecurity they could expect from the MFR whichwould ‘highlight the fact that the objectives ofthe MFR mean that non-pensioners only have a“reasonable expectation” of achieving theirbenefits’, the submission then went on to discussthe key points to be considered.

4.295. In a section entitled ‘proposals for interimchanges’, the submission noted that such changeswere ‘designed to restore its strength to the levelintended when the requirement was firstintroduced’ as ‘the MFR test is currently weaker

than originally intended’. In a later paper, thesechanges were described as technical measures totake into account increased longevity, makeallowance in the valuation of pension increasesfor the possibility that price levels may fall, andto change the equity market value adjustmentfactor to reflect recent changes in corporateactivity.

Parliamentary question on MFR and venturecapital4.296. On 7 June 2000, the then Secretary ofState, Alistair Darling, answered a parliamentaryquestion from Claire Curtis-Thomas MP, who hadasked what assessment had been made of theMFR with reference to the use of venture capital.

4.297. He replied:

The MFR does not prescribe how pension fundsshould invest their assets. Investment practice is amatter for pension schemes. The MFR is intendedto provide a reasonable level of security formembers in the event of the employer becominginsolvent and requires defined benefit schemes tohold a minimum level of assets to meet theirliabilities, valued according to a prescribedmethodology.

Child Support, Pensions and Social Security Act20004.298. The Child Support, Pensions and SocialSecurity Act 2000 received Royal Assent on 28July 2000. Chapter II of Part II of the Act relatedto occupational and personal pension schemes.

4.299. This part of the Act:

(i) provided for procedures to ensure that thetrustee boards of all schemes wereconstituted with at least one-third of theirmembers having been nominated by schememembers;


(ii) gave powers to OPRA to make their registerof disqualified trustees available to thepublic;

(iii) allowed OPRA to monitor schemes whichwere in the process of winding-up, thusimplementing some of the proposalscontained in the winding-up consultation(see above);

(iv) extended the remit of the PensionsOmbudsman;

(v) enabled Regulations to be laid at a later datewhich would require money purchaseschemes to provide members with astatement of their likely future pensionentitlement; and

(vi) changed the way in which schemesdischarged contracted-out pension rights,effected scheme transfers, and dealt withother technical matters.

4.300. In relation to the measures related to thewinding-up of schemes, the Explanatory Notes tothe Bill said:

The measures aim to ensure that a trustee is inplace following the insolvency of the employer sothat decisions can be made about the future ofthe scheme. Where winding-up has started,trustees or managers will be required to makereports to OPRA if winding-up is not completedwithin a specified period of time and OPRA willbe able to direct action to speed the processalong. OPRA will also be able to modify schemerules where they need to be changed to allowwinding-up to proceed.

Report of the Pension Forecasting AdvisoryGroup4.301. In the meantime, in July 2000 the PensionForecasting Advisory Group published a report,entitled ‘Planning Your Future’. The Group hadbeen formed following a Ministerial

announcement on 22 July 1999 with the remit ofconsidering how best to implement theGovernment’s proposals for combined state andnon-state pension forecasting (see above).

4.302. Two of its recommendations were that,first, DSS should supply a general leaflet aboutstate pension provision which would be used byemployers and pension providers to provide anintroduction to the combined forecasting serviceand to explain the state element of anindividual’s forecast pension entitlement.Secondly, while noting that employers andpension providers had a key role to play inproviding further information to individuals, theGroup recommended that DSS should look atmechanisms for ensuring that any advice givenwas made readily available, kept up to date, andexplained in plain language.

4.303. The Group also recommended that DSS,employers and pension providers considertogether what warnings might be needed to beprovided with the combined forecasts.

Final preparations for publication of MFRreview4.304. On 31 August 2000, as part of the finalpreparations for the publication of the actuarialprofession’s report and the Governmentconsultation document published in parallel toit, the Minister’s Private Secretary recorded thePensions Minister’s view that the interim changein relation to the assumptions about futurepension increases should only be an option forconsultation, with no commitment that theGovernment would actually implement it. Thereason given for this view was that there hadbeen no ‘serious evidence/economic forecastsindicating that there will be a fall in prices overthe next 10-20 years’. His support for the otherproposed interim changes to the MFR was alsorecorded in this note.


Security for Occupational Pensions – the MFRconsultation4.305. DSS and the Treasury published aconsultation document on 14 September 2000entitled ‘Security for Occupational Pensions’.On the same day, DSS published in parallel theactuarial profession’s report on the MFR outlinedabove.

4.306. Paragraphs 3 to 6 of the consultationdocument explained:

To provide for their liabilities, defined benefitoccupational pension schemes build up funds.These are subject to the Minimum FundingRequirement introduced under the Pensions Act1995. Schemes whose assets fall below theminimum set by the MFR test have to make upthe shortfall within prescribed time periods.

However, the MFR does not provide a guaranteethat, in the event of an employer becominginsolvent, its pension scheme members’ rightswill be honoured in full. And there have beenindications that the MFR also adverselyinfluences the investment decisions of schememanagers. This could damage the longer termprospects for such schemes, which remain animportant way of providing for retirement.Further to that, in the last budget the Chancellorannounced that he was asking Paul Myners [thenchairman of Gartmore Investment Managementand subsequently chairman of Marks andSpencer] to review the factors that influenceinstitutional investment decisions. Responses tohis review, for example from the NationalAssociation of Pension Funds, suggest that theMFR has distorted investment decisions.

In March 1999 the Department of Social Securitycommissioned a report on the MFR from theFaculty and Institute of Actuaries, which ispublished alongside this consultation document.It contains proposals for reform and identifies anumber of wider issues concerning the security

and costs of defined benefit pensions. But it alsosuggests that the current MFR may not be themost appropriate approach for the future. Thisdocument therefore seeks to explore these widerissues with a view to achieving security fordefined benefit pensions from well performingschemes. A number of options are put forwardand the Government welcomes comments on thealternatives specifically discussed as well as othersuggestions.

Paul Myners has also been asked for his views onthe MFR and the possible alternatives as part ofthe consultation process. He will report at thetime of the Pre-Budget Report.

4.307. Following the introduction, the documenthad seven sections and a conclusion. These wereentitled ‘the importance of occupationalpensions’; ‘existing protection for schememembers’; ‘the MFR review’; ‘how the currentMFR works’; ‘the Actuaries’ report’; ‘a widerdebate’; ‘options for protecting pension rights’;and ‘updating the current MFR’.

4.308. The document noted the importance ofoccupational pension provision within the UKand said that the Government ‘wants to helppeople understand their pension rights andappreciate the value of saving for pensions’.

4.309. In relation to the security of current finalsalary schemes, it said that ‘there is no intrinsicguarantee that the accumulated funds will beable to deliver members’ pension rights’.The documents then stated that the intentionbehind the MFR was:

...to provide protection for pensioners and otherscheme members’ rights by setting a benchmarkfor the acceptable level for the scheme’s assets.With this floor in place, there is a reasonablechance that if the employer becomes insolvent,the pension scheme’s assets will be able to meetthe cost of paying out pensions for those already


retired and provide for other scheme members’rights. It is not a solvency test as such and it issometimes misunderstood to offer a morepowerful guarantee about payment of pensionrights than it actually delivers when a schemewinds up.

The previous Government set the objectives forthis MFR test. The valuation method andassumptions for the MFR were then developedby the Faculty and Institute of Actuaries in1995/1996 to meet the objectives set byGovernment.

4.310. The document went on to explain thecontext in which the actuarial review of the MFRhad been undertaken and that the consultationprocess was intended to launch a wide rangingdiscussion on the issues that had been identifiedwithin the actuaries’ report.

4.311. It then set out what the MFR had beendesigned to deliver – namely, regardless ofwhether the sponsoring employer was solvent,that existing pensioners would have theirpensions paid in full and non-pensioners wouldhave ‘a reasonable expectation of receiving thevalue of their pension rights when they come toretire’.

4.312. The document went on:

...the amount of reassurance the MFR can deliveris commonly misunderstood to be a good dealgreater than it really is. Some people think theMFR test amounts to a full guarantee of schememembers’ pension rights. It is not a solvency test.A funding requirement that gave full protectionto members when their scheme ceased wouldlead to significantly higher costs than is the caseunder the MFR.

4.313. It also reaffirmed that the Government’sobjective was to ‘protect the immediate interestsof pensioners and other scheme members without

damaging the longer-term prospects for currentand future members’.

4.314. The document recognised that theactuarial profession, in its review, had discussed‘the case for bringing home to scheme membersthe scale of protection which the MFR can deliver,perhaps by disclosing to scheme members whatbenefits could be delivered should the schemewind up’.

4.315. The Government explained that it wantedto consider a wider range of options for reformthan those set out in the actuarial profession’sreport, including prudential supervision andeither compulsory mutual or compulsorycommercial insurance.

4.316. In relation to the actuarial profession’srecommendation for disclosure to schememembers, paragraph 56 of the report stated:

One of the key recommendations in theActuaries’ report is for disclosure to membersabout the security of their benefits. Theirconcerns stem from the fact that the MFR is not asolvency test but that this is not always fullyunderstood by members. The report recommendsthat there should be disclosure to members of,broadly, the extent to which their benefits couldbe secured by means of annuity purchase if thescheme were to wind up. This approach could beconsidered whatever policy is adopted. TheGovernment would welcome views on this ideaand how it might be achieved.

4.317. In the list of specific questions on whichresponses were sought by DSS, question 13 asked‘are there any reasons why there should not bedisclosure to members of the scheme’s solvencyposition and of what this might mean shouldtheir scheme cease? How might such informationbe best communicated to members?’

4.318. The press notice which accompanied thepublication of the consultation, which was issued


under the title ‘Darling launches consultationpaper on pension protection’, quoted the thenSecretary of State as saying:

This government is determined to protect thelong-term security of pensioners and otherpension scheme members. In the light of [theactuaries’ review] it is right to look at whetherthe current MFR is the best approach... It istherefore sensible to explore whether there is amore effective or reliable way of protectingscheme members’ rights.

4.319. Paragraphs 3 and 4 of annex one to thepress notice explained that:

The MFR is intended to provide a reasonable levelof security for members in the event of theemployer becoming insolvent and no furtherfunds being available to pay into the scheme. Theunderlying objectives of the MFR were decided byGovernment; the valuation method to meet theobjectives was devised by the Pensions Board ofthe Faculty and Institute of Actuaries.

The objective of the MFR is that a scheme fullyfunded according to its requirements would, if theemployer became insolvent, protect fullypensions already in payment, and provideyounger members with a transfer value thatwould give them a reasonable expectation ofreplicating scheme benefits if they transferred toanother pensions vehicle...

4.320. Paragraph 14 of the annex set out theproposed interim changes to then current MFRarrangements that had been recommended bythe actuarial profession and which theGovernment said it was considering. The noticesaid that these included:

...adjusting the way in which MFR liabilities areassessed to reflect:

l an extra two years longevity;

l for pension increases – that price levels mayfall;

l changing patterns of corporate activity; and

l generally lower market dividend yields sincethe current scheme was introduced.

4.321. Responses to the consultation were soughtby 31 January 2001. According to a subsequentparliamentary answer, 73 responses had beenreceived by 7 February 2001.

4.322. OPRA’s response to the consultation wassubmitted in January 2001 and in it OPRAcommented:

Risk is not generally understood by members ofdefined-benefit schemes, who are exposed to adifferent form of risk – that of the assets of thescheme on termination being insufficient todeliver the accrued benefits. These different risksneed to be explained clearly to members.


...taken as a whole, the provisions of the PensionsAct 1995 may give scheme members grounds tobelieve that they have more security than theyactually have. As with all forms of investment,membership of [defined benefit] schemes carriesa degree of risk. It is unacceptable for schememembers not to have access to a clear and simpleexplanation, by category of member, of the levelof security afforded by the current MFR. There isa parallel here with the ‘Key Features’ documentsrequired in relation to certain financial products.Scheme members should have access to a realisticassessment of the extent to which the pensionrights which they have built up are secure.On balance, it is better that members areprovided with such a realistic assessment, even ifit does give rise to member concerns.


4.324. In response to question 13, OPRA said:

We very much support the disclosure to membersof the scheme’s solvency position... This mightusefully be incorporated in the scheme’s annualreport or in the annual benefit statement issuedto members. In our view, it would be critical thatthe solvency position should be explained in aclear and straightforward way and that thesolvency position should be indicated separatelyfor each membership category. This explanationshould also seek to address concerns that may beraised in members’ minds about the security oftheir accrued rights, if the scheme was not fully“solvent”. Indeed, simply disclosing the scheme’ssolvency position to members may not achievemuch if members are unable to exert pressure onthe sponsoring employer to improve the scheme’sfinancial position or if the upshot is thatmembers leave the scheme. If handled correctly,the disclosure to members of the scheme’ssolvency position could help members tounderstand the nature and costs of the pensionpromises made to them.

4.325. The actuarial profession’s response to theconsultation was also submitted in January 2001.In appendix 6 to their response, the Faculty andInstitute of Actuaries dealt with the proposedinterim changes to the MFR basis.

4.326. In relation to the proposed change to theequity market value adjustment, the actuariessaid:

We have performed further analysis of thechanges to the levels of equity dividends andmarket value adjustments over the period sinceMay 2000 [when the interim changes were firstproposed] and confirm that a reduction to 3.0%would remain appropriate at the current time butthis should be re-examined at the time anychange is put forward, as the trend has continuedand a different figure may by supportable on thebasis of subsequent movements.

DSS research on the role of trustees4.327. In the meantime, on 28 September 2000,DSS published a report of research it hadundertaken into pension scheme trustees’experience of their role. The report was entitled‘the changing role of occupational pensionscheme trustees’.

4.328. Among the research’s key findings was onethat trustees’ knowledge of their duties varied,with those in smaller schemes appearing to bemuch less knowledgeable and heavily dependenton advice.

Revised Actuarial Guidance Note4.329. On 1 December 2000, the actuarialprofession issued a revised version (1.5) of theirguidance note, ‘Retirement Benefit Schemes –Minimum Funding Requirement’. These mademinor technical changes to professional guidancewhich are not of relevance to the heads ofcomplaint.

Parliamentary question on member protection4.330. On 26 February 2001 in response to aquestion from Desmond Browne MP, who hadasked what provisions were in place to protectemployees whose pensions had been affecteddetrimentally by the insolvency of theiremployer, Jeff Rooker, the then PensionsMinister, replied that:

...the Pensions Act 1995 brought in a number ofmeasures to promote security for members ofpension schemes, including the Minimum FundingRequirement which requires defined benefitschemes to hold a minimum level of assets tomeet their liabilities.

In the event of a sponsoring employer’sinsolvency, the legislation requires that anindependent trustee must be appointed. The roleof the independent trustee is to ensure that theinterests of the members are represented ininsolvency proceedings and to make any


necessary decisions about winding up the scheme.If on wind up the scheme is not fully funded on aMinimum Funding Requirement basis, the amountoutstanding becomes a debt on the employer andthe trustee must pursue recovery of this amount.

Where the scheme finds itself in deficit due tofraud, compensation may be payable under thePensions Compensation Scheme. Unpaidemployer and employee contributions may bepayable from the National Insurance fundthrough the Department of Trade and Industry’sRedundancy Payments Service.

Westminster Hall debate on the Basford GroupPension Scheme4.331. On 28 February 2001, Desmond Browne MPinitiated a debate in Westminster Hall on thecircumstances surrounding the winding-up of theBasford Group Pension scheme, which hadcommenced on 26 May 1999.

4.332. The then Pensions Minister, Jeff Rooker, inanswering the debate, said:

When I started to get to grips with the minimumfunding requirement, I mistook it as a solvencytest. It may appear that way to a lay person, butthere is no doubt that it is not. Pension schemesmust be adequately funded to cover theirliabilities. The 1995 Act introduced the MFR,which requires defined benefit schemes –schemes based on final salary – to hold aminimum level of assets to meet their liabilities.


We recognise that matters have changed since theminimum funding requirement was introduced. Itcame into force in 1997. As my hon. Friendacknowledged, many of the issues that affectedhis constituents are not covered by the 1995 Act,which had not come fully into force at that time.The Government consulted on the future of theminimum funding requirement and are currentlystudying the responses.

4.334. The Minister concluded by saying:

Coupled with that was the Myners review, set upby my right hon. Friend the Chancellor of theExchequer. Given that he is about to make amajor speech in the House in the not too distantfuture, he may or may not have something to sayabout that. The report has been received, and theconsultation on the minimum fundingrequirement concluded at the end of January.We have been considering the responses to thatconsultation, because we must make an earlystatement about whether we will do nothing ordo something, so that people know what ishappening.

The Myners Report4.335. The Government published Paul Myners’report, ‘Institutional Investment in the UnitedKingdom: A Review’, on 6 March 2001. His reviewhad been commissioned by the Chancellor of theExchequer at the time of the 2000 Budget toconsider whether there were factors that weredistorting the investment decision-making offinancial institutions – in the light of theGovernment’s concern that such institutionswere investing too much on quoted equities andgilts and too little in small and medium-sizedenterprises and other smaller companies becauseof industry-standard investment patterns.

4.336. As noted above, Myners had been asked inSeptember 2000 to include an analysis of theMFR in his review and he had submitted hisinterim views on the MFR to the aboveconsultation on the MFR in November 2000.

4.337. In his covering letter to the Chancellor ofthe Exchequer, Myners said:

Diagnosis of... problems is easier than cure. I domake a number of suggestions for legislative andtax change. I propose that trustees should, as inthe US, have a legal requirement to be familiarwith the issues when they take investment


decisions. I propose replacing the MinimumFunding Requirement, which distorts investmentand fails to protect scheme members, with a long-term approach based on disclosure and opennessinstead of an artificial uniform yardstick.

But I do not suggest that these alone are enough.Further change is needed. My strong preference,however, is for the industry – if it is willing – todrive change forward itself. Legislation, though itmight in the end prove necessary, is likely to be ablunt instrument to tackle the kinds of problem Ihave described.

4.338. In paragraphs 10 and 11 of the summary ofhis report, Myners explained:

Most occupational pensions are organised on atrust basis, with a board of trustees responsiblefor determining how their assets are invested. Asa survey conducted for the review confirms, manytrustees are not especially expert in investment:

l 62 per cent of trustees have no professionalqualifications in finance or investment;

l 77 per cent of trustees have no in-houseprofessionals to assist them;

l more than 50 per cent of trustees received lessthan three days’ training when they becametrustees;

l 44 per cent of trustees have not attended anycourses since their initial 12 months oftrusteeship; and

l 49 per cent of trustees spend three hours orfewer preparing for pension investmentmatters.

This is not true for all pension schemes, however.Larger schemes are more likely to have theresources to recruit and train moreknowledgeable trustees, and the use ofprofessional trustees has grown in recent years.But generally speaking, pension fund trustees,

whether of defined benefit or definedcontribution schemes, are able to bring limitedtime and expertise to the investment decision-making aspects of their work.

4.339. After dealing with institutional investmentand the context for investment decision-making,the roles of trustees, actuaries, investmentconsultants and fund managers, the position inrelation to defined contribution pensionschemes, and pension fund surpluses, chapter 8of the report dealt with the MFR.

4.340. This chapter first set out the backgroundto the MFR, saying that it was:

...designed to underpin the employer’scommitment to support a defined benefit schemeit sponsors, so that in the event of the schemehaving to cease, whether the employer isinsolvent or not, scheme members already retiredcan expect their pensions to be paid in full, andscheme members who are not yet retired have ‘areasonable expectation’ of receiving the value oftheir pension rights when they come to retire.

4.341. After describing in broad outline how theMFR worked, it continued:

Providing security for members of defined benefitpension schemes is an essential objective for anyresponsibly run pensions system. While there isno reason to doubt that the overwhelmingmajority of pension funds are run both properlyand effectively, it is essential to have effectivesafeguards to ensure that members of definedbenefit pension schemes can have confidence inthe system.

4.342. The report then discussed the effects ofthe MFR on institutional investment decision-making. On turning to the issue of member risk,the report continued:

The MFR applies only to defined benefit pensionschemes, not defined contribution schemes,


because members of defined contribution anddefined benefit schemes are subject to verydifferent kinds of risk. Defined contributionmembers bear the investment risk of thecontributions. Defined benefit members bear norisk at all unless the employer becomes insolvent;if this does occur, then they bear a mixture ofinvestment risk and an additional ‘trustee risk’ –that the trustees could have incompetently ordishonestly managed the fund and left it under-funded.

4.343. Myners’ critique of the MFR was that:

Most fundamentally... a funding standard such asthe MFR, by its nature, does not address properlythe question of protecting defined benefit schememembers. The MFR is concerned to prevent asituation where a defined benefit pension fund isinsufficiently funded and then, because ofemployer insolvency, is unable to meet itsobligations. Yet to determine whether such asituation is likely to arise requires one to take aview of what the future investment returns of thefund will be. Whether or not the pension fundwill in practice be able to pay its pensions willdepend on future investment returns. A truesystem of protection for beneficiaries shouldfocus on the issue of the reasonableness of thatassumed return.

This the MFR fails to do. Rather, it seeks toestablish whether a pension fund is ‘under-funded’ or not using assumptions which are:

l the same for all funds, albeit with adjustmentfactors for maturity;

l fixed by legislation; and

l treated as a technical question, for resolutionby the actuarial profession.

None of these points is justified. The assumptionsshould differ with the maturity of the scheme, thestrength of its sponsor, and the views of the

trustees on a suitable investment strategy.They should be free to change with changingcircumstances. They are not an obscure technicalquestion, but the very heart of the question ofwhether the fund is adequately funded or not.

It follows that the MFR does not provide theprotection that many assume it does, as thestandard assumptions it makes may prove tobe wrong. Indeed, its effects could well becounterproductive to the extent that it givestrustees a spurious sense of certainty aboutfunding levels and weakens the fiduciaryresponsibility that should be at the heart ofprotection for members of defined benefitschemes.

4.344. The report then set out a proposedalternative to the MFR – a scheme-specificfunding standard that would seek to affordeffective protection for members of definedbenefit pension schemes through appropriateinvestment strategies and would be designed toenable the differences between smaller andlarger schemes to be taken into account. Such astandard would be based on transparency anddisclosure and schemes would be required toreport publicly on the current financial state oftheir fund and on future funding plans.

4.345. Myners’ other recommendations, insofar asthey are relevant to this report, were that:

(i) the level of compensation available fornon-pensioner members of schemes whoqualified for compensation should beincreased from 90% of MFR liabilities tosomething closer to the cost of securingmembers’ accrued rights (or the amount ofthe loss, whichever were the lesser);

(ii) there should be a statutory requirement forfunds to be placed in the custody ofsomeone independent of the sponsoringemployer; and


(iii) each defined benefit scheme should berequired each year to set out in clear andstraightforward language such matters as thecurrent value of its assets and in whatclasses these assets were invested, theassumptions used by the scheme to value itsliabilities, planned contribution schedulesand asset allocations, and an explanation ofthe implications of economic volatility forthe value of the assets of a scheme.

4.346. The chapter concluded by expressingconcern that the then proposed EC Directive onthe prudential supervision of occupationalpension schemes, which had been published indraft on 11 October 2000, might, if adoptedwithout amendment, have the effect ofreplicating some of the faults of the MFR.

The Government’s response to the MFRconsultation and Myners4.347. On 7 March 2001, the Governmentpublished its proposals for reform of the MFR,in the light of the responses to the MFRconsultation and the Myners report, in adocument entitled ‘Security for OccupationalPensions: The Government’s Proposals’.

4.348. After explaining why the Government hadrejected proposals for a central discontinuancefund, requirements for commercial insurance orcompulsory mutual insurance, and prudentialsupervision, the document set out two modelsthat had received significant support in earlierconsultations: a common funding standard and along-term, scheme-specific funding standardunderpinned by a regime of transparency anddisclosure, as had been recommended by Myners.

4.349. The Government explained that it haddecided to reject the common funding standardapproach, as it was:

...not satisfied that a practical regime can bedevised which avoids the drawbacks affecting the

current MFR. A common funding standard doesnot take into account the scheme’s specificcircumstances and can therefore worsenprotection. Assumptions that are right for onescheme are not necessarily right for anotherscheme. Further, the process of valuing liabilitieson the basis of a common funding requirementinevitably leads to actuarial conventions drivingand distorting investment, leading to increasedcosts. This option would be fundamentally nodifferent to the current situation and is likely todamage the long-term future of defined benefitpensions or risk reducing the benefits that theyprovide. It does not provide the best protectionfor pensions and brings with it the risk ofdamaging consequences for investment like thecurrent MFR.

4.350. The document explained that, instead,it would seek to implement the scheme-specificfunding standard with additional measures tostrengthen protection further. These includedthe placing of a statutory duty of care onscheme actuaries, stricter conditions onvoluntary wind-up, and an extension to thefraud compensation scheme.

4.351. The document ended by noting that theGovernment’s proposals would require primarylegislation to implement them but that, in themeantime, the Government would work with thepensions industry and other interested parties todevelop proposals for legislation to beintroduced when parliamentary time allowed.

4.352. It also announced that, as the MFR was tobe abolished and as most of the respondents tothe September 2000 consultation had notsupported them, the Government had decidednot to implement the proposed changes to theMFR that had been recommended by theactuarial profession in its May 2000 report.


4.353. Paragraph 33 of the document set thisdecision out thus:

Most of those who responded to the consultationdocument did not support the package of interimchanges to the MFR and many commented thatthey should not be made if the MFR was to bereplaced in the near future. The Government isproposing to replace the MFR and feels that it isnot sensible to introduce these changes now.

4.354. The decision not to implement therecommendations for interim reform of the MFRincluded the proposal for disclosure to membersof the risks to their pension rights should theirscheme wind up without sufficient assets tomeet its liabilities. However, it was said that whatinformation would be required to be disclosed toscheme members would be considered as part ofthe discussions about the detail of the newlegislation to be introduced in due course.

4.355. On the same day, the Chancellor of theExchequer announced the proposed replacementof the MFR as part of the statement he made tothe House to outline his economic and fiscalstrategy report and Budget.

4.356. The press notice which accompanied thepublication of the document quoted the thenSecretary of State, Alistair Darling, as saying:

The Government is determined to protect thelong-term security of pensioners and otherpension scheme members in occupational pensionschemes. It is clear that most people believe thatthe MFR does not provide effective protectionand the Government therefore proposes aradically different approach.

4.357. OPRA confirmed subsequently, on 25 July2001, that the MFR would continue to operateuntil the enactment and commencement of itsreplacement.

Commons debate on occupational pensionschemes4.358. On 3 July 2001, David Watts MP initiated anadjournment debate in the House of Commonson ‘employee pension schemes’.

4.359. He reiterated earlier concerns he had hadabout the placing in administration of a companyin his constituency, whose pension scheme hadsubsequently gone into wind-up despite the factthat the company had had a contributionsholiday not long before the relevant events.

4.360. He then continued to ask whether theGovernment would consider establishing a‘pension protection fund so that the liabilitiesfrom pension schemes that are discontinuedwould pass to a mutual company that wouldprotect the funds of affected pensioners?’ andalso whether the Government would considerreform to prevent companies from takingcontributions holidays.

4.361. The then Parliamentary Under-Secretary ofState for Work and Pensions, Maria Eagle, repliedto the debate. After expressing sympathy forthose former employees of the company whohad suffered ‘the double blow of not only losingtheir jobs and being reduced to statutoryredundancy pay but also finding a hole in thepensions in a defined benefits scheme that theyhad every right to expect would provide themwith a well known, fixed amount when theyretired’, the Minister continued:

Pensions law is tremendously complex, and issuesthat might seem to hon. Members, outsiders andmembers of pension schemes to be relativelystraightforward and simple can be devilishlycomplex because of the law and how the schemeswork.


4.362. She went on to explain the role of theMFR thus:

One of the central features of the Pensions Act1995 was the introduction of the minimumfunding requirement. It was designed to promotesecurity for scheme members. It requires definedbenefit schemes to hold the minimum level ofassets to meet their liabilities. The aim of theminimum funding requirement is to ensure that ascheme that is funded to at least the level of thatrequirement will, in the event of the employerbecoming insolvent, be able to provide pensions.It is also intended to provide younger memberswith a fair value of their accrued rights, whichthey can then transfer to another occupationalpension scheme, or to a personal pension...

It is right that measures should be in place toprotect the interests of members of a schemewhose funding has gone wrong. If a scheme is notfully funded on a minimum funding requirementbasis when it winds up – which has happened inthis case – the outstanding amount becomes adebt on the employer, and the independenttrustee is responsible for pursuing recovery. Thedebts amount to the sum required to bring thescheme back to full funding on the minimumfunding requirement basis. That is all very well ifthe employer is solvent, but it does not help if theemployer is insolvent, as in the case underdiscussion. The provisions will not guarantee thatthe money owing to the scheme can be recovered.They are directed a fairly long way down the listof creditors as are the other obligations that thefirm may have had.

4.363. Ms Eagle ended by saying that theGovernment would consult on a pensionprotection fund (while noting that such an ideahad in the past had little support in the industry)and that compulsory mutual insurance assuggested in the debate would be an option onwhich views would also be sought.

4.364. Further parliamentary debates on thesubject matter of this investigation were heldsubsequently on 22 January 2002, on 2 July 2002,and on 23 October 2002.

A Guide to your Pension Options by DWP4.365. DWP published a revised introductory 34-page guide in July 2001 called ‘a guide to yourpension options’ (leaflet PM1 – first published inJune 1998). Its introduction stated that ‘theseguides can give you helpful information, but onlyyou can make decisions about your pension’(emphasis in original). The revisions to the guidehad been made to take into account theintroduction of stakeholder pensions and theother sections of the guide were identical toearlier editions.

4.366. After describing the main features of statepension provision, the guide went on to set outthe main features of occupational, personal andstakeholder pensions, while referring the readerto other publications by DWP – including leafletsthat dealt with occupational pensions – if theywished more information. The guide alsosignposted the reader to other sources ofinformation, including the then Citizens AdviceBureau and the Pensions Advisory Service andalso publications by the Inland Revenue andothers by DWP.

4.367. Pages 14 to 16 of the guide dealt withoccupational pensions. Under a section entitled‘should I join my employer’s occupational pensionscheme?’, the guide explained:

Most members of an occupational pensionscheme will be better off when they retire thanthey would be if they did not join it. This isbecause most employers pay something towardsan occupational pension on top of the paymentsyou may have to make. Generally, this means youwill get a bigger and better pension that youcould get for the same money anywhere else.


4.368. It continued (with original emphasis):

If your employer runs an occupational pensionscheme, you should think carefully before youdecide not to join it. If you are in any doubt, getas much information as you can (for example, byreading information from the scheme provider orby talking to a union representative or financialadviser) before you decide.

4.369. The guide then said that if the readerwished to know more about how occupationalpension schemes worked, they should ask for acopy of the DWP leaflet that dealt specificallywith such schemes.

4.370. In a section called ‘what else do I need tothink about?’, pages 24 to 28 of the guide set out‘other things that could affect your pension’. Itlisted change to the state pension age forwomen, the effects of divorce, the new systemof bereavement benefits, and the implications ofliving abroad.

Letter from Actuarial profession4.371. On 5 September 2001, the Chairman of thePensions Board of the actuarial profession wroteto the Head of Private Pensions at DWP toinform him that the actuarial professionproposed that an interim change – the loweringof the dividend yield in the equity market valueadjustment – should be made prior to reform ofthe MFR. The Chairman said in his letter that:

...the lack of any dividend from companies such as[a big multinational] would indicate that somechange should be made to the MVA factor whichproduces a weakening of the basis at the point itis changed. Note however that this is aimed atbringing its strength back to that originallyintended rather than an actual weakening. On theother hand, improvements in longevity wouldindicate a strengthening of the basis.


The extent to which these two effects cancel eachother out in terms of the total for the MFRliabilities will depend on the maturity of eachparticular scheme. We are of the view, however,that the overall position has changed sufficientlyto require a lowering of the dividend yield in theMVA from 3.25% to 3%. If we had considered moredetailed changes in the form of our earlierproposals we would now be proposing a largerchange to the MVA factor, to something of theorder of 2.75% rather than 3%. However, in orderto keep the proposal simple and to take someaccount of the underlying need for a change tothe mortality assumption, we are suggesting thata smaller change is made which implicitly can betaken as making some allowance for themortality change.

Actuarial paper on post-MFR framework4.373. On 14 September 2001, the actuarialprofession wrote to DWP to submit a paper ithad prepared which set out the thoughts of theInstitute and Faculty of Actuaries about theissues that would ‘need to be addressed in thecoming review of the framework to follow theMFR’.

4.374. In relation to ‘transparency and disclosure’,the actuarial profession said that:

Solvency on winding up is not yet a requireddisclosure [to scheme members] and we wouldpropose that an approved measure reflecting thesolvency position of a scheme should be arequirement. We are also aware that this fullerand wider disclosure has the potential to causesome confusion to members but we are equallyconcerned that lack of disclosure may hideimportant information. To that end we encouragefull disclosure with greater consumer education.


Further consultation on the MFR 4.375. On 18 September 2001, DWP and theTreasury published a joint consultationdocument called ‘The Minimum FundingRequirement: The Next Stage of Reform’.

4.376. The then Secretary of State for Work andPensions and the then Economic Secretary to theTreasury, in a joint Foreword to the document,explained that, since the publication of theGovernment’s proposals (see above), theGovernment had received comments andsuggestions from interested parties as to whatshould be done in the period prior to theenactment of new legislation to give force totheir proposals.

4.377. The Ministers announced the formation ofa Consultation Panel to assist with reform of theMFR. This would include issues related to whatshould be disclosed to scheme members aboutthe security of their pensions and the solvencyposition of their scheme.

4.378. Membership of the panel was drawn fromthe National Association of Pension Funds; theAssociation of British Insurers; the Faculty andInstitute of Actuaries; the Association ofConsulting Actuaries; the Association of PensionLawyers; the Society of Pension Consultants; theFund Managers’ Association; the Trades UnionCongress; the Confederation of British Industry;the National Consumer Council; and the BritishChambers of Commerce.

4.379. The terms of reference for the panel wereto:

...assist in developing the detailed policy forlegislation on the replacement for the MFR, inparticular to:

(i) assist officials in assessing the practicalimplications of a proposed policy or courseof action, that is, to act as a sounding boardof experts;

(ii) work through the detailed policy packageand draft legislation to ensure that it iscoherent and workable across a wide rangeof occupational pension schemes but doesnot have adverse effects on investmentbehaviour or have unintended effects; and

(iii) facilitate a two-way communication processbetween the policy makers and the pensionsindustry.

4.380. The document then set out the principalcomments that had been received in relation toits longer term proposals and went on to set outthe package of measures that it proposed shouldbe introduced in the interim.

4.381. The interim reforms, which were describedas being ‘a balanced package that is good both formembers and for employers’, consisted of threemain proposals.

4.382. The first measure involved extending thedeficit correction period to 3 years for seriouslyunder-funded schemes to reach 90% of the MFRfunding level – and to 10 years for under-funded(including seriously under-funded) schemes toreach 100% of the MFR funding level. Thedocument said:

This change modifies the current MFR rules in away that is consistent with the Government’sproposals to replace the MFR with a long-termfunding standard. It will allow schemes to fundand invest in a more optimal way and smoothesout some of the short-term volatility associatedwith the current MFR regime.

4.383. The second measure removed therequirement for automatic annual recertificationof schedules of contributions where a scheme’slast MFR valuation showed that the scheme was


fully funded on the MFR basis. The documentexplained:

Again, this change is consistent with theGovernment’s proposals to move to a long-termfunding standard. It takes the focus, for a fullyfunded scheme, from the short-term to a morelong-term basis. Consideration is also being givento the addition of a requirement for an out ofcycle valuation where it appears that there hasbeen a significant change in the funding positionof the scheme – by bringing into force regulation11 of the current Minimum Funding RequirementRegulations. This would mean that, althoughannual checks are being removed for fully fundedschemes, security would still be re-assessedshould there be a significant change in thefunding position.

4.384. The third measure introduced stricterconditions on voluntary wind-up. The documentsaid:

The Government has said it will legislate to makeit clear that employers must meet in full theaccrued entitlements of scheme members as theyfall due. And the proposed policy for the longerterm is that the method of calculating the debton the employer when a scheme winds-up shouldbe strengthened by including:

(i) the actual costs of winding-up the scheme;

(ii) the actual costs of annuities for pensionermembers; and

(iii) cash-equivalent transfer values for non-pensioner members calculated on the newlong-term funding basis.

4.385. The document then explained that theGovernment proposed to move towards thethird policy outlined above in the period prior tothe replacement of the MFR by immediate actionto strengthen the debt on the employerprovisions by using actual costs rather than the

MFR basis, while continuing to use the MFR tocalculate cash-equivalent transfer values.

4.386. Responses to the consultation were soughtby 10 December 2001 and the proposedRegulations to give effect to the interimproposals were attached to the document indraft. According to a later parliamentary answer,140 responses were received.

GAD advice on actuarial profession’s proposal4.387. On 25 September 2001, following‘discussions’ held with DWP officials, a chiefactuary at GAD emailed DWP.

4.388. The purpose of the email was, at DWP’srequest, to:

...set out GAD’s views on the following matters:

(a) does GAD consider that events in thefinancial markets since 11 September meanthat there is a case for taking action tochange the MFR regulations to extend thedeficit correction period in advance of theplanned date of March 2002?

(b) does GAD consider that the DWP shouldaccede to the request from the actuarialprofession that the MFR equity MVA shouldbe amended, by replacing the assumedlong-term dividend yield of 3.25% with 3%?

4.389. The chief actuary continued by explainingthat it was GAD’s view, in relation to (a) above,that ‘the increased market volatility experiencedsince 11 September and anticipated in comingmonths would support taking early action toextend MFR deficit correction periods, given thatMinisters have already indicated that this changewill be implemented next spring followingconsultation’.

4.390. He then explained the work – described as‘approximate calculations’ – that GAD hadundertaken in support of this view and set out anumber of scenarios to put this in context.


4.391. In relation to the request for advicemarked (b) above, the chief actuary’s full adviceon this specific request was as follows:

In our view, recent events – in and of themselves– do not undermine the thrust of the argument ofthe actuarial profession. Accordingly, GAD wouldagree that the change to the equity MVAproposed by the profession is justified as a simplechange which adjusts the MFR to a level ofprotection consistent with that applying whenthe equity MVA was last adjusted in June 1998.

DWP response to actuarial profession4.392. On 23 October 2001, DWP replied to theactuarial profession’s letter of 5 September 2001.

4.393. After having noted that wholesale reformof the MFR required primary legislation and thatthe Government was currently consulting on anumber of proposals for shorter-term reform ofthe MFR, the letter stated:

Our view is that we need to take a consideredand balanced view as to the next stage of reformof the MFR, and that we should not makepiecemeal changes. As such we would propose togive full consideration to your suggestionalongside others which we receive as part of thecurrent consultation on the interim package ofmeasures. Whilst we note the arguments you haveput forward for an immediate change to theequity MVA we do not believe that such a changeshould be made in isolation, but should beconsidered as part of a coherent and balancedpackage arising out of the current consultation.

Parliamentary questions on occupationalpensions4.394. On 8 November 2001, in response to aquestion from Professor Steve Webb MP, whohad asked what plans the Government had todiscuss trends in occupational pension provisionwith the pensions industry, the then Minister, IanMcCartney, replied that the Government

regularly discussed these matters with thepensions industry. Those discussions included‘the role that Government can play in supportingand encouraging pension provision’.


The Government acknowledges the contributionthat occupational pension schemes play in theprovision of income in retirement and want toencourage continued employer involvement.

4.396. The Minister then went on to explain theGovernment’s proposals for pension reform.

4.397. In response to a further question fromStephen Hepburn MP on how DWP planned to‘encourage private pensions provision’, theMinister replied:

This Government are committed to encourageprivate pension provision – through pensioneducation, making saving pay, providingappropriate savings vehicles, and betterregulation...

Our pension education campaign has been drivinghome the message that those who can afford tosave have an obligation to do so.

4.398. Later, in response to another question,from Gillian Merron MP, the Minister confirmedon 29 January 2002 that MFR reform through theproposed new Regulations would not haveretrospective effect.

OPRA announcement on MFR4.399. Following speculation in the wake of theevents in the US on 11 September 2001 about theeffects of the stock market fall on pensionschemes, OPRA made an announcement on6 December 2001 to confirm that, contrary tosuch speculation, OPRA was not intending –nor did it have the power – to suspend theoperation of the MFR.


4.400. After drawing attention to the fact that,under existing legislation, schemes could applyto OPRA for an extension to the normal timeallowed for an ‘under-funded’ scheme to makeup MFR shortfalls, the then Chairman of OPRAwas quoted as saying:

These applications are complex and involvedifficult decisions for [OPRA] ... We may bepresented with a case where payment of therequired level of contributions could seriouslydamage the business. But we have to balance thatagainst our assessment that such an employer,already in financial difficulty, is likely to be ableto continue in business.

Members of final salary schemes should be awarethat their benefits are not guaranteed in theevent that their employer becomes bankrupt,even if the scheme is funded to 100% on the MFRbasis. Pensions in payment are usually protected,but those members who have not retired couldget reduced benefits. We advise members to takean active interest in their scheme and to find outabout its funding position.

Consultation panel discussion on disclosure4.401. In the meantime, the Consultation Panelappointed on 18 September 2001 (see above) hadmet to discuss the disclosure of information toscheme members on 16 November 2001.

4.402. The record of that meeting reported that:

A discussion then followed as to the importanceof educating members of the risks involved intheir defined benefit scheme. If the employerremained in existence there would be noproblems but members should be made aware ofwhat happens should their employer becomeinsolvent. However, the point was made thatthere were a range of risks, only one of which wasthe insolvency of the employer. And that theserisks must be set in context.

4.403. The note continued:

Even with these risks, a defined benefit schemewas less risky than a defined contribution schemeand that wind-up with an insolvent employer israre and is only one of a range of risks. Disclosureof the winding-up position must not make peoplethink this will happen – this must be set incontext. It was pointed out that whenever youenter a contract you should know the exit terms.What happens in wind-up should be disclosed tomembers, that there must be ways of overcomingthe fear of members being frightened by thisinformation, that it should be possible formembers to understand that this situation is rare,and that we should not assume that memberswill act in an ill-informed way if this informationis disclosed to them.

4.404. It went on:

However, [one member] expressed the view thateverything should not hang off the winding-upposition. But that members should be given areassurance that the standard being used by theirscheme is reasonable and that their scheme is beinglooked after. Or if it is not meeting this standard,then members should be told how this is beingfixed. What happens should the scheme wind-upshould be a secondary piece of information. Theemphasis should be that their security is an ongoingemployer. [Another member], agreed but said thatthis does not explain the risks involved, one ofwhich is insolvency.

4.405. The Panel decided to establish a sub-groupto specifically look at the issue ofcommunication with scheme members. Thissub-group met later on 16 May 2002. Accordingto the note of this meeting:

There was then a discussion but no overallconclusion about what type of informationshould be disclosed to members. How muchemphasis should there be on short-term market


conditions that may effect the security ofmember benefits? It was suggested that memberscould be made aware of the risks to the securityof their benefits – such as the under performanceof scheme investments. Information about riskssent to members needs to be balanced becausethe greatest risk to the security of their benefits isthe employer going out of business.

A comment was made that it is not enough to tellmembers about investment returns andcontributions because on its own this informationcould be misleading. There needs to be anappropriate balance between providinginformation that is too bland to be of use anddisclosing information that is too technical to beproperly understood. It was noted that currentlythe only automatic disclosure item in relation toscheme funding was the requirement to disclosenon-payment of scheme contributions in certaincircumstances.

Ministerial speech to NAPF conference4.406. On 22 November 2001, the then PensionsMinister, Ian McCartney, delivered a keynotespeech to the annual conference of the NationalAssociation of Pension Funds.

4.407. The press notice issued by DWPannouncing that speech said that the Ministerhad emphasised the importance of stakeholderpensions but that ‘just as important is educatingpeople to help them make an informed decision’.

4.408. The press notice then quoted the Ministeras saying:

It is crucial that we provide better information.People need to see in black and white just howmuch they may or may not have in retirement, sothat, if appropriate, decisions to secure additionalpensions are made in good time.

Submission to Minister on interim MFR reform4.409. On 11 January 2002, Ministers had beeninvited to approve the actuarial profession’s

further recommendation, made on 5 September2001 (see above), to reduce the equity marketvalue adjustment factor from 3.25% to 3%.

4.410. This was to be part of a wider package ofreform to the MFR, which included an extensionof the deficit correction periods, during whichsponsoring employers had to make up shortfallsin scheme funding, the removal of therequirement for certain schemes to obtainannual certifications of the adequacy of thescheme’s schedule of contributions to enable itto meet the MFR, and the introduction ofstricter conditions on voluntary scheme wind-up.

4.411. The submission to the Minister said, inrelation to the equity MVA proposal, that thisaimed at ensuring ‘that the assets which schemeshave to hold relative to their MFR liabilitiesunder current economic conditions remainsconsistent with the original intentions of theMFR’.

4.412. The submission, in its detailed treatment ofthis proposal, stated that:

As part of its role in reviewing the actuarial basisfor the MFR, the Pensions Board of the F&IoA haveconcluded that changes are needed to the equityMVA in order to align the MFR more closely to thelevel of protection originally envisaged. Thechanges are considered necessary mainly becauseof the trend towards reduced levels and non-payment of dividends by companies (which hasthe unintended effect of causing the MFR tooperate at a level in excess of its original strength),and the increase in life expectancy.

4.413. The submission continued:

Increased life expectancy requires an increase inMFR liabilities. The reduction in dividend yieldsrequires a lowering of the MVA. The F&IoArecommend that the overall impact of these factorscan be addressed by lowering the dividend yield inthe MVA from 3.25% to 3%. You will recall that the


Pensions Board wrote to officials on 5 September2001 recommending this change. Our response[given on 23 October 2001] explained that we werecurrently consulting on a balanced package ofchanges to the MFR and did not propose to makepiecemeal changes. But that we would consider thissuggestion along with any others we received aspart of the consultation exercise.

4.414. It went on:

GAD’s advice is that adjusting the MVA now inthe way proposed by the F&IoA is justified undercurrent circumstances. This change will lead to anestimated reduction in MFR liabilities of 7.7% inrespect of scheme members who are more than10 years below pension age, with more modestreductions for those closer to normal pension age.This returns things to the level when the MFR wasintroduced.

4.415. This part of the submission then set outofficials’ recommendation that the Minister‘agree to adjust the MVA in line with the F&IoA’ssuggestion’.

Consultation on Myners4.416. On 4 February 2002, the Governmentissued three ‘consultation documents onrecommendations in the Myners Report’.

4.417. These related to Myners’recommendations:

(i) that where trustees were taking a decision,they should be able to take it with the skilland care of someone familiar with the issuesconcerned;

(ii) that there should be a statutoryrequirement for funds to have independentcustody; and

(iii) that UK law should incorporate an activistduty (similar to one imposed under USlegislation) on those responsible for theinvestment of pension scheme assets.

Responses to the September 2001 consultation4.418. Also in February 2002, DWP and theTreasury published a summary of the responsesthey had received to the consultation on thedraft Regulations to make interim changes to theMFR (see above).

4.419. In the light of those responses, theGovernment said:

(i) that it had decided to proceed with theextension of the deficit correction periods,although this proposal was modified so thatthe extended periods would apply to newschedules prepared following an MFRvaluation, irrespective of the date of thevaluation;

(ii) that it had decided to proceed with theremoval of the annual recertificationrequirement for schemes that were 100%funded on an MFR basis, although it wasnow proposed that, in order to qualify forexemption from the requirement, a schemehad to be ‘fully funded’ both at the effectivedate of the last MFR valuation and at thetime of the funding estimate undertaken forthe purposes of certifying the subsequentschedule of contributions;

(iii) that it had made a number of revisions tothe detailed draft Regulations to implementthe proposal to impose stricter conditionson voluntary wind-up and that theGovernment would continue to examinewhat arrangements should apply in areaslinked to the MFR as part of the work todevelop its replacement.

4.420. While recognising that this had not formedpart of the draft Regulations that had beenissued for consultation, the Government alsoannounced that it had accepted arecommendation from the Faculty and Instituteof Actuaries to amend the MFR equity market


value adjustment from 3.25% to 3%. TheGovernment said:

This change would take account, in a simple andstraightforward way, of the overall impact on thestrength of the MFR test caused by reductions individend payments made by companies, and ofmortality improvements, and align the strength ofthe MFR test more closely with its originalintended strength.

4.421. The document ended with the statementthat the Government would feed othercomments it had received during theconsultation process into the work it was doingto work up proposals for the replacement of theMFR, assisted by the Consultation Panel.

The Occupational Pension Schemes (MinimumFunding Requirement and MiscellaneousAmendments) Regulations 20024.422. The Regulations to put the interim changesto the MFR basis into effect were made on 22February 2002 and laid before Parliament on 26February 2002.

4.423. The Regulatory Impact Assessment thataccompanied the Regulations noted that therehad been widespread criticism of the MFR sinceit had been introduced. It then set out again thespecific interim measures being implemented bythe Regulations and argued that the risks of nottaking this action would have been:

(i) that schemes would have continued to havehad to respond to short-term marketfluctuations over an inappropriately shorttime frame. This would have distortedinvestment behaviour by encouraging extrainvestment in gilts (to reduce volatility), orled to short-term cash injections, which mayhave damaging consequences for theemployer, and would have acted against thelong-term interests of members;

(ii) that well funded schemes would havecontinued to have had to invest time, energyand money every year on complex checkswhich were of doubtful value; and

(iii) that scheme members would not havebenefited from the greater security whichwould be provided by the changes to thecalculation of the debt on the employerwhen a scheme wound-up voluntarily.

4.424. The Assessment then set out the rationalefor the Government’s decision not to imposedebt on the sponsoring employer in schemewind-ups of the full amount needed to buy outthe pension liabilities of all members throughtraditional or guaranteed deferred annuities:

While the Government is keen to strengthenprotection for members when their schemes windup, moving to such a stringent requirement wouldlead to high and uncertain costs hanging overongoing schemes. This could be unsustainable formany UK companies and could have damagingconsequences, including scheme closures in somecases. This would be in no-one’s interest.

It should also be realised that guaranteeddeferred annuities are not necessarily the mostappropriate vehicle for younger scheme members,who might do better over the long period beforeretirement by investing the value of their existingpension rights in a stakeholder pension or otherarrangements.

Finally, the very large size of some schemes issuch that movement to an annuity buy-out basisfor wind-ups might simply be impractical: thereare doubts as to whether the insurance industrycould deal with what might be required.

4.425. The Assessment then considered therelative costs and benefits of the Government’sproposals.


4.426. In note 4 to the press notice whichaccompanied the laying of the Regulations,DWP confirmed that it had approved, on therecommendation of the actuarial profession, thereduction in the equity market value adjustmentassociated with the MFR test (see above).

4.427. In the debate in the House of CommonsStanding Committee on the Regulations on14 May 2002, the then Minister, Maria Eagle,explained that ‘the Regulations were introducedto improve the way in which the MFR operatesin the period up to its replacement’.

4.428. When asked whether the Regulationswould speed up the wind-up of insolventemployer schemes, the Minister replied:

The hon. Gentleman should not go away thinkingthat the regulations apply to the winding up ofinsolvent schemes. They do not. Delays oftenoccur in respect of insolvent companies but theregulations do not apply to such situations.

4.429. In relation to concerns about theincreasing number of final salary schemes thatwere closed to new entrants, the Minister repliedthat ‘some 8 million people remain in defined-benefit schemes, so we should not overplay theseriousness of what has happened’. Shecontinued:

Reading the newspapers, one might get theimpression that schemes are closing every dayand that people in schemes that close no longerhave pensions, but that is not the case. Mostschemes close to new members alone; very fewclose to existing members, although that hashappened... the situation is not all doom andgloom.

Press notice by actuarial profession4.430. On the same day as the MFR changes wereannounced, the actuarial profession released apress statement, which had been seen by DWP in

draft, under the heading ‘actuarial professionwelcomes Government’s changes to MFR’.

4.431. This statement began:

Today’s government changes to the MinimumFunding Requirement (MFR) are a helpful easingof the burdens on employers. We hope thechanges will encourage employers still to sponsoroccupational pension schemes – particularlythose of the defined benefit type.

[The then] Chairman of the actuarial profession’sPensions Board warned that the Governmentdoes need to be honest and open about theimpact of any such measures on member security,particularly if, as a consequence, there is anincreased chance for some members that thepension they expect will not be delivered.

We recognise that the government’s task is not aneasy one – it isn’t possible to bolster memberprotection in occupational pension schemes andat the same time reduce the cash burdens onemployers. These are conflicting objectives.

4.432. The statement continued to outline thechanges that it specifically welcomed, which itlisted as being:

l the ‘acceptance of the change werecommended to the... [equity] MVA – torecognise current market conditions and thelower dividend payouts in recent years. Thischange eases the burdens on employers byreducing the amount needed to meet the MFR.But it also reduces the amount of minimumtransfer values for people changing schemes’;

l the ‘extension of the “deficit correction period”giving employers the extra flexibility whichthey have been seeking in funding patterns andtheir own cashflows, but still within adisciplined framework for funding theirschemes’; and


l the ‘reduced administrative burdens ontrustees and employers by removing annualrecertification for schemes that pass the MFRtest. However this could give a lower level ofmember protection for such schemes and thisshould be recognised by the government’.

4.433. However, the profession went on to:

...caution that:

l the removal of these annual funding checksmeans that, for as long as 3 years, there willbe no statutory mechanism to check thatcontributions by the employer are stillsufficient when the next actuarial valuationis due;

l the fact that a scheme is funded at the level of100% on the MFR basis is no guarantee that itwill continue to be so over the next threeyears. A significant proportion of schemeshave seen reducing MFR funding levels over thepast three years. In current conditions aninterval of 3 years between valuations is onein which funding levels can decline rapidly.Scheme trustees and their advisers will need tocontinue to be watchful in carrying out theirduty towards pension scheme members; [and]

l we also recommended that the governmentshould not implement the removal of annualfunding checks, if no workable solution couldbe found to provide compensating provision toprotect members. In the event the governmenthas introduced the dispensation but hasdecided to apply it to schemes with fundinglevels lower than we believe wise, especially incurrent conditions. This causes us concern.

4.434. The statement concluded by saying:

The interim amendments to the MFR made by theDepartment for Work and Pensions today followconsultations in which we participated actively.We also co-operated closely with the DWP in

making the necessary changes to two of ourprofessional guidance notes, which we are alsoreleasing today.

Revised Actuarial Guidance Note4.435. On 7 March 2002, the actuarial professionformally issued a revised version (1.6) of theirguidance note, ‘Retirement Benefit Schemes –Minimum Funding Requirement’ to reflect theabove changes to the MFR basis.

Actuarial profession’s briefing statement onabolition of the MFR4.436. Also in March 2002, the actuarialprofession issued a briefing statement entitled‘reform of the MFR: consequences of the abolitionof the MFR’, which ‘set out the thoughts’ of theFaculty and Institute of Actuaries on thesematters.

4.437. After noting that the precise form ofreplacement had yet to be determined, thestatement continued:

..there is an advantage in linking the amountpayable by the employer when a scheme windsup and the priority order. This would help ensurethat, when a scheme winds up and the employerpays any debt in full, the assets of the schemewould be sufficient to satisfy any priorities set byGovernment. This would improve on the currentsituation where an employer can satisfy the debton the employer regulations by ensuring that thepension scheme has assets to cover both pensionsin payment and deferred pensions. However,when pensions in payment are secured, thepriority order allocates them funds equal tothe cost of purchasing annuities. Annuitiescurrently tend to cost more than the value of apension in payment on the MFR basis. Hence,currently, where an employer pays this debt infull, the assets remaining after purchasingannuities for pensioners, tend to be insufficient topay full transfer values for deferred pensioners.


Parliamentary questions on scheme wind-upand under-funding4.438. On 18 March 2002, the then Minister,Malcolm Wicks, replied to a question from ColinPickthall MP, who had asked what mechanismswere proposed by the Government to preventcompanies from winding-up, closing down orfundamentally altering pension schemes withoutthe consent of scheme members; what measuresthe Government proposed to introduce toencourage the continuation of final salaryschemes; and whether the Government wouldbring forward proposals for legislative reform toincrease member protection.


Occupational pension schemes are providedvoluntarily by employers, and they are thereforefree to decide whether to continue to providesuch pensions in the future. The legislation that isin place is to ensure that the pension rights thatindividuals have already built up in schemes areprotected...

The Government have already announcedproposals to replace the minimum fundingrequirement (MFR) with a long-term schemespecific funding standard in the context of aregime of transparency and disclosure, withadditional measures to strengthen security. Thiswill be taken forward as soon as parliamentarytime is available. Meanwhile the Governmentannounced a package of changes on 26 Februaryto improve the way the MFR operates in theperiod leading up to its replacement, and increaseprotection for pension scheme members where anemployer decides to wind a scheme upvoluntarily.

We have asked Alan Pickering and Ron Sandler, intwo separate studies to review the regulation andoperation of the pensions, and the wider marketof savings products, including final salary

schemes. Alan Pickering will report, withrecommendations for reform, in June and RonSandler will also report around that time.

The Government will then set out its proposals,which will build on the reforms put in place since1998, and on which it will consult, to simplifythe regulatory system, to look at how theGovernment and employers encourage andsupport pension savings, and to make sure thatthe most appropriate incentives for savings inretirement are in place.

We have already announced last month aninterim package of measures to improve the waythe minimum funding requirement works, whichwill reduce compliance costs for employers withdefined benefit pension schemes.

4.440. On 21 May 2002, in response to a questionfrom Peter Duncan MP, the Minister explainedthat, in 2000, 13% of private sector final salaryschemes had been under-funded on an MFRbasis, made up of 6% which were funded at alevel below 90% of the MFR level and 7% fundedat between 90% and 99% of that level. He alsoexplained that, by February 2002, it wasestimated that the total proportion of under-funded schemes had risen to one in six.

Revised Actuarial Guidance Notes4.441. Meanwhile, on 19 March 2002, theactuarial profession had issued a revised version(4.2) of their guidance note, ‘Retirement BenefitSchemes – Winding-up and Scheme AssetDeficiency’ and also a revised version (2.0) oftheir other guidance note, ‘Retirement BenefitSchemes – Minimum Funding Requirement’.

Accuracy of information project4.442. On 22 March 2002, the DWP departmentalboard signed off the final report of its ‘Accuracyin Information’ project.

4.443. The project had been established in April2001 in the light of critical reports by my


predecessor and the Comptroller and AuditorGeneral, both issued in March 2000, concerningthe quality of the information that had beenprovided by DSS in relation to changes made bylegislation to the arrangements for theinheritance of SERPS.

4.444. The National Audit Office report had said:

Where the Department provide publicity aboutlegislative changes, they have a responsibility toensure that the information is correct and notmisleading. We consider, therefore, that:

a) the Department’s new procedures forensuring the contents of leaflets arecomplete and accurate should in the futurebe applied systematically to all publicitymaterial, including electronic sources.Although the Department are responsible forthe quality of their publicity, they shouldalso consider how they can engage pressuregroups and other interested parties more inconsultation on the text of new leaflets andother publicity material. They should alsoensure that the new arrangements allow forthe handling of ad hoc corrections notifiedto the Department outside the regular reviewprocess;

b) particular attention should be paid toensuring that information about changes tolegislation that do not come into effect forsome years is included in publicity material;

c) given the potential consequences of incorrectand incomplete leaflets, this area remainshigh risk, and we suggest that theDepartment’s Internal Audit Serviceundertake a regular review to ensure that thenew arrangements for ensuring complete andaccurate leaflets are being implementedeffectively; and

d) the current work to develop the informationprovided in state pension forecasts (the

means by which citizens are able to obtain aprojection of what pension they will receiveat state retirement age, based on a series ofassumptions), and the amount ofexplanatory material accompanying it,should be progressed as soon as possible aspart of the wider improvements to theinformation about pensions available tocitizens.

4.445. Legal advice provided to the project teamon 26 May 2000 had confirmed earlier advice,given on 17 November 1999, that the Governmentwas not under a general duty to provideinformation or advice. It also said that, if it did soin circumstances where the recipient could beexpected to rely on it, the Government would beliable for loss resulting from the information oradvice ‘being incorrect’.

4.446. The adviser noted that ‘being incorrect’included ‘telling only part of the story’. The legaladviser continued (with my emphasis):

On the face of it, the best general approachwould seem to be for the Department toconcentrate on administering the system andproviding appropriate information about it.We should leave the task of giving advice to theprofessional advisers like CABx and Age Concernand make sure that to the extent that theyhave information from the Department it isclear and reliable so that they can perform theirfunctions most effectively.

4.447. On 31 May 2000, the Policy Director of DSShad stated that ‘in the pensions context, thedepartment believes that its role should be togive accurate information on the optionsavailable but to avoid giving advice on whichoption to choose’.

4.448. Further legal advice had been provided on8 March 2001, which had confirmed the earlieradvice and which, in a DWP official’s summary of


it, had said that ‘where we choose to giveinformation it is incumbent on us to ensure it isaccurate, complete and can be relied on’.

4.449. On 11 September 2001, the Executive Teamof DSS had been invited to agree a Departmentalobjective on accuracy which was defined broadlyas being that ‘all information provided tocustomers by any part of the DSS, by anymethod, should be accurate and up-to-date, withno significant omissions’ (with original emphasis).This objective had been agreed and the minutesof that meeting had stated that furtherconsideration of the impact of this objective‘was particularly relevant to the developmentof the Working Age Agency [later to becomeJobCentre Plus] and new Pensions organisation[which later was named the Pensions Service]’.

4.450. The project led, in line with its aims, to thedevelopment of agreed definitions of‘information’ and ‘advice’ and of the department’srole in relation to both; to the adoption ofinformation and advice standards frameworkswithin each part of the department andimplementations plans for each; to a DWPInformation Strategy; and to a content reviewprocess for public information leaflets.

4.451. It also led to the revision of ‘FinancialRedress for Maladministration’ to, among otherthings, incorporate the agreed role of thedepartment in relation to information and adviceand also the new definitions of both.

The work of the Consultation Panel4.452. On 7 May 2002, the MFR Consultation Panelmet to discuss ‘reform of MFR: consequences forallocation of assets on wind-up and scheme assetdeficiencies’ as part of its series of themedmeetings. It discussed possible ways of requiringthe disclosure to scheme members of varioustypes of information about their scheme withinthe new statutory regime to be implemented, andwhat that information should contain.

4.453. The minutes of the Panel’s meetings makeclear that there was little general agreementabout how best to communicate scheme fundingissues to scheme members in terms which wereaccurate or ‘fit for purpose’ while being at thesame time generally understood.

Occupational Pensions: Your Guide4.454. In May 2002, DWP published a leafletcalled ‘occupational pensions: your guide’ (PM3).This 28-page leaflet began by stating (withoriginal emphasis):

Everyone needs to plan ahead for retirement.The basic state Retirement Pension will give youa start, but you’ll need to build up a secondpension to make sure you have the lifestyle youwant in retirement. And the sooner you take oneout, the better.

To help you, this guide tells you howoccupational pensions work. It looks at some ofthe questions you may need to think about and ittells you where you can find more information...

These guides can give you helpful information, butonly you can make decisions about your pension.

4.455. After describing what an occupationalpension is and the links between such a pensionand the state additional pension, in a sectionheaded ‘is an occupational pension a good choicefor me?’, the guide continued:

For people in work, occupational pensions areusually a very good way of saving for a secondpension. But the effectiveness of anyoccupational pension will depend on yourworking patterns and your personalcircumstances, such as your pay.

Generally, if you work and your employer offersyou an occupational pension scheme... you wouldbe better off joining it... If you are already amember of an occupational pension scheme, youmay already be in the most beneficial pension


arrangement. Occupational pensions are usually avery good deal, so... check it out carefully whenyou are looking at your pension options.

4.456. The guide continued with an explanationof the different types of scheme, the tax reliefarrangements and the possibilities for makingadditional contributions to schemes. It thenwent on to discuss ‘how do I know my money issafe?’:

Although your employer pays into the schemeand may be a trustee, the assets of the pensionscheme belong to the scheme and not to youremployer. As a scheme member, you areprotected by a number of laws designed to makesure schemes are run properly and to make surefunds are used properly.

In particular, there are laws about:

l the way occupational pension schemes mustbe run;

l the information you must be given;

l people who are not eligible to be trustees...;

l some of the trustees being nominated by themembers;

l who the trustees should be...;

l the way the funds are invested;

l the records that the scheme provider mustkeep; and

l who is authorised to manage pensioninvestments.

4.457. In relation to regulation, the sectioncontinued:

OPRA is responsible for regulating occupationalpension schemes. They can act quickly to protectyour interests if the trustees who run the scheme,or your employers, do not meet their obligations.

4.458. After dealing with the position if thereader changed employment, the guide informedthem of other sources of useful informationprovided by DWP and the Inland Revenue andalso explained the rules regarding schemedispute resolution procedures and thearrangements for pension sharing on divorce.

4.459. The back of the guide stated that ‘thisleaflet is for guidance only: it is not a completestatement of the law’.

The Sandler Review4.460. The Treasury published the report of theSandler Review on 9 July 2002, which had beenled by Ron Sandler, a former chief executive ofLloyd’s of London. The Review, whose report wasentitled ‘Medium and Long-Term Retail Savingsin the UK’, had been announced on 18 June 2001,with a remit to ‘identify the competitive forcesand incentives that drive the industriesconcerned, in particular in relation to theirapproaches to investment, and, where necessary,to suggest policy responses to ensure thatconsumers are well served’.

4.461. While noting that there was much positiveabout the financial services industry, the reportidentified a number of causes for concern. Thesewere the high degree of complexity (includingthe wide use of ‘technical terms which are largelyincomprehensible to the layman’), considerableopacity and a resulting inability to compareproducts and providers, consumer detrimentcaused by commission-driven selling, andproblems with institutional investment decision-making. The report considered that these hadcontributed to a problem of consumerreluctance to save, particularly among the lower-paid.

4.462. After considering these concerns in detail,the report then set out its view as to what awell-functioning market for retail savings mightlook like. It said that such a market would be one


in which, among other features, consumers had areasonable understanding of retail savingsproducts, where proper competition forauthoritative, high-quality and reasonably pricedadvice flourished, where products were simpleand straightforward, and where consumers,particularly in lower income groups, couldreasonably easily access the markets forproducts and advice.

4.463. The report then went on to recommendthe development of ‘stakeholder’ savingsproducts to realise the aim of maximising thesaving potential of all groups in society.

ASW goes into receivership4.464. On 10 July 2002, Allied Steel and Wirewent into receivership. The official receiver forthe company, which employed about 1,000workers in Cardiff, 400 at Sheerness in Kent,and 30 in Belfast, began to wind up its two finalsalary pension schemes one week later. Thisfollowed BUSM in 2001; Dexion went intoreceivership in 2003.

4.465. Early estimates were that the ASWschemes would only be able to meetapproximately ten per cent of their liabilitiestowards non-pensioner members. At the sametime, the ASW Sheerness scheme was reportedas being 104% funded on the MFR basis.

The Pickering Review4.466. The Government published the PickeringReview on 11 July 2002. The Review – whosereport was entitled ‘A Simpler Way to BetterPensions’ – had been announced by theGovernment on 26 September 2001 and hadbeen led by Alan Pickering, a former head of theNational Association of Pension Funds.

4.467. Its terms of reference had been to carryout a comprehensive review of DWP privatepensions legislation to identify a ‘package ofoptions for simplification and the reduction of

compliance costs’; to consider the principlesbehind the legislation as well as its supportingprocesses and ensure that the law wasproportionate to the policy purpose; to considerthe means by which the regulatory frameworkwas enforced; to identify areas of simplificationwhich could be achieved by secondary legislationand identify more fundamental reforms to beachieved by primary legislation; and to report tothe Secretary of State by July 2002 withproposals for simplifying the regulatoryframework that did not compromise the securityof individuals’ investments.

4.468. The review was to have regard to the needto maintain effective protection for pensionscheme members; wider economic andexchequer effects; the links with and impactson tax rules and work being done on this by theInland Revenue; the separate work to implementthe recommendations of the Myners review andto reform the MFR; and the work of theforthcoming five-yearly review of OPRA.

4.469. The Review’s objective, the report said,was to identify ways to make it easier foremployers to provide good quality pensions fortheir employees, easier for commercial providersto sell appropriate products to appropriatepeople, and easier for individuals to accumulatepension benefits.

4.470. The report identified three key themes:first, the ‘need for a proportionate regulatoryenvironment’; secondly, ‘a pension is a pension isa pension’; and, finally, ‘more pension,less prescription’.

4.471. The key proposal of the Review was that anew Pensions Act was required to consolidate allexisting pensions legislation and to deliverreform.

4.472. In relation to the provision of informationto scheme members, the report suggested that


too much emphasis had been placed on theprovision of information by schemes and that,whilst this was an important issue, suchdisclosure was not a panacea. The reportacknowledged that communication had a role toplay in alerting members to risks and enablingthem to take action to protect their interests,but asserted that the provision of informationhad much more to do with consumerenlightenment than with benefit security.

4.473. The report concluded that the provision oftoo much, poorly targeted information hadresulted either in information being ignored or inpeople failing to take action which it had been intheir interests to take.

4.474. It recommended that any communicationsshould be based on the following principles:

(i) communication should be aimed primarily atinfluencing behaviour. The informationshould give individuals the facts theyneeded to decide whether to join, stay inor leave a scheme;

(ii) communication should provide memberswith basic information about their likelypension – including setting out (in broadterms) the risks;

(iii) individuals should be properly informed ofmajor events which might affect membersand their options on leaving or retiring orwhat would happen to their pension if theydie;

(iv) it was also necessary to provide informationto assist the protection of members –people in defined benefit schemes shouldhave access to information about theirscheme’s funding position; and

(v) all communication with members should betested to see whether it was understandableand would work.

4.475. The report recommended that only keypieces of information should be sentautomatically to members, with all additionalinformation being available on request.

OPRA guide to winding-up4.476. On 6 August 2002, OPRA published a guidewhich outlined the new arrangements for, and itsnew powers to speed up, the process of winding-up pension schemes, which had been introducedin April 2002. The guide was published as an‘exposure draft’.

4.477. In appendix 3 to the guide, OPRA said:

Some time ago [NICO], in consultation with thepensions industry, made plans to deal with thedelays in providing membership listings andrelevant calculations... Most reconciliation issuescentre on agreeing the scheme membership andthe main reason for the problem is the provisionof inconsistent information to both the schemeadministrator and [NICO]. Part of the solutionis good record keeping during the lifetime of apension scheme and regularly updating [NICO]and administrators about changes. OPRA and[NICO] work closely together to ensure aconsistent approach.

DWP evidence to Select Committee4.478. On 4 October 2002, DWP submitted amemorandum to the parliamentary SelectCommittee on Work and Pensions, whichoversees its work. This set out the backgroundto, and the detail of, the Government’s reformagenda.

4.479. In a section entitled ‘role of the state’,DWP said that:

The immediate role for the state is to providehelp and encouragement for people to save,providing the right rewards for saving, andmaking sure it pays to save. It must also ensureproper protection for savings. As part of that role,the Government is examining ways to strip away


some of the layers of regulation that have builtup around some pension and savings products;and provide clear and accurate information aboutwhat pensions will provide so that people willunderstand how much they can expect atretirement before it is too late to do somethingabout it.

4.480. In explaining the role of the recentlyestablished DWP agency, the Pensions Service,the memorandum explained that one of its roleswould be to ‘improve the service to futurepensioners, by providing accurate information tohelp them make decisions about saving for theirretirement’.


The Department is actively promoting a pensioneducation publicity campaign that is supportedby a range of simple, impartial guides. Thepurpose of the campaign is to promote awarenessof the importance of saving for retirement withthe objective of encouraging people to save. Themain elements of the campaign include mediaand TV advertising, and direct marketing tospecific target groups such as young people,women and the self employed.

4.482. The memorandum went on to state theGovernment’s intention to ‘continue to encouragepeople to take out private pension provision aspart of its overall savings strategy, by makingpeople more aware of the “need” to save and howmuch pension a given level of saving willguarantee, and by increasing people’s knowledgeof the options available’.

4.483. It then explained that the provision offinal salary schemes was something that ‘theGovernment will want to continue to positivelyencourage in the future’ although ‘it is not theGovernment’s role to champion the cause ofeither defined benefit or defined contributionschemes’.

4.484. In the subsequent Select Committeereport, which was published on 14 April 2003,the Committee recommended, in relation tofinancial education, that the FSA pass some ofits functions, especially those related to themarketing of – and education about – pensions,to the proposed new regulator; that theGovernment support a pilot scheme to improvefinancial literacy; and that, with each substantivechange to state benefits, an impact assessmentof these changes on savings patterns should beproduced and published.

The NAO report on OPRA4.485. On 6 November 2002, the Comptrollerand Auditor General published a report by theNational Audit Office (NAO) called ‘OPRA:Tackling the Risks to Pension Scheme Members’.

4.486. The NAO report found that the then currentregulatory arrangements addressed only some ofthe risks to pension provision. It continued:

There is little, however, that any regulator coulddo directly about one of the biggest risks topension scheme members receiving the pensionthey expect, that of the employer going out ofbusiness or closing the scheme. Employers are notobliged to provide an occupational pensionscheme and incur significant cost in supportingone. Scheme trustees are volunteers, mostlyunpaid, whose dedication and goodwill is essentialto good governance. The burdens of regulation,including Opra’s actions, could increase the riskof employers closing their schemes to thedetriment of the members concerned.

4.487. A footnote to the above paragraphexplained further:

If the employer closes the scheme, it is still liableto fund for pension rights already accrued. If anemployer becomes insolvent, then insufficientfunds may mean that all members may suffer –pensioners and, more probably, employees (future


pensioners). The risks to members once a schemeis closed relate to pension rights that an employeewould have expected to gain in the future.

4.488. The report also set out the NAO’s findingsthat OPRA had encouraged better governance ofpension schemes; that it had little informationon the outcome of its work; that such work hadfocused on reports about matters that posed alow risk to scheme members; that it had taken along time to develop its approach to theidentification of high risk schemes; and that itsobjectives did not clearly articulate how its workshould protect scheme members.

4.489. It recommended that OPRA should:

(i) become better informed of the risks facingpension scheme members as the lack ofinformation it possessed constrained itsability to identify risks to members’ pensionrights;

(ii) produce a document that set out itsregulatory functions and objectives clearlyso that it could be seen to perform thoseconsistently and transparently;

(iii) develop different communicationapproaches for different types of scheme,including guidance on the features of a well-administered scheme;

(iv) utilise distinct but proportionate regulatoryapproaches for different types of scheme;

(v) shift their resource allocation to targetschemes and common weaknesses posingthe greatest risks;

(vi) focus more regulatory effort on providersand third-party administrators; and

(vii) raise the threshold for the reporting bywhistleblowers of breaches of pensionslegislation so that only material breacheswere reported.

4.490. The report also recommended that DWP,in developing proposals for a new regulator,should be clear about what it expected from thenew body and how it should report performanceagainst this expectation – and should considerwhether the new regulator should act as thecentre of expertise on occupational pensions.

4.491. In the subsequent Committee of PublicAccounts report, published on 31 March 2003,the Committee came to four ‘main conclusions’.These were:

(i) that OPRA and DWP had been slow todevelop objectives and tackle legislativeconstraints and as a result had failed toaddress major risks to pension schememembers;

(ii) that OPRA did not consider that it had thepower to prevent another Maxwell case;

(iii) that OPRA had done little to check thesuitability of trustees or the appointment ofadvisers to pension schemes; and

(iv) that OPRA had focused on trivial cases.

4.492. The Committee also commented:

Many pension schemes have been closing to newmembers, reducing the benefits they provide, orare insufficiently funded to meet all members’entitlements if they are wound up. Many schememembers are concerned about the security oftheir retirement income and others may bemaking insufficient provision. OPRA has little roleat present in tackling these concerns, since itsfocus is on the way pension schemes aregoverned, but its expertise could be used toinform the future of pension provision. A newregulator would be more effective with a wider-ranging role in advising the Government onpensions-related issues in general, such as theclosure of schemes with insufficient assets to


meet their commitments to all members, andeducating employees and trustees on how tomake pension choices.

Select Committee on Work and Pensionshearing4.493. On 4 December 2002, the parliamentarySelect Committee on Work and Pensions tookevidence from OPRA, from the PensionsOmbudsman, and from the Chief Executive ofthe Occupational Pensions Advisory Service(OPAS) as part of its inquiry into the future ofpensions in the UK.

4.494. In a discussion on the MFR, the ChiefExecutive of OPAS said:

There is a great deal of misunderstanding aboutthe minimum funding requirement; certainly asfar as scheme members are concerned, if theyhave heard of the phrase at all, they think that itis some sort of solvency test, some sort ofguarantee that in the event of something goingwrong, they will get their full pensionentitlement.


The minimum funding requirement is not that, itis simply a requirement that a scheme has to befunded over a period of time to match a levelwhich will guarantee the pensions in paymentand some part of the pensions entitlement ofthose who have not yet retired. It is a veryimprecise measure of funding. One of the greatproblems is that many employers are now seeingthis as a maximum funding requirement asdistinct from a minimum funding requirement.We have seen one or two quite bad examplesrecently of very large employers who havedecided to close down, to wind up their pensionschemes and they have been content to limit thefunding at that point in time to the level of theminimum funding requirement. This has meantthat the pensioners have continued to get their

pensions, but the active and deferred members,people who have not yet retired, are only getting50 to 60% of what they believed to be theirpension entitlement.

4.496. The Chief Executive then said:

There is a fundamental problem there with aminimum funding requirement and if we are goingto have a funding requirement, it should be aproper one and should attempt roughly to matchthe anticipated liabilities of the scheme so that inthe event of an employer choosing to wind up ascheme, and that is his decision and I am notchallenging that in any way, then the money isguaranteed to meet most if not all the pensions inpayment. That is a situation where the employeris solvent. Where the employer is insolvent, youhave a very different situation. It is often the casein my experience, that an insolvent employer willleave behind him an insolvent pension schemebelow the minimum funding requirement or evenonly at the minimum funding requirement in thebest cases.

In that situation you have a real problem becausethe members, even pensioners, are not guaranteedto get all the pensions. What happens in practiceis that all the funds are then used based on apriority order which is laid down in regulations totry to fund the pensions in payment, leaving verylittle for anyone else.

The example I quoted in my submission to you isof a man who paid into a final salary scheme for38 years and was on the brink of retirement whensuddenly the employer went bust, the pensionscheme was found to be underfunded and heended up after 38 years with a fraction of thepension he was expecting to get. That is adevastating situation for somebody in thatposition.

Something needs to be done to address that. If wecannot amend the minimum funding requirement


to guarantee a level of pension, and it might bevery difficult with an employer who has goneinsolvent, then it may be the approach is theother way round, some sort of insurance.

BBC story on Sea-Land wind-up4.497. On 13 December 2002, the BBC ran a story– under the heading ‘Did the Maxwell affairchange nothing?’ – about the winding-up of thepension scheme for staff at Sea-Land – a divisionof Maersk, the Danish shipping group.

4.498. After setting out the background to thecase and its similarities with other examples –including that of the scheme of which Mr J was amember – the article quoted a spokesman forOPRA as saying:

When a pension [scheme] is 100% funded for theminimum funding requirement there may only bemoney in there for 40% of the benefits.

4.499. The article then quoted work done for theBBC by a leading actuarial consultancy whichestimated that, since the beginning of 2002, thelevel of funding in employer schemes whichinvested most of their money in shares hadshrunk by an average of 15% to 20% and thatthree-quarters of the UK’s pension schemes werein deficit, compared to less than half in January2002.

The further Green Paper on Pensions4.500. DWP, the Treasury and the Inland Revenuepublished a further Green Paper on Pensions,entitled ‘Simplicity, Security and Choice: Workingand Saving for Retirement’, on 17 December 2002.

4.501. The then Secretary of State for Work andPensions, Andrew Smith, in the Foreword to thePaper, said that the Government’s aim was to‘help people choose how they plan for retirement,how much they save and how long they keepworking’.

4.502. In the words of its summary, the Paper setout:

...the Government’s proposals to renew thepartnership between the Government, individuals,employers and the financial services industrywhich has long been a strength of the UKpensions system.

The new proposals will:

l help people make better informed choicesabout their retirement;

l reaffirm the role and responsibilities ofemployers in the pensions partnership,improving saving through the workplace, andproviding greater protection for members ofoccupational schemes;

l encourage simple and flexible savingsproducts, broadening access to the financialservices industry; and

l introduce measures to extend working lives.

4.503. The Paper set out the ‘background ofincreasing concern’ over the adequacy andsecurity of pension provision in the UK. The mainconcerns it discussed were increased longevity,signs of a decline in work-based pensionprovision, the complexity of pension products,the cost of financial advice, the legacy ofpersonal pensions mis-selling, and a trendtowards earlier retirement. It also referred to thefact that ‘employee confidence has also suffereddue to the action of a few companies, who havelet their employees down when they havebecome insolvent with an under-funded pensionscheme’.

4.504. Under a heading ‘informed choice forindividuals’, the Paper continued:

The Government provides the foundation ofpension income, but in a voluntary system theamount people should save in addition to the


basic State Pension will depend on their owncircumstances and preferences... Current estimatesshow that up to 3 million people are seriouslyunder-saving for their retirement – or planning toretire too soon. In addition, a further group ofbetween 5 and 10 million people may want toconsider saving more, working longer, or acombination of both, depending on theirexpectations for retirement.

The Government believes this reflects the factthat choice is currently frustrated by complexityand confusing flows of information which do notrelate clearly to an individual’s circumstances, byhard-to-compare products and by expensiveadvice. The Government wants to help peoplemake better informed choices about theirretirement and believes that those who seem tobe saving too little will save more if:

(i) there is a simpler framework to help peopleunderstand their choices; and

(ii individuals are equipped to understandfinancial choices and receive clearinformation tailored to their owncircumstances.

4.505. After setting out the Government’sproposals to simplify the tax regime for pensions,the Paper continued:

The Government recognises the value of goodinformation in helping people to make informedchoices, and will continue to work with the FSAto improve basic financial literacy and make surethat individuals are equipped to understandfinancial choices.

But the Government also believes that providingtailored information based on an individual’scircumstances will make the biggest differenceand encourage people to save more.

4.506. It then set out the proposed approach toachieve this, which included strategies:

(i) to increase the number of people receivingforecasts of their pension income – forexample by working with employers andscheme providers to increase the uptake ofthe combined state and non-stateforecasting service; and

(ii) to improve the range of services providingtailored information – by offering integratedtelephone and internet services and byissuing information at key points in people’slives to encourage greater awareness andunderstanding of savings options.

4.507. The Paper also set out the Government’saim to make it easier for employers to set upand run good pension schemes. This would becomplemented by a strategy to simplify thecomplexity in pensions legislation and theassociated tax regime.

4.508. Key elements of this approach would bethe removal of unnecessary administrative andtax burdens, the replacement of the MFR with ascheme-specific funding standard, thesimplification of the structure of contracted-outbenefits, and the consolidation of existinglegislation. The replacement of the MFR wasdescribed as being able to ‘make the fundingposition more transparent for members’.

4.509. The Paper went on to note that thesesimplifications could save employers between£150 million and £200 million a year inadministrative costs but that there was a balanceto be struck in the reform process with the needfor better protection for scheme members.


The Government is determined to ensure thatreduced regulation and red tape around pensionsis married with greater protection for consumers


to give them the confidence they need to joinschemes. This is why the Government is proposinga new pensions regulator that will focus onprotecting the benefits of scheme members.The new regulator will operate proactively toanticipate problems, concentrating its effort onschemes where it assesses that there is a high riskof fraud, bad governance or maladministration.To reinforce this approach the Government is alsolooking at proposals to protect members whenproblems do arise, such as when employersbecome insolvent or when there is insufficientfunding in the pension scheme to meet all thepension liabilities.

4.511. The Paper summarised the proposals setout in the Green Paper as being ‘betterinformation, simpler pensions, simplified taxtreatment, better protection, and more flexibleretirement’ which were ‘designed to enablepeople to make their own choices for retirement’.

4.512. Chapter 3 of the Paper dealt with ‘informedchoice in pensions – choices for individuals’.It started with the recognition that there were a‘range of barriers’ to pension saving in the UK andthat these barriers needed to be addressed.It then stated the Government’s belief thatpeople would be more likely to make adequateprovision for their retirement if there was asimple framework of law and regulationgoverning pension provision, if they wereequipped to understand financial choices, if theywere provided with ‘clear information tailored totheir own circumstances’, and if they were offereda choice of suitable products.

4.513. In relation to the role of official publicityin attempts to remove barriers to being able tonavigate the pensions system, the Paper said,in paragraphs 31 to 33 of Chapter 3, that:

The current government awareness campaign,supported by a series of pensions informationguides, has been running since January 2001. More

than 2 million copies of the guides have beendistributed. The campaign so far has focused onmaking people aware of the need to save forretirement whilst also providing simple andimpartial information on pension options.

The Department for Work and Pensions’ researchsuggests that it is having the desired effect onpublic attitudes: more people agree that it isbetter to start saving sooner rather than later forretirement than did before the campaign began.However, similar campaigns (such as those ondrink-driving or wearing seat belts) havehistorically taken a significant length of time tochange public attitudes in a major way. Thecampaign must therefore be sustained over thelong term.

We intend to build on the work that has alreadybeen done, by moving the emphasis of thecampaign away from promoting simpleawareness of the need to save, and towardsinformation that will prompt people to takeaction. We will also ensure that the publicitycampaign is linked into other initiatives, such aslife events marketing..., that might be developedas part of this Green Paper.

4.514. With respect to the detailed discussion inChapter 4 of the Paper about the security offinal salary pensions, the Paper noted that:

...if they are to join schemes, prospective pensionscheme members will want to have confidencethat the pensions they are promised will actuallybe delivered. Most people receive the pensionthey are promised, but sadly there are exceptions.There has been a lot of concern in recent monthsabout pension schemes that are being wound up,either through the decision of a solvent employeror as a result of the employer becoming insolvent.

We are determined to act to increase protectionfor scheme members. We will increase securitybut we will aim to ensure that in doing so we do


not increase the overall burden on employersproviding pensions. Employers provide schemesvoluntarily, and we need to ensure that theycontinue to choose to do so. We want thisconsultation to inform our strategy so that wecan provide greater protection without riskingscheme existence. We recognise this is a difficultbalance to achieve.

4.515. The Paper then discussed the detailedproposals for inclusion in a new Pensions Bill.These included the establishment of a proactiveregulator whose objectives and resources wouldbe focused on protecting the benefits of schememembers; greater protection for accrued pensionrights on wind-up through changes to the priorityorder in which liabilities would be met; a centralorganisation or form of insurance to protectscheme members whose sponsoring employerbecame insolvent; increased compensation in thecase of fraud or dishonesty; and measures toensure that members had the right to beconsulted about changes to their scheme.

4.516. The Green Paper also sought views onwhether insolvency law should be amended togive pension schemes higher preference thanother unsecured creditors when the assets of aninsolvent company were being shared out.

4.517. In relation to solvent employers who choseto wind up the scheme that they had beensponsoring, the Paper said:

When [employers] do this they need to makearrangements to meet the pension promise theyhave made to their past and present employees.There have been instances recently in whichmembers have lost out substantially under thesecircumstances. The Government believes thatmembers need greater protection against suchlosses.

In March 2002, we increased the amount ofmoney that solvent employers have to put into

the pension fund if they choose to wind up thescheme. This means that employers are requiredto put enough money in to buy annuities with aninsurance company for pensioners (guaranteeingtheir full pension) and for people who had notretired, the value of their accrued benefits,worked out on the MFR basis (which they cantransfer to another pension arrangement). It doesnot guarantee the full pension they wereexpecting as the transfer value is calculated bymaking assumptions about the level ofinvestment growth between the time of wind-upand when the individual retires. If investmentgrowth is more or less than assumed then thevalue of the pension fund at retirement could besimilarly greater or smaller. With transfer values,therefore, the risks are borne by the individual.

After the replacement of the MFR with scheme-specific funding requirements, it will be forschemes to determine their own transfer valueson a basis that is fair to all. As the MFR hasprovided a minimum measure of funding, wemight expect that in many cases transfer valueswould be higher than the minimum amount thatthey were under the MFR.

4.518. The Paper then went on to seek views onwhether the then current arrangements for buy-out should be strengthened and, if so, whetherthis should be done on a full or partial basis,with the latter only relating to existingpensioners and those close to retirement.Responses were sought to the issues summarisedin annex 1 to the Paper by 28 March 2003.

4.519. The Paper was accompanied by a technicalpaper, published at the same time. A separateInland Revenue consultation document,‘Simplifying the Taxation of Pensions: IncreasingChoice and Flexibility for All’ – on detailedproposals to simplify the tax treatment ofpensions – was also launched that day.


4.520. The Paper also announced the establishmentof two bodies – the Pensions Commission, chairedby Lord Turner – a former Director-General of theConfederation of British Industry – and theEmployer Task Force, chaired by Sir Peter Davis –then Chief Executive of the Sainsburys Group. TheCommission produced its final report on 30November 2005, following an interim reportpublished on 12 October 2004 – and the TaskForce reported on 13 December 2004.

The technical paper4.521. The technical paper set out in more detailthe Government’s proposals concerning changesto contracting-out, greater flexibility forschemes, the revaluation of preserved pensions,simplification of the rules surrounding pensiontransfers, pensions on divorce, transfer ofundertakings legislation, transfers withoutconsent, and the re-introduction of compulsoryscheme membership in certain situations.

4.522. It also dealt with two issues relevant tothis investigation: communication with schememembers (although the focus of this was on thecommunication of information to them bythe schemes themselves) and the protection ofpension rights in the case of wind-up.

4.523. In relation to communication with schememembers, the technical paper set out therelevant findings of the Pickering Report (seeabove) and the Government’s view on them,which was to accept most, but not all, of thePickering recommendations.

4.524. In relation to the protection of pensionrights during wind-up, the technical paper firstset out the Government’s decision that pensionslegislation should retain a statutory priorityorder and then asked for views on whether sucha continued order should be based on eitherincreasing the priority given to people who wereapproaching retirement age or basing the level ofprotection on the number of years an individual

had contributed to the scheme, regardless of age,as had been proposed by Frank Field MP.

4.525. The technical paper continued with adiscussion of the options for reform of thestatutory priority order of creditors of insolventcompanies. It set out the circumstances in whichcertain debts owing to pension schemes weretreated as preferential debts and then explainedthat, in relation to other debts not covered bythose circumstances, pension schemes wereunsecured creditors who were categorised at thebottom of the list of creditors that could make aclaim on the assets of the relevant company.

4.526. In relation to any reform of the priorityorder to give pension schemes higher priority,the technical paper sought views on what theright balance should be between the potentialimpact of such reform on business and the needto provide adequate protection for schememembers.

The quinquennial review of OPRA4.527. The Government also published thereport of the quinquennial review of OPRAon 17 December 2002. The review had beenundertaken by Dr Brian Davis – a former ChiefExecutive of the Nationwide Building Society –with the purpose of commenting on theperformance by OPRA in the discharge of itsstatutory functions and to makerecommendations for the future.

4.528. The report’s findings were that OPRA wasan organisation that had performed well withinthe limitations of the powers it had been given;that it had potential to take on a new anddifferent role and to develop further; and that itwas seen to be open and accessible. It reportedthat OPRA would welcome a more pro-activerole.


4.529. The principal recommendations made inthe review included:

(i) that occupational pension schemes wouldcontinue to require supervision by aregulator and that a ‘new kind of regulator’,to operate at ‘arms length’ from theGovernment, was needed to deliver theregulation of future revised pensionslegislation;

(ii) that the current pensions environment andpublic expectation suggested that a pro-active regulator was needed – within arevised legal framework which set out itsobjectives clearly;

(iii) that the new regulator’s objectives shouldreflect the need to focus on the key risks topension scheme members – and the need tobe seen to be doing so;

(iv) that the current legal framework had meantthat OPRA had processed high volumes ofrelatively low value reports and breaches –which was not consistent with a risk focusedand pro-active approach and that thisshould be remedied in the revised legislativestructure;

(v) that the new regulator’s guidance to schemeadvisors should direct them to ‘blow thewhistle’ only on breaches that were likely tohave a direct impact on the security ofmembers’ benefits;

(vi) that a pro-active regulator would not onlyinvestigate and sanction, but also encouragecompliance through education and guidance;

(vii) that the number of bodies involved in thefields of pensions authorisation, sales,marketing, advice and regulation had led toconfusion, which should be addressed;

(viii) that OPRA had produced ‘good qualitypublications and a popular website’ – andthat the new regulator should build on thisfoundation; and

(ix) that OPRA had a low public profile but waswell known amongst pensions professionals– the new regulator would need to decideon its key audiences for publications andother communications and to co-ordinatethis with information issued by other bodies.

Parliamentary exchanges on scheme funding4.530. In oral questions to Work and PensionsMinisters on 13 January 2003 in the House ofCommons, John Bercow MP asked, in the light of‘widespread and justified concern aboutcompanies which, in choosing to wind up theirfinal salary schemes, universally [reneged] ontheir pensions obligations to their staff’, whetherthe Government’s proposals for reform of theMFR would lead to greater or lesser protectionfor scheme members.

4.531. A then DWP Minister, Maria Eagle, replied,referring to a then recent high-profile case, thatsuch actions were currently lawful if ‘prettydisreputable by any standards’ and that theGovernment’s proposals would lead both to amore fair sharing of assets between the differentcategories of scheme member on wind-up and toenhanced protection for all members’ rights.

Revised Actuarial Guidance Note4.532. Also on 13 January 2003, the actuarialprofession issued a revised version (2.1) of theirguidance note, Retirement Benefit Schemes –Minimum Funding Requirement, which made onlyminor technical changes to their guidance.

Parliamentary answer on scheme wind-up4.533. On 11 February 2003, Ian McCartney, thethen Pensions Minister, replied to a questionfrom Frank Field MP, which had asked about thenumber of pension schemes then in wind-up.


4.534. The Minister replied that:

l during the period from 1 April 1997 to 31March 1998, 24,974 pension schemes hadcompleted wind-up (these schemes had541,298 members);

l in 1998-1999, 7,388 schemes (with 165,572members) had done so;

l in 1999-2000, the figures were 8,151 schemeswith 343,365 members;

l in 2000-2001, the figures were 6,047 schemeswith 158,118 members; and

l in 2001-2002, the figures were 4,388 schemeswith 230,406 members.

4.535. He also said that, during each year, thefigures for schemes (and members) who hadnotified OPRA that they were commencingwind-up were:

l in 1997-1998, 94 schemes with 9,485 members;

l in 1998-1999, 154 schemes with 5,732 members;

l in 1999-2000, 4,623 schemes with 107,397members;

l in 2000-2001, 1,771 schemes with 76,156members; and

l in 2001-2002, 2,263 schemes with 77,642members.

DWP report on the communication ofinformation 4.536. On 27 February 2003, DWP published areport of research it had commissioned into thecommunication of information to schememembers.

4.537. The research examined how members ofsuch schemes might react to the receipt ofdetailed information about the funding of theirscheme. In particular, the focus of the researchwas on seeking to establish whether members

would read and understand the informationprovided and what action, if any, they might beprompted to take as a result.

4.538. A sample of thirty people had beenselected to receive a specimen letter, drafted byDWP officials, which related to a fictitiousscheme. The letter set out the scheme’s fundingposition following a full valuation, the level ofemployer and employee contributions, anoutline of the actuarial assumptions on which ithad been based, and a description of what wouldhappen should the scheme close with funding atits current level.

4.539. The key findings of the research were setout in a DWP press notice that accompaniedpublication of the report as being thus:

(i) that nearly all respondents said they wouldread such a document and severalcommented that it was clearer than otherpensions material they had been sent abouttheir own scheme;

(ii) that the general understanding of thedocument was reasonably good, includingthose sections relating to the fundingposition of the scheme. Nevertheless therewas some confusion about the purpose ofthe document;

(iii) that several people did not understand whatwould happen to the money they hadcontributed to a defined benefit scheme.They thought they had an identifiable pot ofmoney they could control and alter by, forinstance, increasing their contributions if thescheme had a shortfall. It was not clearwhether they would seek appropriate advicebefore taking such steps;

(iv) that the information about thecircumstances under which the schememight close had caused some concern and,for many, was new information; and


(v) that a small number suggested suchinformation might lead them to considerleaving the scheme. All of these respondentssaid they would consult someone first,but some said they would speak only tocolleagues.

4.540. One of the topics covered in the face-to-face meetings with pension scheme membersthat formed part of this research was theirunderstanding of scheme closure. Discussionswith scheme members were organised aroundtesting the participants’ understanding ofmessages in sample material which discussedthree questions: ‘Is my pension guaranteed?’,‘Why might the scheme close down?’ and ‘Will Iget my full pension if the scheme did close down?’

4.541. It was reported, in section 7.1, that, whilethose who read the sample material ‘had nodifficulties in understanding’ that the messagewas that their scheme could be closed, ‘this wasnew information for around half’ of theparticipants. With respect to the others, thereport continued:

Some had witnessed their scheme closing to newmembers or were aware that this could happenbut very few were aware that the scheme couldactually be closed to active members. Severalfound this a worrying message:

... “What it states is that the pension isguaranteed so long as they are in existence unlessthey change the scheme. If it closes down beforeyou retire you won’t get the amount you expect.

It is a worry – I don’t remember ever seeinganything like this in the documents I haveread before.

It is very alarming because I didn’t think pensionschemes could close down. I thought that it waslaw that all companies must have a pensionscheme.”

4.542. Other comments made by participants inthe research included that the material ‘lets youknow that your pension is not 100% safe –something I’d never thought of before’ and that,if such information was provided with respect toan actual scheme, they ‘would try to get someinformation in writing as to the actual likelihoodof the scheme closing down and what safeguardsthere are in place’.

4.543. When material was shown to participantsthat indicated that, were a scheme to wind-upnot ‘fully-funded’, they might not receive theirown personal full entitlement, the researchreported that ‘many active members wereconcerned by this... and a good number felt thatthey would be angry if they received suchinformation about their own scheme’. The reportcontinued:

The respondents who stated that they would beangry were those who did not comprehend howsuch a situation could have come about... theyfelt that if they did not receive their fullentitlement then they would have been ‘robbed’by their employer. Some simply felt it could notpossibly be the case that they would not receivetheir full entitlement if their own scheme were toclose down.

“It is just rubbish. You have built up the fund andyou are guaranteed the pension because of youryears of service and for an insurance company tosay that they have lost money because they areincompetent and the fund hasn’t made the moneyit should do – that’s not my fault and I shouldn’tbe penalised.”

4.544. The research report came to some ‘keypoints to consider’ about this material. Theseincluded:

(i) that ‘discussing circumstances wherebyschemes may close can alarm people andthis can become the central message that


they take from the document. The alarmpartly comes from their lack of knowledgeabout the possibility that schemes can close’;

(ii) that it is ‘difficult to communicate tomembers that their pension is not fullyguaranteed. This may serve to galvanisepeople to check on how their schemes areperforming but it may also alarm someand/or lead them to take action that is notnecessarily in their best interests’; and

(iii) that ‘discussion of how much of theaccumulated pension that a member mightexpect should the scheme close mayencourage members to considersupplementary investments’.

Letter from actuarial profession4.545. The new Chairman of the Pensions Boardof the Faculty and Institute of Actuaries wrote toDWP on 28 February 2003. In his letter, theChairman said:

We last proposed amendments [to the MFR basis]in September 2001 and in the following Februarythe Government approved a change to the basisin GN27. The main driver for recommending aweakening of the MFR at this time was a reducedlevel of the non-payment of dividends. The extentof this weakening was, however, mollified by anallowance for improvements in mortality.

Since then, MFR has weakened substantially. Thisis mainly as a result of falling stock markets. Webelieve that further changes are now needed ifthe Government wishes to align the MFR moreclosely to the level of protection originallyenvisaged. The strength of the MFR is a decisionfor Government...

Our advice is that retaining the MFR at its currentstrength in the meantime [i.e. prior to thereplacement of the MFR] would representmaterially less security of members’ benefits,especially where schemes are funded at the MFR

minimum level, compared with the securityimplicit in the MFR when it was originallyintroduced.

Revised DWP guide to pension options 4.546. In April 2003, DWP issued a revised versionof their leaflet PM1 – ‘a guide to your pensionoptions’ (see entry for July 2001).

4.547. In the section that dealt specifically withoccupational pensions, the revised guiderepeated the first part of the earlier edition butthen, in a new second paragraph, set outamended text which advised:

Occupational pensions are usually a very gooddeal, so if your employer runs an occupationalpension scheme, check it out carefully when youare looking into your pension options.

4.548. In a new section, entitled ‘keep an eye onyour pension arrangements’, the revised guidewent on to explain that:

...you need to keep an eye on your pensionarrangements regularly to make sure you willhave the income you want when you retire. If youbecome better off, you may want to pay in moreto build up your pension.

4.549. The revised guide then explained that,in such a position, an individual might makeadditional voluntary contributions to theiroccupational scheme or to another scheme,change to a stakeholder pension to takeadvantage of tax concessions, or make additionalcontributions to other savings vehicles.

4.550. The revised guide repeated the text about‘other things that could affect your pension’ thathad been set out in the earlier edition.

4.551. In a new addition to a section entitled‘what do I need to do now?’, the revised guideincluded a statement that ‘if your employeroffers access to an occupational scheme, it isusually worth joining’.


4.552. In addition to the sources of informationset out in the earlier edition, the revised guidesignposted readers to FSA consumerpublications. As with the earlier edition, on theback cover of the leaflet, it was stated that ‘thisleaflet is for guidance only: it is not a completestatement of the law’.

Revised DWP guide to occupational pensions4.553. DWP at the same time also issued a revisededition of their leaflet ‘occupational pensions:your guide’ (PM3). The only relevant substantivechanges to the text from the earlier edition (seeabove) were in the updating of possible sourcesof information and advice.

DWP guide to contracting-out4.554. DWP also published in April 2003 a leaflet(PM7) called ‘contracted-out pensions – yourguide’.

4.555. In the section dealing with final salaryschemes, after explaining that the rules relatedto Guaranteed Minimum Pensions had beenchanged, the guide said ‘any GMP that you builtup before April 1997 will still be paid when youretire, but pension entitlement you earned fromthat date will be assessed and paid under the newrules’.

4.556. In a section entitled ‘what else do I need tothink about?’, the guide explained the tax reliefprovisions and the possible effects of livingabroad when a person retired. It ended with a listof other official publications or organisationsthat might be helpful.

Government response to second Green Paper4.557. On 11 June 2003, DWP published a WhitePaper or ‘action plan’ – ‘Working and Saving forRetirement: Action on Occupational Pensions’ –which set out its proposals, following theconsultation on the most recent Green Paper onpensions (see above), to drive forward its agendaof ensuring that individuals could ‘plan for their

retirement and make real and informed choices’about work, saving and pensions.

4.558. The document set out its proposals for theimprovement of member protection thus:

The Government will protect consumers andimprove the future security of pensioners by:

(i) introducing a Pensions Protection Fund toguarantee members a specified minimumlevel of pension when the sponsoringemployer becomes insolvent;

(ii) requiring solvent employers who choose towind up their pension schemes to meet theirpension promise in full; and

(iii) revising the priority order which applies onwind-up to ensure the fairest possible sharingof assets.

In addition, the Government will introduce newprotection to deal with anxieties arising from thedemands of an increasingly dynamic economywhere companies are taken over and people movebetween jobs more frequently.

We will:

l increase protection when firms are bought outby extending the protections offered by theTransfer of Undertakings (Protection ofEmployment) regulations to the pensionschemes of workers in the private sector;

l help people build up rights in short-stay jobsby introducing a new approach to vesting. Atthe moment, rights are only protected aftertwo years’ employment;

l in future, employees who have been schememembers for at least three months and leaveduring the vesting period will be offered thechoice of a refund of contributions or a CashEquivalent Transfer Value. This will be of


particular benefit to women, who are morelikely to change or leave jobs during theperiod; and

l introduce a requirement on employers toconsult before making changes to pensionschemes to ensure changes are developed inpartnership.

The Government will introduce a new system ofprivate pension regulation with a new PensionsRegulator. The new Pensions Regulator willconcentrate on rooting out fraud and badpractice so that everyone has confidence in thesystem. It will do so in a way that supports ourobjectives of simplicity and reduced burdens onbusiness.

4.559. In relation to ‘making pension provisioneasier for employers’, the document reaffirmedthe Government’s commitment to replacementof the MFR with a scheme-specific fundingarrangement. It also set out proposals to reducethe cap on mandatory indexation, to increase thescope for flexibility for schemes to rationalisethe structure of their benefits, and to simplifythe legislative framework.

4.560. The Government said that in parallel itwould be taking steps to enable people to ‘maketheir own decisions about how and when to save’.

4.561. The press notice which accompaniedpublication of the document quoted the thenSecretary of State for Work and Pensions,Andrew Smith, as saying:

We have listened to the pension scheme members,employers and the pensions industry – and it isnow time for action. This balanced packagestrengthens protection for scheme members whilstreducing the burden on companies who runschemes. The new Pension Protection Fund willensure that, where company pensions have beenpromised, pensions will be delivered. I want to endthe scandal of workers being denied the pensions

they have built up over many years, or pensionersseeing their pension cut if their firm goes bust andtheir scheme winds up.

4.562. In his statement to the House on the sameday, Mr Smith said that:

...examples of good practice are too often over-shadowed by cases where employers have goneback on promises, causing anxiety. People alsoworry about the get out clause which lets solventcompanies – who could afford to keep theirpension scheme running – wind it up withinadequate compensation.

In the cases where firms have done this, it hasinflicted damage on confidence in the wholesystem. People worry that other schemes willfollow suit.

We need to act to make sure that a pensionpromise made by employers is a pension promisehonoured by employers. We will thereforestrengthen member protection where solventemployers decide to wind up their pension scheme...

Sometimes – when firms go bust – the moneyisn’t there to meet pension commitments. Recentcases have shown the terrible injustice when thishappens, and I believe the public are right todemand action. We should not accept that justbecause a firm goes out of business workers canfind that a pension they’ve saved in for all oftheir working life is worth next to nothing.

Parliamentary questions on the MFR4.563. On 14 July 2003, Malcolm Wicks, the thenPensions Minister, replied to a question fromOliver Heald MP, who had asked what changeshad been made to the basis for the MFR sinceMay 1997 and what effect such changes had hadon the demonstrated level of funding of a typicalpension scheme.



The actuarial basis for the MFR is kept under reviewby the Faculty and Institute of Actuaries. They haverecommended two substantive changes to the basissince May 1997, and both were implemented.

From 15 June 1998 the factor for the equitymarket value adjustment, which generally appliesto the calculation of liabilities for schememembers below pension age, was reduced from4.25 per cent to 3.25 per cent and the gross yieldon the FTSE Actuaries All-Share Index wasreplaced with the net yield on the same index.

From 7 March 2002 the factor for the equitymarket value adjustment was further reduced,from 3.25 per cent to 3.00 per cent.

The changes were intended to address movementsin the strength of the MFR test resulting fromchanging economic and demographic trends. Inaddition to these changes there have been anumber of minor technical amendments to theactuarial guidance which governs the calculationof a scheme’s MFR liabilities.

It is not possible to define a typical pensionscheme, but estimates about the effect of thesechanges on the aggregated MFR funding levels ofall schemes subject to the MFR have beenprepared by the Government Actuary’sDepartment. These indicate that the changewhich took effect from 15 June 1998 may haveincreased aggregate funding levels against theMFR by around 5 per cent and that the changewhich took effect in March 2002 may havefurther increased aggregate funding levels againstthe MFR by around 3 per cent.

4.565. In reply to another question by Mr Heald,the Minister said that, as at June 2003, it wasestimated by the Government Actuary that 50%of schemes were funded below 100% MFR leveland that this equated to an aggregate £30 billionshortfall. He continued that, if judged against the

MFR basis that had existed in May 1997, therespective figures would have been 75% and£60 billion.

OPRA update on winding-up4.566. On 18 August 2003, OPRA published its‘update 3’ on winding up. Aimed at trustees,advisers and insolvency practitioners, the updateset out OPRA’s views on the issues that oftenarose during the winding-up process. Theseincluded defining when wind-up began,investment issues, MFR valuations, defining andcertifying scheme deficits, cash equivalenttransfer values, GMP equalisation, employerinsolvency, and the appointment of independenttrustees.

Revised OPRA guide to the MFR4.567. In October 2003, OPRA issued a revisedversion of its guide to the MFR (see the entry forMay 1999, above).

4.568. In the revised section ‘about the MFR’, theguide stated that ‘the MFR is not, however, aguarantee of members’ benefits. It is not intendedto ensure that members’ benefits will be met infull if the scheme is wound-up’.

4.569. Page 31 of the revised guide introduced anew section called ‘what if the scheme goes intowind-up?’ After explaining the role of trusteesduring the winding-up process, the guidecontinued:

If a scheme in wind-up is under-funded, trusteesmay need to instruct the scheme actuary toformally certify the amount of the under-fundingas a debt on the employer. This may not benecessary if the employer is solvent and makesadequate funds available to the scheme to enablebenefits to be fully secured.

Once the amount of the under-funding iscertified, it then becomes a formal debt on theemployer and the trustees should consider takingaction to enforce it.


4.570. The guide warned:

However, if the employer is insolvent, the debt isnot a preferential debt and it only ranks withdebts owed to other unsecured creditors of theemployer. This means that the debt may beunlikely to be paid in full and the amount ofmoney the trustees will receive from theemployer will depend on the extent of theemployer’s liabilities when it became insolvent.

Government announcements on GMP andpriority order4.571. On 20 October 2003, the then Secretary ofState for Work and Pensions, Andrew Smith,announced in the House that the Governmentintended to introduce measures to permitcontracted-out final salary schemes to convertGuaranteed Minimum Pension entitlements intoscheme benefits on the basis of actuarialequivalence.

4.572. Two days later, Malcolm Wicks, the thenPensions Minister, made a written statementconcerning the priority order for the distributionof scheme assets on wind-up. It read:

Today we have published proposals to amend thestatutory priority order when a defined benefitpension scheme subject to the minimum fundingrequirement is wound up and draft regulations tobring these proposals into effect.

The draft regulations are intended to ensure that,where there are insufficient assets to meet allliabilities, they are shared as fairly as possiblebetween non-pensioner and pensioner schememembers.

As outlined in “Action on Occupational Pensions”the degree of protection offered by the newpriority order reflects the length of time amember has been contributing to a scheme andalso gives priority to the rights of non-pensionersover the future indexation of pensions inpayment.

We are consulting on the draft regulations andproposed new priority order and should welcomeviews on both by 3 December 2003. We aim tolay these regulations by early 2004 so that theycome into force as soon as practicable.

Consultation on EC Directive4.573. On 28 October 2003, DWP published aconsultation document on its proposals toimplement the EC Directive on OccupationalPensions. The Directive required theimplementation of a ‘prudent person’ approachto investment, competent regulation by a publicauthority, measures to oversee cross-borderactivity by pension schemes, the disclosure ofinformation to scheme members, and that finalsalary schemes should hold ‘sufficient andappropriate assets’ to cover accrued liabilitiesand to adopt a recovery plan if there wereunder-funding.

Early Day Motion4.574. On 3 December 2003, Kevin Brennan MPtabled an Early Day Motion, which in due courseattracted 300 signatures from Members ofParliament. The motion stated:

That this House acknowledges the plight ofworkers who have lost their final salaryoccupational schemes through companyinsolvency despite being promised by firms andsuccessive governments that their pensions wereguaranteed and in many cases having beencompelled to join their scheme as a condition ofemployment; further believes that theGovernment has a moral and possibly legalobligation to help those workers who have beenstripped of their pensions through no fault oftheir own; and further calls upon the Governmentto introduce legislation to compensate victims ofthis singular injustice.


Parliamentary question on contributionsholidays4.575. On 8 December 2003, Malcolm Wicks, thethen Pensions Minister, was asked by ShaunWoodward MP what plans the Government hadto review the policy of unlimited pensioncontribution holidays in final salary pensionschemes.

4.576. He replied:

Since pension provision by employers isvoluntary, the levels of contributions are a matterfor agreement between pension scheme trusteesand sponsoring employers.

Under the new scheme-specific funding regime,which is intended to replace the MinimumFunding Requirement, trustees and sponsoringemployers will be required to develop and agree,with the scheme actuary’s advice, the fundingprinciples for their scheme – including adetermination of whether the level ofcontributions is sufficient to meet a scheme’slong-term pension commitments.

The new proposed, simpler tax regime forapproved pension schemes (set out in thedocument “Simplifying the taxation of pensions:increasing choice and flexibility for all”(December 2002)) would abolish the rulesrequiring approved occupational pension schemesto run off their surplus funds (for example byagreeing contributions holidays) or lose their fulltax-exempt status. In addition, the document“Action on Occupational Pensions” announcedthat pension funds will be able to make paymentsto employers from an actuarial surplus onlywhere the scheme is funded above a levelsufficient to secure full buy-out of schemeliabilities.

Informed Choices for Working and Saving4.577. On 3 February 2004, DWP published adocument, ‘Informed Choices for Working and

Saving’, which set out the Government’s plans forsteps to support informed decision making byindividuals.

4.578. The document noted that the Governmentwas ‘committed to opening up options for peopleto extend their working lives and to ensure thatpeople have sufficient information to plan and toprovide for their retirement’. It then set out thethree elements of its proposed ‘Informed ChoiceStrategy’: the activation of the current system tomaximise provision and to ensure that everyonehad access to ‘good choices’; the continuation ofwork with the FSA to raise overall levels offinancial education and awareness of the need toplan and to provide for retirement; and furtherwork to ensure that all people of working agehad access to personalised information to helpthem understand how the choices available tothem related to their own retirement prospects.

4.579. The document lamented a position where:

...there are still too many people who, because ofa lack of understandable and trusted information,do not engage with the choices they have, and, asa consequence, make no choice at all. This is avery high-risk approach. We believe the publicwill be better served by a more fail-safe systemwhere people do not cut themselves out of apension scheme by inertia alone.

4.580. After reiterating that ‘for most people,their employer’s pension scheme is the best formof saving for retirement’, the documentcontinued by setting out three options to changepension schemes to increase employeemembership and contribution, on which furtherviews would be sought.

4.581. In relation to the raising of awareness anddeveloping financial education strategies, thedocument said:

It is key that the Government and its agencieswork together to provide education appropriate


to people’s needs at different points in theirworking lives. We want to move to a positionwhere people approaching retirement are betterinformed about the choices they face. Forexample, their options around when to retire,opportunities for flexible working, or the timingand nature of annuity purchase, as well asunderstanding the implications of those choiceson their potential retirement income. We want allpeople of working age who are contemplatingcareer breaks, working part-time or retiring earlyto be better informed about the implications fortheir pension saving.

4.582. The document then noted theGovernment’s recognition that DWP ‘can do moreto provide better information’ and then set outproposals for an integrated retirement planningservice, which would include improved marketingbased on ‘leaflets giving information on all typesof pension and the services government andothers offer to support people in making choices’.

4.583. Chapter 4 of the document was entitled‘giving people the right information’. It began bystating that:

We want to make sure that people get the rightinformation at the right time, in the right way.Many people say that they want to plan forretirement but do not know where to start. Thereis a lot of information available to individualsabout pensions and retirement planning. Thisquantity of information can be confusing andsome individuals will not necessarily trust it.Individuals may not always be able to understandwhether the information is impartial or is gearedto marketing a particular product or group ofproducts.

We know that people want help from animpartial source they can trust which isspecifically about their own status, prospects and

options. We think that personalised informationmakes a difference and prompts people to thinkabout their retirement planning.


We are keen to ensure that all of ourcommunications are as clear and effective aspossible. Therefore, we propose to commissionnew research on effective pensioncommunications. This will help us to furtherimprove our messages and ensure we get the rightinformation, to the right people in the right way.

4.585. The document concluded by stating theGovernment’s view that their strategy would‘help to renew further the pensions partnershipbetween government, employers, individuals, thefinancial services industry, trade unions and thevoluntary sector. These measures will help toempower individuals to make their own decisionsabout retirement and the level of income theywant in retirement’.

4.586. In the press notice which accompaniedpublication of the document, the then Secretaryof State for Work and Pensions, Andrew Smith,was quoted as saying:

I have met with many employees and employerswho have said that it is the quality and relevanceof information that is crucial in allowing them totake key decisions about their pension. I believethat through this package of measures we willhave taken a major step towards changingpeople’s attitudes towards their pension andhelping them plan properly for their retirement.

Publication of Pensions Bill4.587. The draft Pensions Bill, designed to enactthe Government’s reform agenda and toconsolidate existing legislation, was published on12 February 2004.


4.588. The then Secretary of State was quoted inthe press notice which accompanied publicationof the Bill as saying:

Where companies with under-funded pensionshave gone bust, workers have found themselvesseverely short-changed on the pension they wereexpecting. With the Pension Protection Fund,people in pension schemes can be much surerthat they will get the pension they werepromised. The Fund will be complemented by aflexible Pensions Regulator which will make iteasier for businesses to get on with running goodpension schemes. It will focus on the under-funding, fraud and maladministration that canthreaten members’ benefits, whilst minimisinginterference for well run schemes.

Parliament begins consideration of thePensions Bill4.589. The House of Commons gave the PensionsBill its Second Reading on 2 March 2004.

4.590. In the Commons Standing Committeedebate on 23 March 2004 on the proposedreplacement of the MFR, Malcolm Wicks, thethen Pensions Minister, said, in response to arequest from the Official Oppositionspokesperson to explain why the MFR basis hadbeen changed twice:

The hon. Gentleman also asked why theGovernment have twice cut the value of the MFR,in 1998 and 2002. I am bound to say that this is ahighly technical arena that concerns the actuarialbasis for the MFR, which has, as he said, beenadjusted twice. The relative strength of the MFRtest is affected by a range of factors, includingeconomics and demography and covering issuessuch as longevity, changes in yields from equitiesand other investments, which were mentioned,and changes in the costs of buying annuities anddeferred annuities. Perhaps it is inevitable that

such factors will change over time and, therefore,the strength of the MFR will fluctuate relative toprevailing market conditions.

4.591. The Minister continued:

The Faculty and Institute of Actuaries monitorsthe actuarial basis for the MFR, with a view torecommending changes when appropriate. Thatbasis was adjusted in 1998 and 2002, following itsrecommendations, because the MFR wasoperating at a higher strength than originallyintended. As I said, those changes representedtechnical adjustments, which were recommendedby the actuarial profession and were intended torealign the MFR closer to the strength that wasoriginally intended. They did not involve anychange in policy regarding its strength. These areprofoundly difficult matters. Although one isoccasionally tempted into partisanship, it isnormally sensible to listen to what the actuarialprofession advises.

4.592. In response to a further question fromNigel Waterson MP, for the Official Opposition,who had asked whether he accepted that thosewho had lost out on their pension rights wouldhave had more to show had the changes to theMFR basis not been made, the Minister said:

Hindsight is a wonderful thing. All I can say isthat that was the recommendation of the Facultyand Institute of Actuaries at the time and it wassensible of the Government of the day to followthat advice. It all adds up to us – not just to theGovernment, but to others, too – thinking thatwe need to move ahead in a different direction,hence the proposals that we are discussing todayabout scheme-specific funding.

4.593. Pressure continued to mount duringparliamentary scrutiny of the Bill to dosomething to provide compensation to thosewho had suffered due to scheme wind-ups. InPrime Minister’s Questions on 21 April 2004, in


response to a question from Tony Lloyd MP, MrBlair said:

...we are actively considering the position ofpeople who, having been forced to contribute tooccupational pension schemes, find that all themoney that they have invested yields absolutelynothing. We are examining what we can do insuch special cases, and, in the context of thecurrent debate on pension protection issues andlegislation, I hope that we can come forward withthe solution.

Publication of revised DWP guide tocontracting-out4.594. DWP published a revised edition of itsguide to contracted-out pensions in April 2004.

4.595. In a new section called ‘what happens if acontracted-out salary related scheme has to windup?’, the guide first explained the circumstancesin which schemes might wind up. It continued:

When a salary-related scheme winds up, thetrustees of the scheme have to pay what is owedto scheme members using the scheme’s currentfunds (or assets). Sometimes there may not beenough funds to do this. When this happens, anyshortfall becomes a debt the employer owes thescheme...

But there is still a chance that you may get lessthan you expect if your salary-related schemewinds up. That is why the Government hasannounced its plan to introduce a new PensionProtection Fund and a new pensions regulator.

4.596. The guide then explained the role of thePPF and the new regulator, before informing thereader that, if they wanted to find out moreabout the protection of their pension duringwind-up, they could talk to scheme trustees oran authorised financial adviser.

Further revision of DWP guide to occupationalpensions4.597. Also in April 2004, DWP issued a furtherrevision of their leaflet ‘occupational pensions:your guide’ (PM 3 – see above).

4.598. The principal revisions of relevance to thisreport were:

(i) the renaming of the section that formerlyasked ‘how do I know my money is safe?’,which now became ‘is my moneyprotected?’; and

(ii) the inclusion of a new section called ‘whathappens if a salary-related scheme has towind up?’

4.599. The latter section, which it is worth herequoting in full, said:

Winding up is the process of ending anoccupational pension scheme. This may happenfor a number of reasons depending on a scheme’srules. For example:

(i) an employer may decide to stop contributingto a scheme;

(ii) an employer may become insolvent and thismay lead to the scheme being wound up; or

(iii) the scheme’s trustees may decide to wind upthe scheme.

4.600. It went on:

When a salary-related scheme winds up, thetrustees of the scheme have to try to pay what isowed to scheme members using the scheme’scurrent funds (or assets). Sometimes there maynot be enough funds to do this.

When this happens any shortfall becomes a debtthe employer owes the scheme. This allowstrustees to take action to chase the debt.Regulations also make sure that assets are sharedout as fairly as possible. Some unpaid


contributions can be claimed when employersbecome insolvent. And, in certain circumstances,members may have some or all of their SERPS orState Second Pension restored for the period theywere contracted-out. All of this helps to protectthe pension that you have built up. But there isstill a chance that you may get less than youexpect if your salary-related scheme winds up.

4.601. The guide continued:

That is why the Government has announced itsplan to introduce a new Pension Protection Fundand a new pensions regulator. The PensionProtection Fund will pay compensation to schememembers when an employer becomes insolventand there are not enough assets in the scheme topay the Pension Protection Fund level of benefits.The Pension Protection Fund level of benefits isbroadly equal to the amount of compensationthat would be paid by the Pension ProtectionFund. For most schemes this will be based on100% of benefits to those over the scheme’snormal pension age and 90% of benefits tomembers below the scheme’s normal pension age.However, there will be a limit on the benefit thatcan be paid.

The new pensions regulator will focus onprotecting the benefits of scheme members byconcentrating on schemes if it considers that thereis a high risk of fraud, poor management, or pooradministration. If you want to find out moreabout how your salary-related pension isprotected during winding up, you can contact yourscheme’s trustees. If you are in any doubt aboutyour position, you can also contact an authorisedfinancial adviser. But, remember, if you do see afinancial adviser, you may have to pay for theiradvice.

GAD survey on occupational pensions4.602. Also in April 2004, the GovernmentActuary published his twelfth in a series ofsurveys of occupational pension provision in the

UK that had been undertaken by his Departmentsince the 1950s.

4.603. In Chapter 8 of the survey, which was anew addition and contained analysis of thoseschemes which were winding-up at that date, theGovernment Actuary said that there were around470,000 members of schemes in wind-up, ofwhich approximately 120,000 were existingpensioners and 70% of the total membershipwere in final salary schemes.

4.604. It also said that approximately 230,000people (both pensioners and those yet to retire)were in final salary schemes where thesponsoring employer was insolvent.

4.605. Paragraph 8.5 of the survey noted thatonly 78% of its respondents who were winding-up had notified OPRA that they were so doing.

Reform of the priority order4.606. On 19 April 2004, Regulations were laidbefore Parliament to reform the statutorypriority order in which the liabilities of a schememust be discharged on wind-up by placing therights of non-pensioners before increases forpensions in payment. This reform would haveeffect from 10 May 2004.

Announcement of Financial Assistance Scheme4.607. On 14 May 2004, Andrew Smith, the thenSecretary of State for Work and Pensions,announced that the Government would beproviding £400 million of public money, to bepaid over 20 years, to create a scheme toprovide ‘assistance’ to some of those who hadlost part or all of their pension rights due totheir scheme winding up under-funded.

4.608. In a BBC radio programme, Money Box,that was broadcast on 15 May 2004, MalcolmWicks, the then Pensions Minister said, in relationto the proposals to establish a ‘financialassistance scheme’ that those proposals were ‘amajor step forward that we’ve announced this


week in terms of helping this group of people,they’ve effectively had their money stolen fromthem and through no fault of their own and wethink it’s right that the public should supportthem and that’s what we’re going to do’.

4.609. During further consideration of thisproposal, Mr Wicks said in the House ofCommons on 19 May 2004 that:

The pension protection fund is a major socialpolicy advance that will bring protection andsecurity to more than 10 million pension schememembers and their families... but it isovershadowed by a cloud – the plight of the tensof thousands of workers who have already losttheir pension rights or a large percentage of them,which is debilitating for those affected andundermines confidence in the idea of saving for apension.

4.610. Mr Wicks continued:

Most of those people expect to receive a muchreduced pension. I have been deeply moved, aswe all have, by the distress and bewilderment ofmany people who, after long years of paying intoa pension scheme, have been told that, after all,the pension they are relying on, and which theyhave paid for, will not be there.

4.611. The Minister then went on to formallypropose an amendment to the Bill that wouldprovide for the establishment of a ‘financialassistance scheme’ to ‘assist people who have lostout severely as a result of the winding-up’ of an‘under-funded’ scheme which would not becovered by the PPF.

4.612. He explained:

The Government have put forward £400 millionover 20 years to help address the serious lossesthat some now face. It is open to industry to offerfurther support. We hope that that support willbe forthcoming. This money will not cover

everyone who feels aggrieved, nor will it givethose it does help everything they might want,but it represents significant help to those whohave lost the most.

4.613. The Minister went on to say that:

The coverage must ensure that those sufferinglosses are helped according to the principles ofopenness, fairness and, very importantly,operational practicability. The role of theindustry, employers, actuaries, trustees and tradeunions in resolving those issues is as great as thatof the Government... I would like briefly to takethe House through how we intend to turn ourcommitment into reality. It involves four phasesof work: first, we shall engage with our partnersand industry experts, including the trade unions;secondly, we shall design the detail of the policyand the operational framework; thirdly, we shallprepare to implement the scheme; and, fourthly,we shall go live and make payments.

Pensions Information Pack4.614. DWP launched a new pensions informationpack for employers and employees on 29 June2004, which had been devised by the Associationof British Insurers.

4.615. At the launch event, the then FinancialSecretary of the Treasury said:

Informed choice is an essential part of theGovernment’s strategy, reaffirming the essentialpartnership in pensions between employers,employees, providers and the Government. Itbuilds on the work we are doing to increaseprotection through the Pensions Bill and thesimplification of the pensions tax system.

DWP research on schemes affected by wind-up4.616. On 30 June 2004, DWP published researchit had undertaken to establish the number ofpeople affected by pension schemes which hadwound up under-funded since 1997 withinsolvent sponsoring employers. The report


provided estimates based on informationgleaned from trustees responsible for winding-upthe relevant schemes.

4.617. It reported that:

(i) the number of people facing losses of 20%or more of their pension totalled 75,000;

(ii) the number who faced losses of 30% ormore were 70,000;

(iii) the number who faced losses of 40% ormore were 60,000; and

(iv) those who faced losses of 50% or morenumbered 40,000. This included 35,000people who were facing losses of more than£5 per week.

4.618. The research did not cover those in solventemployer schemes who might be facing similarlosses.

4.619. In the press notice which accompaniedpublication of this research, Andrew Smith, thethen Secretary of State, was quoted as saying:

...for the future our new Pension Protection Fundwill provide cover to ensure that even where afirm goes bust employees can still be sure they’llget a worthwhile pension. The £400 millionscheme for those who have already lost out isanother step that will help to boost confidence inoccupational pensions and I hope industry willplay its part in that by making a contribution tothe scheme. We hope to have the legislativeframework of the scheme in place by spring ofnext year and making payments as soon as it’spractical.

OPRA update for under-funded schemes4.620. OPRA published its ‘update 9’ on 26August 2004, which provided information aboutits expectations in the light of theannouncement of the FAS. It urged trustees ofschemes in wind-up to advance the process so

that the relevant liabilities could be determinedas soon as possible.

Early Day Motions and parliamentary questions4.621. On 11 October 2004, the Governmentreiterated, in response to a parliamentaryquestion, that it would have the legislativeframework in place for the FAS by Spring 2005and that it hoped to make payments from theFAS as soon thereafter as was possible.

4.622. Sandra Osborne MP tabled an Early DayMotion on the FAS on 23 November 2004, whichsubsequently received 158 signatures fromMembers of Parliament. It read:

That this House recognises the suffering of thosemembers of final salary schemes who have losttheir pensions when their schemes were in wind-up and their need for urgent assistance; welcomesthe provision of £400 million for the FinancialAssistance Schemes but is concerned that this isnot a sufficient sum to provide the substantialassistance promised by the Government; asks theGovernment to consider pooling the assets ofwinding-up schemes, rather than purchasingannuities, and paying pensions on an ongoingbasis, as will be the case with the PensionProtection Fund, so that costs to the Exchequercan be spread over a long period of time whichwould provide an affordable option withoutoverburdening the public funds; notes that if theFinancial Assistance Scheme lasts 20 years thosepeople currently in their fifties will only be intheir seventies when the Scheme runs out; furthernotes that estimates suggest that if theGovernment will commit to pay a sum of £75million a year, index linked, for 40 years into acentral fund and pool all the assets of theschemes which have not yet bought annuities,promised pensions to non-retired members couldbe paid to at least the level of the PensionProtection Fund; calls on the Government toacknowledge that further resources will be


required to fulfil the Government’s desire torectify this injustice and restore confidence inpensions; and finally urges the Government tosettle this matter as soon as possible and inadvance of a general election.

4.623. Two days later, David Willetts MP tabledanother Early Day Motion on the FAS, which indue course received 91 signatures from Membersof Parliament. It read:

That this House welcomes the creation of theFinancial Assistance Scheme; notes with concernthat people who have already been affected bythe wind-up of a pension scheme do not knowwhether they will be eligible for assistance, whatlevel of assistance they will receive, or whenassistance will commence; is very concerned that£400 million will not provide the level ofassistance that many might be expecting; calls onthe Government to reveal details of the schemeat the first possible opportunity; and urges theGovernment to consider using unclaimed assetsto boost the funds available for assistance.

4.624. On 29 November 2004, the Governmentconfirmed, in response to a parliamentaryquestion, that the FAS would be funded out ofexisting spending commitments from April 2005to March 2008. For later years, the Governmentsaid it would take account of their commitmentto the FAS in future spending reviews.

4.625. As part of a series of answers toparliamentary questions given on 6 December2004, DWP Ministers stated that theGovernment did not accept that they had anyliability for the losses that had been or would beincurred by scheme members due to thewinding-up of their scheme without sufficientfunds to meet all liabilities.

FAS eligibility and Royal Assent for thePensions Act 20044.626. In the meantime, on 12 November 2004DWP had issued a press notice regarding the FAS,shortly after it had announced the eligibilitycriteria for assistance from the PPF. This statedthat work to determine eligibility for the FAScontinued.

4.627. On 18 November 2004, the Pensions Act2004, which incorporated provisions for theestablishment of both the PPF and the FAS andthe replacement of the MFR, received RoyalAssent. The previous day, the OccupationalPension Schemes (Minimum FundingRequirement and Actuarial Valuations)Amendment Regulations 2004 had been madeby the Secretary of State and were laid beforeParliament on 23 November 2004. TheseRegulations came into force on 21 December2004.

4.628. On 2 December 2004, Malcolm Wicks,the then Pensions Minister, made a furtherannouncement about eligibility for the FAS.He said:

Since the Financial Assistance Scheme wasannounced in May we have made good progressin scoping what is an extremely complex problem,involving hundreds of pension schemes, withdiffering scheme rules and in different stages ofwinding up. Following an initial data-gatheringexercise, we laid a report before the House inJune, setting out an estimate of the numbersaffected.

Ministers and officials have since consulted withscheme members, trade unions and industryexperts to gather and analyse more data, andexplore options for the best way to get assistanceto those who need it most.

Obviously, the full extent of the problem can beknown only once all potentially eligible schemes


have been identified and information obtained onthe individuals affected and the extent of theirlosses.

In September, we launched a second, moredetailed data-gathering exercise to identifypotentially eligible schemes. It is important thatall scheme trustees and actuaries who think theirschemes might be eligible respond by 10December. Data-gathering on the position ofindividuals will follow.

While we continue to seek industry contributionsto the Financial Assistance Scheme, fullparticipation in this exercise is an immediateopportunity for the pensions industry to providevaluable practical help and assistance in kind.


As we have previously said, the scheme will notgive everyone all of what they want. Nor will thescheme provide the same assistance levels as thepension protection fund, which provides covergoing forward, funded by a levy. The primaryobjective is to provide significant help to thosewho have lost the most.

The available funding is set. People who areyounger have more time to work and save for apension to replace one that has been wholly orpartially lost. Therefore we are minded to gearassistance levels with reference to the number ofyears an individual is from their retirement. Tofurther focus resources, we are consideringmaking payments for all individuals at age 65.

The pension protection fund has a benefit cap forthose below scheme pension age, and it makessense that the FAS should also have one, whichwe intend to set at a lower level.

4.630. Mr Wicks went on:

To minimise bureaucracy and to maximisepayments to those facing the most serious losses,Ministers intend that, other assistance criteria

aside, the FAS will include only those who willreceive at least £10 a week, or equivalent, fromthe scheme.

Information already gathered makes clear thatthe vast majority of those that had startedwinding up with significant funding shortfalls didso after January 1997. We can therefore confirmthat members of schemes that commencedwinding up from 1 January 1997 will potentiallybe eligible, subject to the other FAS entry rules.Schemes starting to wind up right through to theintroduction of the pension protection fund (6April 2005) will also be potentially eligible.

Solvent employers have a duty to support theirschemes and provide the benefits that memberswere expecting. So, it is right that the FAS focuseson insolvent employers. Nevertheless, issuesconcerning the definition of “employer solvency”remain under active consideration.

Those who have lost out due to their schemewinding up under-funded have already seen theirexpectations for retirement upset once. It istherefore important that the resources availablefor FAS are deployed in a way that ensures thatany new promise made to those eligible will bedelivered. This points to providing assistance bymeans of top-up to the occupational pension thatindividuals would otherwise receive. Trusteesshould therefore fulfil their duty to wind upschemes in an expeditious manner, includingannuitisation where appropriate. We will considerfurther the precise means of delivery – optionsinclude a top-up pension, a cash lump sum, orpurchase of an annuity at age 65.

4.631. He concluded:

Early next year we would hope to be in a positionto announce what we propose by way ofindicative assistance levels to those facing themost urgent difficulties, as well as an indicative


list of schemes that are likely to be eligible forassistance if those schemes are subsequentlyshown to comply with the FAS rules.

The complexity of the issue, the amount of datathat has had to be collected, and the level ofconsultation undertaken, means that the formalregulatory consultation will begin in the spring.

In April we will set up the body to administer thescheme and following the formal consultation wewill lay regulations before Parliament, makingpayments as soon as practicable thereafter.

4.632. In response to a parliamentary question on20 December 2004, the then Pensions Ministerconfirmed that no assessment of an averagepayout to affected scheme members hadunderpinned the Government’s decision to makeavailable £400 million to the FAS.

4.633. A further announcement about FASeligibility was made on 22 February 2005. Thewritten statement to the House said:

In December 2004 we said that our priority wasgetting help to those facing the most urgentdifficulties being closest to, or already at,retirement age and therefore less able to makeprovision to replace their lost pensions.

At that time we had asked independent trusteesto provide data on the pension schemes that theythought might be eligible for the financialassistance scheme. We had a very good responseand from the information provided it appearsthat there are at least 380 schemes in whichmembers might be potentially eligible forfinancial assistance. The precise scale of thefinancial shortfalls in these schemes cannot beknown until the winding-up processes are close tocompletion.


A list of these potentially eligible schemes hasbeen placed in the Library. It is a provisional list

which broadly confirms earlier estimates of thescale of the problem, and the number ofindividuals affected. The detailed eligibilitycriteria for both schemes and members will be setout in regulations that we expect to publish forwider consultation in the spring. Once finalisedthese will need parliamentary approval, which wehope to obtain by the end of July.

As solvent employers have a duty to support theirschemes and provide the benefits members wereexpecting, it is right that the FAS focuses oninsolvent employers. We expect employers tostand by their pension promise to theiremployees, and will take a dim view of thesolvent employer who seeks to avoid theirresponsibilities to their employees or theemployees of a company for which they havebeen a parent company. We have consultedwidely on how we should define “employerinsolvency” and concluded that for FAS purposeswe should have a sufficiently general definition ofinsolvency to capture schemes where thesponsoring employer no longer exists and alsowhere insolvency may have occurred some timeafter scheme wind-up had started. This definitionwill be similar to that used by the PPF but withthe additional inclusion of some companies whichhave undergone members’ voluntary liquidations– where a declaration of solvency was made atthe time of wind-up but where the company isnow no longer solvent and so no employer existsto support the scheme.

We are minded to judge the insolvency positionfor multi-employer schemes on the principalemployer of the scheme.

4.635. The statement continued:

The list contains those pension schemes on whichwe received information in the latest datacollection exercise and which, from theinformation provided by trustees, appearpotentially eligible under the criteria set out


above. The list provides an early indication ofscheme eligibility for members of the schemes wehave been told about. But I need to make clear anumber of caveats. First, it will take time toestablish the final position, but as wind-upprogresses we will become clearer on the size ofthe gap between assets and liabilities of theseschemes. Second, presence on this list does notguarantee individuals will receive support fromthe FAS. Third, it does not mean trustees shouldstop their duties of securing the best possibleoutcome for their scheme members.

After the FAS regulations have come into force,there will be a six-month period during which weshall accept formal notification from theindependent trustees of other under-fundedpension schemes, which may in due course beadded to the list, so absence from this list doesnot preclude eligibility.

Whilst we have sought industry contributions, itis very disappointing that no financialcontribution has been forthcoming. As a resultthe available funding stands at £400 million over20 years, which the Government have committedon behalf of the taxpayer.

4.636. The statement went on:

As we have explained before, in many cases thetrustees are not yet able to provide detailedinformation on the scale of individual losses andin practice this may not be available until theyare close to completing the winding-up of eachpension scheme. But those scheme members whohave already retired or expect to retire within thenext few years need to know where they standnow.

I can therefore announce today that the financialassistance scheme will provide help to thosewithin three years of their scheme pension age on14 May 2004. The assistance will top upindividuals to a level broadly equivalent to 80 per

cent of the core pension rights accrued in theirscheme. That means that those within three yearsof their pension scheme age on 14 May 2004should expect to get 80 per cent of their corepromised pension. As we previously announced,payments will be subject to a de minimis leveland a cap on assistance provided. Furtherinformation on these will be provided when thedraft regulations are published.

The assistance will be paid as a monthly pension.FAS payments will be treated by the tax andbenefit system in broadly the same way aspayments from an occupational pension scheme.

4.637. The statement concluded:

We have already committed ourselves to reviewthe financial assistance scheme after three years.Government funding is already fixed for thecurrent spending review period up to andincluding 2007-08. But as with all our spendingplans, we will review the funding for the FAS inthe next spending review alongside otherspending priorities.

A dedicated team of DWP officials, based in York,will administer the scheme and aim to getpayments to recipients as soon as possible oncethe regulations are in place.

4.638. In oral questions to DWP Ministers in theHouse of Commons on 28 February 2005, theFAS was discussed at length.

4.639. Alan Johnson, the then Secretary of State,said, as part of those discussions, that it was theintention of the Government to set the FAS capat the same level as that for the PPF (but thencorrected this statement to explain that the capfor the FAS would in fact be less, at £12,000 perannum); that it was intended to lay the FASRegulations in the Spring, with approval of themby July 2005 and then to give a six month periodin which individuals would apply for ‘assistance’;and that the sum set aside would be ‘on the basis


of our original calculations enough to give propercompensation’ to the affected people.

4.640. The spokesperson for the OfficialOpposition argued that the FAS was insufficientto remedy the losses incurred by those affectedby insolvent scheme wind-ups, as £20 million ayear would only provide approximately £1,300per year to 15,000 people.

4.641. On 4 April 2005, DWP issued draftRegulations to establish the FAS and soughtviews on them by 16 May 2005.

4.642. An additional announcement was made on22 June 2005, as a result of the consultationexercise on the draft Regulations (see above).Revised Regulations were also tabled that dayand it was announced that terminally illmembers and those already over the age of 65would receive advance, interim payments fromthe FAS. In addition, it was announced that thoseschemes where the sponsoring employer was nottechnically insolvent, but where it was also clearthat it no longer existed, would be includedwithin the scope of the FAS.

4.643. In the press notice that accompanied thisannouncement, the Pensions Minister, StephenTimms, was quoted as saying:

We have always said that the aim of the FinancialAssistance Scheme is to get money out as quicklyas possible to those who need it most, andtoday’s regulations will put those words intoaction.

The ability to make early payments to qualifyingmembers who are terminally ill and thosereaching 65 before their scheme has completedwinding up, will provide vital help to peoplesuffering the worst difficulties.

4.644. At the same time, the Governmentpublished its response to the representations ithad received in the consultation exercise on the

draft FAS Regulations. In relation to thecontinued exclusion of members of solventemployer schemes, DWP said:

The Government believes that solvent employershave a duty to support their schemes and toprovide the benefits that members wereexpecting. We recognise the difficulties whichmembers of such affected schemes face.Nevertheless, we believe that it is right for FAS tofocus its help on those schemes where there is nosolvent employer at all.

4.645. In relation to opposition to the proposed‘cut-off’ date, which meant that FAS ‘assistance’would be available only to those within threeyears of their scheme’s normal retirement age at14 May 2004, the Government said that it:

...acknowledges the strength of feeling that havingsuch a ‘cut-off’ date arouses but believes that,given the funds available for the FinancialAssistance Scheme, help must be focused on thosewho are facing the most urgent difficulties andare closest to, or have already arrived at,retirement age and therefore less able to replacetheir lost pensions. The FAS will be reviewed afterthree years and its funding will be considered inthe next spending review alongside otherspending priorities.

4.646. Finally, in relation to opposition to theproposal that ‘assistance’ would be available onlyfrom an individual’s 65th birthday, regardless ofnormal scheme retirement age, the Governmentsaid:

The FAS provides assistance to some of those whohave lost out by the failure of their occupationalpension scheme. It does not attempt tocompensate for that loss or to reflect the rulesand conditions of individual schemes: to do sowould introduce administrative complexity andsubstantially increase costs. The Governmentconsiders that backdating FAS payments to the


later of the 65th birthday or 14th May 2004means that taxpayers’ money made available forthe scheme can assist the widest range of people.

The Government acknowledges that it would notnecessarily be appropriate to delay FAS paymentsto eligible scheme members who reach their 65thbirthday but whose schemes have not completedwind-up and for whom, therefore, a definitiveaward cannot be calculated. The FinancialAssistance Scheme manager will, therefore, havethe discretion to make initial payments at a ‘safe’rate of 60% of expected pension entitlement toeligible scheme members who have attained theage of 65. This award will be recalculated and anyarrears paid when their scheme completes wind-up. The Government believes that this approachensures that members are not grossly penalisedfor delays in the winding-up process and reflectsthe approach of many pension schemes in makingsimilar ‘safe’ payments to members in similarcircumstances.

The Government has also decided that in caseswhere a scheme member aged under 65 is eligiblefor the FAS, suffering from a terminal illness andnot expected to live for longer than six months,then FAS payments will be made with immediateeffect.

4.647. On 1 September 2005, DWP announcedthat scheme trustees who had not yet submittedinformation to the FAS had six months to applyfor registration. It also published guides to theFAS – one for scheme members and another fortrustees, their advisers and other pensionsprofessionals.

Other developments during 20054.648. In the meantime, on 10 January 2005, thethen Pensions Minister, Malcolm Wicks, hadurged employees to consider seriously theirpensions options. According to the DWP pressrelease:

...one of the easiest ways to do this is to checkwhat options your employer can offer you. Thereare approximately 4.5 million people who haveaccess to company pension schemes but have notjoined them. Where an employer makes acontribution to the scheme, these individuals aremissing out on a significant employee benefit.

4.649. On 24 February 2005, DWP published adocument, entitled ‘principles for reform – thenational pensions debate’, that set out theprinciples that the Government had decidedwould guide pension reform. The principles setout were that:

(i) the pensions system must tackle povertyeffectively;

(ii) the opportunity to build an adequateretirement income should be open to all;

(iii) affordability and economic stability must bemaintained;

(iv) the pensions system should produce fairoutcomes for women and carers;

(v) reform should seek to establish a systemthat people should understand; and

(vi) reform should be based around as broad aconsensus as possible.

4.650. On 11 March 2005, DWP issued aconsultation document that set out theGovernment’s proposals to allow contracted-outbenefits to be paid as part of a cash lump sum.

4.651. On 22 March 2005, DWP issued a furtherconsultation document that set out its detailedproposals related to the new scheme fundingrequirements which would include a newstatement of funding principles and therequirement for trustees to keep membersinformed about the funding of their schemes.

4.652. On 5 April 2005 – almost eight years tothe day since the commencement of the relevant


provisions of the 1995 Act – many of therelevant provisions of the Pensions Act 2004came into force, including the establishment ofthe new regulatory body to replace OPRA andthe beginning of the operation of the PPF.

4.653. On 14 June 2005, DWP published itsresearch report, entitled ‘effective means ofconveying messages about pensions and savingfor retirement’. While this research had largelyfocused on money purchase schemes, in relationto tackling a lack of understanding andawareness of pension choices relating to finalsalary schemes the report concluded that, forthose respondents who had trust in Governmentor banks, they would seek information fromthem about their pension options. Those whohad no such trust would rely on informationfrom family members or friends.

4.654. On 20 July 2005, a Memorandum ofUnderstanding between DWP, the PPF and thePensions Regulator was agreed and published.

4.655. On 1 September 2005, DWP announcedthat the new funding framework for definedbenefit pension schemes would come into forceon 31 October 2005.

NAO report on DWP leaflets4.656. On 25 January 2006, the National AuditOffice published a report by the Comptrollerand Auditor General entitled ‘Department forWork and Pensions: using leaflets to communicatewith the public about services and entitlements’.

4.657. The report examined ‘how effectively theDepartment manages the risk of providinginaccurate information in its leaflets’ and alsoconsidered ‘whether the Departmentcommunicates clearly and effectively’ in its publicinformation leaflets.

4.658. The NAO recognised that ‘it is vital thatcustomers can rely on the accuracy of thisinformation to make informed choices about

their lives’. It also recognised that ‘the need toconvey often complex information in accessibleformats is a constant challenge for theDepartment, on the one hand ensuring thatinformation is complete and accurate, but on theother, that often complex information is conciseand accessible’.

4.659. The report said that the impact ofinaccurate and incomplete information in DWPleaflets would impact on its efficiency and mightlead to ‘inappropriate decisions by customers’,to ‘inappropriate claims by customers’, and to‘social exclusion and confusion’.

4.660. In noting that ‘a key objective of theDepartment for Work and Pensions is to ensurethat accurate and timely information is providedto its customers and the wider public’, the NAOsaid that DWP:

... identifies and records its risks via a strategicrisk register, which is reviewed routinely... Thisregister lists “providing unreliable advice orinformation to the public” as one of its 17 keycorporate risks.

4.661. In a section of the report dealing withmanaging the risks of not communicating clearly,the NAO said that:

Citizens should be able to rely on the accuracyand completeness of information provided by allgovernment departments. Citizens use theinformation government departments supply tojudge the performance of schools and hospitals,make benefit claims, make arrangements to travelabroad, complete tax forms and much more.Written communication (in particular leaflets,letters and paid-for advertising) is regarded bythe public as the most trustworthy source ofinformation from Government.

4.662. One of the report’s recommendations wasthat DWP should ‘ensure all its agencies treat


inaccurate and incomplete information as a keyrisk’. The NAO said that DWP:

... must better identify the risks associated withcommunicating with the public and ensure all itsagencies include the issue on their risk registersand monitor actions to manage the risksregularly.


Introduction5.1. This chapter sets out my assessment of theevidence that my investigation has disclosed andmy determination of whether the actions and/oromissions of the bodies complained aboutconstitute maladministration causing injustice toindividuals.

5.2. I will begin by outlining the key conclusionsI have drawn about the role of the bodiescomplained about from the evidence I haveinvestigated.

5.3. I will then set out the questions that I haveasked. Finally, I will set out my findings on thesematters.

The role of public bodies – conclusions fromthe evidence5.4. I consider that the evidence about thematters that I have investigated demonstratesthe following about the role of Government inoccupational pension provision during the periodrelevant to my investigation.

5.5. First, the public bodies under investigationhad responsibilities in relation to the aspectsof final salary occupational pension provisionthat are the subject of this investigation.

5.6. In particular, DWP and its predecessor wereresponsible for the legal framework governingsuch provision and took the lead withinGovernment on policy issues related to it.In addition, OPRA was the regulator of suchprovision and NICO participated (with OPRA) inthe process of winding-up final salary schemeswhere that occurred. This is apparent from thenature of the legal, regulatory and administrativeframeworks described in annex A to this report.

5.7. Secondly, the Government saw itself asacting – and told the public that it was doingso – in partnership with others both topromote the benefits of membership ofoccupational pension schemes and to remind

individuals that, where they could, they had anobligation to save for their retirement.

5.8. The Government’s role in the promotion ofmembership of pension schemes is apparentfrom official statements throughout the periodrelevant to this investigation – ranging from theMinisterial press notice to accompany thepublication in June 1998 of the report of thePensions Education Working Group to DWP’sevidence to the Work and Pensions SelectCommittee in October 2002. It is also apparentfrom other official statements, including in theDecember 1998 Pensions Green Paper andanswers given to parliamentary questions inNovember 2001.

5.9. The Government’s view that saving is anobligation on those who can afford to do so isalso apparent from the 1998 Green Paper andfrom various Ministerial statements in Parliamentsuch as those in February 1999 and November2001.

5.10. Thirdly, the Government recognisedthroughout the relevant period that pensionswere complex and often not a topic that wasgenerally understood and that, consequently,there was a need for greater financialeducation, for improved awareness of pensions,and for clearer information about the varioussavings options.

5.11. This is apparent from the public observationsof OPRA both in June 1997, shortly after thePensions Act 1995 came into force, and in April1999. It is also apparent from the work of theGovernment-appointed Pensions EducationWorking Group – published in June 1998 – fromthe official response to that work, and from thewhole thrust of the Pensions Green Paperpublished in December 1998.

5.12. Fourthly, the Government saw itself ashaving a key role in promoting such better

5. Findings | 147

5. Findings

education, awareness and information aboutpensions and saving for retirement –and told others that it would do so.

5.13. This role was discussed in, among otherplaces, the Pensions Green Paper of December1998, in a Cabinet Office report in April 2000, inthe joint DWP-Treasury consultation on the MFRissued in September 2000, in DWP evidencegiven to a parliamentary Select Committee inOctober 2002, and, most recently, in DWP’s laterpublications on ‘informed choice’.

5.14. Fifthly, the Government said at therelevant time that the information leaflets andother official publications issued by publicbodies were an integral component of thepromotion of the benefits of saving forretirement and aimed to assist people tomake informed choices about various pensionsoptions.

5.15. OPRA publicly accepted in June 1997 thatpart of its role was to ‘[get] across importantmessages to all those involved in workplacepension schemes, including scheme members’ anddescribed its relevant publications as aimed atgiving ‘trustees a better understanding’ of theissues related to running a pension scheme.

5.16. In addition, the then Pensions Minister toldthe TUC in June 1998 that DWP leaflets were‘user-friendly’ and would ‘reinforce the message’of the importance of saving for retirement.Moreover, in the December 1998 Green Paper theGovernment said that its then current proposalsincluded the provision of ‘better information’both on the various pensions options and on thegeneral need to save. That Paper also describedofficial publicity leaflets as being their ‘steps toensure that people are better informed aboutpensions issues generally and about the optionsavailable to them as individuals in particular’.

5.17. While Government did on occasion statethat their information products were notsufficient in themselves to enable individuals tomake complex financial decisions, the December2002 Pensions Green Paper did suggest thatofficial material from that period on would‘[move] the emphasis... away from promotingsimple awareness of the need to save and towardsinformation that will prompt people to takeaction’. Furthermore, in earlier evidence to aSelect Committee in October 2002, DWP hadsuggested that the ‘role of the state’ was ‘toprovide clear and accurate information aboutwhat pensions will provide so that people willunderstand how much they can expect atretirement before it is too late to do somethingabout it’.

5.18. Finally, the Government accepted at therelevant time that it had certain obligations inrelation to the accuracy, completeness, clarityand consistency of its publications.

5.19. There is no general statutory or common lawobligation on public bodies to provideinformation or advice to members of the public.However, it was recognised by legal adviceprovided to DWP in May 2000 that, where DWPor another public body chooses to provideinformation, this should be correct andcomplete. Such advice constituted, along withother things such as its public statements, the‘internal’ standards to which DWP should havehad regard.

5.20. In addition, as noted in chapter 2 of thisreport, previous Ombudsmen have held that apublic body may be deemed to have acted withmaladministration either where it had knowinglyprovided information or advice which wasmisleading or inadequate or where it had failedto follow its own procedures or policies inrelation to the provision of such information oradvice. I concur with that view.


5.21. Leaving aside for now considerations of thelaw and of good administration, in suchsituations where information is provided – and inthe context relevant to this investigation –DWP’s own internal guidance set additionalstandards against which its publications andother official statements might be judged.

5.22. Following the ‘Accuracy of InformationProject’ – itself a consequence of reports by mypredecessor and by the Comptroller and AuditorGeneral which found that the quality ofinformation provided by DSS about changes tothe inheritance of SERPS had been seriouslydeficient – from March 2002 DWP’s ‘PublicInformation Policy Statement’ had set out suchguidance.

5.23. The Statement provided, first, that, in orderto meet ‘communication requirements’, allinformation provided by DWP should be‘appropriate, relevant, correct, up-to-date, clear,concise and to the point, helpful and targeted’.

5.24. Secondly, and notwithstanding the lack of ageneral legal duty to provide information,it stated that:

It is widely accepted that the Department has aduty to give information or advice [to] inform thepublic about any new policies and developmentsthat may affect them and, crucially, keep theminformed on a continuing basis of their rights andresponsibilities. It would be unreasonable for theDepartment not to do this and it is clearly anecessary part of our business.

5.25. It continued:

The Department must take care to achieve thenecessary balance of resource and effort betweenannouncing changes and new policies and ourduty to provide routine information. The commonlaw duty of care means that any information weprovide must be timely, complete and correct.

The Department may also be held responsible ifwe give advice and someone relies on our adviceto their detriment.

5.26. In addition, this general strategy was, forinformation provided by the Pensions Service,complemented by a ‘Standards Framework’,aimed at front-line staff. This frameworkprovided that ‘the Pensions Service has aresponsibility to provide factual, accurate, timelyand appropriate information to all of itscustomers through all appropriate media’.

5.27. In relation to the general advice provided bythe Pensions Service, the framework said that itwould encourage individuals to plan for a secureretirement and, where possible, to save toachieve this.

5.28. Finally, the quality assurance processestablished by the framework said that individualinformation and advice provided by the PensionsService in correspondence, telephone calls or inface-to-face interviews would be reviewed byassessing, among other things, whether:

l the information and advice given was ‘accurateand up-to-date’;

l it was ‘comprehensive’;

l it was ‘tailored to the customer’scircumstances’; and

l it mentioned ‘appropriate future legislativechanges’.

My approach to determining the complaints5.29. Having set out key conclusions from theevidence that I have scrutinised as part of thisinvestigation, I now turn to the determination ofwhether maladministration occurred and, if so,whether it caused – or contributed to – theinjustice claimed by those who have complainedto me and others in a similar position to thosecomplainants.

5. Findings | 149

5.30. Before doing so, I should explain that thefindings I come to below were determinedfollowing consideration of submissions made byDWP during the investigation in relation to myinitial concerns about certain issues. Thosesubmissions, and my assessment of them, are setout in annex C to this report.

5.31. The rest of this chapter sets out my findings– that is, my answers to the following questions:

(i) did maladministration occur?;

(ii) if so, did individuals suffer injustice?;

(iii) if such injustice exists, has it beenremedied?; and

(iv) did any maladministration I have identifiedcause – or contribute to – any unremediedinjustice?

Did maladministration occur?5.32. As explained in chapter 2 of this report, myapproach to the determination of whethermaladministration has occurred is broadlystructured around consideration of the followingaspects of the complaints I have received:

(i) first, whether the information provided bythe bodies under investigation was clear,complete, consistent and accurate;

(ii) secondly, whether the bodies underinvestigation took the disputed decisionsabout the MFR and the disclosure of riskwithout maladministration; and

(iii) thirdly, whether the bodies underinvestigation undertook their responsibilitiesin relation to the process of winding-upcertain contracted-out final salary schemeswithout undue delay or other administrativeerror.

5.33. In dealing with the first aspect, I willconsider the following information provided byDWP (and its predecessor) and OPRA in relation

to the security provided to the accrued pensionrights of scheme members by the MFR:

(i) what public bodies said about the intentionof the MFR before it was devised andimplemented;

(ii) what public bodies said about the securityprovided by being funded to the MFR levelwhen it was announced and introduced; and

(iii) what public bodies said about such securityduring the operation of the regime of whichthe MFR was a component part.

5.34. In relation to the second aspect, I willconsider three discretionary or policy decisionstaken by public bodies in relation to the MFRand risk:

(i) the decision to change the MFR basis in June1998 by amending the equity market valueadjustment;

(ii) the decision, communicated in March 2001,not to make new disclosure to schememembers (as it was claimed had beenrecommended by the actuarial profession)of the risks to their pensions and to explainthe degree of security afforded by beingfunded to the MFR level; and

(iii) the decision in March 2002 to change theMFR basis by making a further change to theequity market value adjustment.

5.35. Finally, in relation to the third aspect, I willconsider whether the actions of NICO in relationto the schemes with which the fourrepresentative complainants were associated –and their handling of the wind-up of the othersample schemes I have examined – constitutedmaladministration.

Findings – official information5.36. I turn first to whether the informationprovided by DWP and OPRA about the security


of the pensions of members of final salaryschemes was clear, complete, consistent andaccurate.

5.37. In relation to the period prior to theintroduction of the MFR, the two principalsources about the intention behind the 1995legislation which introduced it – and about thespecific purpose of the MFR – were thestatements made by Ministers during the passageof that legislation and in the official leafletpublished by DSS in January 1996 to explain whatParliament had enacted.

5.38. Having regard to the relevant debates setout in chapter 4 of this report, I consider thatanyone reading or hearing the Ministerialstatements about the MFR and the purposebehind this statutory mechanism would havereasonably believed that a scheme funded to theMFR level would have enough assets to pay thepensions already in payment and to provide acash transfer value of the accrued pension rightsof non-pensioners, regardless of what happenedto the employer. On many occasions, Ministersemphasised that this was the case during passageof the legislation that introduced the MFR.

5.39. Leaving parliamentary statements aside toturn to the official information which is thefocus of this investigation, the leaflet publishedby DSS in January 1996 stated that the aim of theGovernment in introducing the Pensions Act1995, of whose provisions the MFR had been akey component part, was ‘to remove any worriesthat people had about the safety of theiroccupational... pension following the Maxwellaffair’.

5.40. Despite the warnings of the actuarialprofession in 1994 and 1995 that there was adanger that scheme members would be misled asto the degree of security that the MFR wouldprovide and the Government’s recognition at thetime that ‘it is important’ how what became the

MFR ‘is explained to members’, the leaflet wenton to say that the MFR ‘aimed at making surethat... schemes have enough money in them tomeet the pension rights of their members’ andthat ‘pensions are protected whatever happensto the employer’.

5.41. The leaflet also assured the reader that, onwind-up, a scheme funded to the MFR levelwould ‘provide all younger members with a cashvalue of their pension rights’. No mention wasmade that the Government intended fornon-pensioners that they would only have a‘reasonable expectation’ that this would be thecase, still less that such an expectation meantonly an ‘even chance’.

5.42. DSS had been given warnings that care hadto be taken to ensure that scheme members didnot misunderstand the degree of protection thatthe new legislative framework would provide fortheir pension rights. They had a responsibility toensure that there were no significant omissionsfrom any information they chose to publish.

5.43. Given this, I consider that the failure toensure that the most fundamental aspect of theMFR – the policy intention that Governmentwould adopt towards what the MFR wouldactually provide in terms of security for schememembers – was included in the officialinformation given to people to ‘remove anyworries’ they might have was highlyunsatisfactory. It misled the readers of thatleaflet by giving them assurances that werenever intended to be met.

5.44. Turning now to the publicity surroundingthe introduction of the MFR, this continued togive a misleading impression – by saying (myemphasis) that ‘schemes funded to this minimumlevel will be able, in the event of an employergoing out of business, to continue paying existingpensions and provide younger members with afair value of their accrued rights which they can

5. Findings | 151

transfer to another scheme or to a personalpension’.

5.45. Furthermore, during the operation of theMFR, official statements about the securityprovided by a scheme being funded to the MFRlevel continued to be vague, incomplete ormisleading.

5.46. It was not the case that the concept behindthe MFR was that ‘people who have built uppension rights should be able to draw theirpensions in full, even if the employer is no longerthere to pay extra contributions’ as was stated inthe December 1998 Green Paper.

5.47. No mention of risk or of the real intentionbehind the MFR was made in any of the generalinformation leaflets produced by DWP and it wasnot until the April 2004 edition of ‘OccupationalPensions: Your Guide’ that any mention ofscheme wind-up as a relevant factor in relationto pension security was made.

5.48. I do not accept DWP’s submission that itwould not have been appropriate to cover risk inits publications. I note that OPRA, the regulatorybody, had told DSS in January 2001 that ‘risksneed to be explained clearly to members’. TheDecember 1998 Green Paper had also said thatofficial information to be provided by DWP andothers to support the need that existed for ‘clearinformation and advice’ and which would help to‘improve the general quality and comparability ofpensions information’ would (my emphasis)‘include promoting awareness of the benefitsand the risks associated with different kinds ofinvestment and providing appropriateinformation and advice’.

5.49. Given this – and other similar examples –I consider that DWP’s current submissions aboutwhat I should now expect from officialinformation are incompatible with what DWPand other public bodies at the time said about

the information they would provide – and to therole that they then saw themselves playing inrelation to financial education.

5.50. In addition, I note that the first time thatpublic statements were made – albeit not in theleaflets aimed at the public – that the MFRprovided for non-pensioners only ‘a reasonableexpectation’ – defined as an even chance – ofproviding a transfer value that would, followinginvestment, give them their full pension was onpublication of the consultation on the MFR inSeptember 2000. This was more than three yearsafter the MFR became operational and almostfive years since the enactment of the relevantlegislation. Official leaflets aimed at the publicnever made this clear.

5.51. Whether it is ‘reasonable’ that such anexpectation might denote only a 50% chance isnot clear to me, although I do not consider thatthis would be a usual interpretation of such anexpression.

5.52. Leaving this aside, I have seen that thisintention had been referred to prior toSeptember 2000 in internal DWP documents andin setting the terms of reference for the actuarialprofession’s review of the MFR, which were onlymade public at the same time as the publicationof the above consultation.

5.53. Indeed, as is shown in chapter 4 of thisreport, the Government had instructed theactuarial profession on 22 November 1995 thatthey should devise an actuarial basis for the MFRthat would only deliver ‘at least an even chance’that non-pensioner members would receive acash value that, when invested elsewhere, wouldreplicate the pension that they would havereceived had their scheme not wound-up.

5.54. However, this intention was significantlydifferent from what was said publicly byGovernment about what the MFR was intended


to achieve. I remain extremely concerned that nostatement to the public had been made prior toSeptember 2000 that this was the intention ofthe MFR – and that the implications of this wereonly clearly stated in April 2004.

5.55. Furthermore, DWP and its predecessor knewthat scheme members had no idea of the risks totheir pensions but their leaflets and other publicstatements did nothing to dispel that lack ofawareness – indeed, they reinforced it.

5.56. Do all of these failings constitutemaladministration? Public bodies chose topublish information to support Government’sgeneral policies of making people aware of theirpension options and of encouraging membershipof occupational pension schemes.

5.57. Whether or not it had a general duty toprovide information about these policies andabout the legal framework that it had establishedand was responsible for overseeing, DWPprovided such information.

5.58. According to legal advice it received,information DWP provided had to be ‘clear andreliable’ and its officials at the time hadrecognised that its role should be to ‘giveaccurate information’ on pensions options.‘Telling only part of the story’ was alsorecognised at the time as being equivalent toproviding incorrect information.

5.59. In this context, I consider that the earlyofficial publications issued by DWP and itspredecessor did not meet the standards they setfor themselves.

5.60. Furthermore, from 22 March 2002, DWP’sown formal internal guidance required that theinformation it provided was, among other things,appropriate, relevant, correct and clear. It hadalso earlier agreed, on 11 September 2001, thataccurate information would contain‘no significant omissions’.

5.61. The May 2002 edition of ‘OccupationalPensions: Your Guide’, which was issued after theagreement of DWP’s Public Information PolicyStatement, contained 28 pages of text. Yet itmade no mention of the risks to accrued pensionrights should a scheme be wound up withinsufficient funds to meet all of its liabilities; nordid it mention the statutory priority orderswhich would have an impact on the amount ofmoney a non-pensioner might receive in such asituation.

5.62. The position with the April 2003 revisedleaflet was similar. Neither explained the policyintention behind – or the necessary effects onpension security of – the MFR. Both editions did,however, contain approximately 250 words abouthow an individual might make additionalcontributions to a final salary scheme and alsomore than 300 words about pension sharing ondivorce.

5.63. Even following the first public statement –in what amounted to a footnote to theSeptember 2000 consultation document – thatnon-pensioners had only an ‘even chance’ ofreplicating their pensions, conflicting messageswere being given about the security afforded bythe MFR to pension rights within final salaryschemes.

5.64. In a parliamentary debate on 3 July 2001,the then Minister continued to say that the MFRwas intended where a scheme wound up due tothe insolvency of the sponsoring employer‘to provide younger members with a fair valueof their accrued rights’.

5.65. I note – but do not accept – DWP’sexplanation (set out fully in annex C to thisreport) of what ‘fair value’ means.

5.66. Such an explanation is not consistentwith the other, less qualified statements inParliament and in official information about

5. Findings | 153

what a non-pensioner scheme member would beentitled to on wind-up. Furthermore, I am notpersuaded that any reasonable personconsidering the phrase ‘fair value’ would take itto mean without further explanation what DWPnow tells me that it always meant – that is, avalue that would provide only a 50% chance ofreceiving the expected pension following theinvestment of a transfer value of accrued rights.

5.67. I have seen nothing that would make medoubt that the Government’s intention behindthe MFR was always that it could only provide alimited degree of security to non-pensionermembers – which was apparent from its design –and I have seen that the discussions behindclosed doors within and between the publicbodies responsible for occupational pensionspolicy generally reflected this.

5.68. However, this was not properly disclosed tothose most affected by such an intention.I consider that the official information given tothe public about the degree of security providedby a scheme being funded to the MFR level:

(i) was, prior to September 2000, misleading,incomplete and inaccurate – in that it gaveassurances which were incompatible withthe design and purpose of the MFR asprescribed by Government – and with itspractical operation.

These assurances were that the MFR wasdesigned to ensure that schemes hadsufficient assets to meet their liabilities andthat a scheme funded to the MFR levelwould be able to pay cash transfers ofaccrued rights to non-pensioners. Inaddition, no disclosure or even mention wasmade of risks to accrued rights or of thepotential effects of statutory priority orderson wind-up;

(ii) was, between September 2000 and April2004, deficient – in that it lacked anydegree of consistency as to what might beexpected from the MFR.

Some official statements and publications –especially those aimed at the general public– continued not to mention risk and to givea misleading impression as to the security ofpension rights, while others began to explainthe true position; and

(iii) was only broadly accurate from April 2004onwards.

5.69. I consider that these findings are reinforcedif DWP publications are read in conjunction withother official publications.

5.70. For example, OPRA’s publications, which arewithin the scope of this report, were inconsistentand therefore deficient. Earlier publicationscontained some potentially misleadingstatements that eventually were balanced byothers that set out the real position moreappropriately.

5.71. Complainants have told me that officialassurances about the security of their pensionsgave them what turned out to be a false senseof security. I can understand why they felt this.In my view, official information about thesematters was not clear, complete, consistent oralways accurate.

5.72. DWP’s own standards provided – and theadvice it received at the time suggested – thatinformation it produced had to be complete andaccurate. I consider that the deficiencies inofficial information that I have identified abovemeant that this information did not conform tothe standards set for itself by DWP – whether inrelation to what it recognised and was advisedwas appropriate at the time, or to its publicinformation strategy, or to its wider and self-acknowledged role within financial education.


5.73. Moreover, I would expect officialinformation about such important matters to beclear, complete, consistent and accurate –especially where Government had at the timerecognised that there was considerable scope formisunderstanding and also a need for clearerinformation. I consider that official informationprovided in this case fell far short of what wasappropriate in this context and therefore it didnot accord with principles of goodadministration.

5.74. For both of these reasons, I consider thatthe deficiencies in the relevant officialinformation that I have identified constitutedmaladministration.

Findings – discretionary decisions taken by DWP5.75. I now turn to consider the threediscretionary decisions taken by DWP which havebeen complained about: two in relation tochanges to the MFR basis and one not toproactively disclose to pension scheme membersthe fact that their pensions might be at risk – thelatter allegedly in spite of a recommendation todo so by the actuarial profession.

5.76. In doing so, it is important to reiterate whatI have said in chapter 1 of this report, namelythat the law provides that I may not question themerits of discretionary decisions taken withoutmaladministration.

The 1998 reform of the MFR5.77. In relation to the first decision in March1998 to alter the equity market value adjustment(MVA) assumption that formed part of the MFRbasis, I have seen no evidence that that decisionwas taken with maladministration.

5.78. Not only was the decision taken after DWPhad regard to the available options, it was takenafter full consideration of the advice of theactuarial profession – which was supported by

further evidence and statistics to back thatadvice up.

5.79. In addition, it was decided to give nopublicity to this reform in addition to that givenby the actuarial profession to inform theirmembers. While not everyone would have takenthis view when dealing with a decision thataffected the pension security of so many people,the decision not to give publicity to the changeto the MFR basis was a decision that DWP wasentitled to take, and was not whollyunreasonable in all the circumstances.

5.80. Furthermore, in the absence of any officialpublicity about this decision, it would be difficultto establish that someone could have beenmisled about it.

5.81. I therefore cannot uphold complaints aboutthis decision, as it was not taken withmaladministration.

The 2001 decision not to disclose risk5.82. I now turn to the decision not to disclosethe risks to scheme members in the light of theactuarial profession’s recommendation that suchdisclosure should be made because schememembers did not understand the role andpurpose of – and the degree of securityprovided by – the MFR.

5.83. It should be noted first that therecommendation by the actuarial profession wasnot that the Government should communicatedirectly with scheme members but rather thatdisclosure – perhaps through schemeadministrators and trustees – should be effectedby pensions professionals or by others inpartnership with them, which may have included– or been facilitated by – public bodies.

5.84. In any case, as is clear from chapter 4 of thisreport, DWP consulted on the various optionsfor disclosure and it established a consultativepanel to help it decide, with key stakeholders,

5. Findings | 155

what should be done in the light of the whole ofthe actuarial profession’s recommendations.

5.85. I have scrutinised all of the papers providedto me relating to the work of the panel. It isapparent that there was no consensus on whatshould be disclosed, in what manner and bywhom. The issue of disclosure was recognised asan important one and it was taken up as part ofthe work done to effect a more fundamentalreform of the statutory framework, including theabolition and replacement of the MFR.

5.86. Not everyone would have taken the samedecision faced with information that schememembers were under an illusion that the MFRprovided them with more security than it did.However, the decision by DWP – not toundertake new and direct communication withscheme members to inform them of the risks –was one that DWP was entitled to take.

5.87. Nevertheless, it should be remembered thatdecisions as to how DWP should respond to theactuarial profession’s recommendations weretaken in a context where the Government hadrecognised that it had a key role to play ininforming citizens about their pension optionsand where the Government was encouragingindividuals to join their occupational schemewhere possible through its publications andother official information.

5.88. It should also be remembered that theactuarial profession had been concerned thatscheme members might be misled as to thesecurity of their pensions since before the MFRhad been introduced – and had communicatedthose concerns to DWP’s predecessor and maderecommendations about the need for anawareness campaign to dispel anymisunderstandings.

5.89. It seems to me that the issue of newdisclosure in the light of the actuarial

profession’s recommendation could not bedivorced from consideration of what had givenscheme members the false assurance that theirpensions were safe.

5.90. That being so, I am concerned that – facedwith further evidence that scheme memberswere wholly unaware of the risks to theirpensions and that they did not understand thedegree of security that the MFR provided – DWPdid not separately review the information aboutthe security of final salary pensions that it hadalready placed – and was continuing to place –in the public domain.

5.91. I consider that, within the discretionafforded to it by the law, it was open to DWPnot to make new disclosure about such issues.

5.92. However, at the same time, it seems to methat it was incumbent on DWP, given what itknew, to ensure that the information that it hadalready produced and was continuing topublish did not add to the misunderstandingsthat it knew and recognised existed about theMFR and the security of final salary pensions.

5.93. This was a relevant consideration but I haveseen no evidence that DWP considered it. I havetherefore concluded that the failure by DWP atthat time to review the official information itprovided constituted maladministration.

5.94. This was a lost opportunity for Governmentto take action to remedy the huge discrepancybetween what it had told the public was thepurpose of the MFR and the policy intention thatGovernment had been working with behindclosed doors since the inception of the MFR.

The 2002 reform of the MFR5.95. I now turn to the second decision, taken inMarch 2002, to change again the equity MVAelement of the MFR basis.


5.96. In its initial response to the complaints Ihave investigated, DWP said that this change, likeothers, had been made followingrecommendations to do so by the actuarialprofession – and had had the intention ofrealigning the MFR with its original level, fromwhich it had departed due to economic anddemographic trends. DWP also said that thesechanges were not at the relevant time seen toconstitute a weakening of the MFR or of theprotection afforded by it to scheme members.This position was reaffirmed by DWP insubsequent submissions.

5.97. As I understand matters, the actuarialprofession, working to instructions given to themby DWP and its predecessor, made four sets ofrecommendations concerning the actuarial basisof the MFR.

5.98. The first set of recommendations was madein May 1998, although the preciserecommendations made then were a revisedversion of earlier recommendations made inDecember 1997 in the light of the 1997 Budget.The profession argued that the MFR was thenstronger than originally intended and proposedchanges to its basis to weaken the MFR in orderto bring it back to that original intention. TheGovernment approved this set ofrecommendations and implemented the changeto the MFR basis in June 1998.

5.99. The second set of recommendations wasmade in May 2000, although the profession hadfirst intimated that it would make theserecommendations in November 1999. Theprofession argued that the MFR was then weakerthan had been originally intended and proposedchanges to its basis to strengthen the MFR inorder to bring it back to that original intention.The Government decided not to implementthose recommendations. In ‘Security foroccupational pensions: the Government’s

proposals’, its March 2001 response to the MFRconsultation, the Government said that:

The consultation document also includedproposals for some limited changes to the MFR,recommended by the Faculty and Institute ofActuaries. Most of those who responded to theconsultation document did not support thepackage of interim changes to the MFR and manycommented that they should not be made if theMFR was to be replaced in the near future. TheGovernment is proposing to replace the MFR andfeels that it is not therefore sensible to introducethese changes now.

5.100. The third set of recommendations wasmade in September 2001. The profession arguedthat the MFR was then stronger than originallyintended and proposed changes to its basis toweaken the MFR in order to bring it back to thatoriginal intention. The Government approved thisset of recommendations and implemented thechange to the MFR basis in March 2002. Thisdecision is, with that made in June 1998, one ofthose that have been complained about.

5.101. A fourth recommendation was made inFebruary 2003. The profession argued that, sincethe last change to the MFR basis in March 2002,the MFR ‘ha[d] weakened substantially’ to theextent that it was weaker than had originallybeen intended. The profession said that changeswere necessary to strengthen the MFR and that,if those were not made, ‘retaining the MFR at itscurrent strength’ prior to replacement of theMFR ‘would represent materially less security ofmembers’ benefits, especially where schemes arefunded at the MFR minimum level’ comparedwith the security ‘implicit in the MFR when it wasoriginally introduced’. The Government decidednot to amend the MFR basis as the MFR was dueto be abolished.

5.102. It seems to me that a number of conclusionscan be drawn from the above. The first is that it is

5. Findings | 157

clear that the actuarial profession, in line with itsinstructions, monitored the MFR basis against thepolicy intention set for the MFR by Government –and that the profession made a number ofrecommendations over time, which were aimed atensuring that the MFR remained aligned with thelevel intended by Government.

5.103. The second conclusion I draw is that, of thefour sets of recommendations made by theprofession concerning the MFR basis, only twowere implemented by the Government.

5.104. It is clearly not the case that the existenceof a recommendation from the actuarialprofession – couched in terms of ensuring MFRalignment with the Government’s policyintention – was sufficient cause for DWP toagree to change the MFR basis.

5.105. Indeed, while it may be nothing more thancoincidence, the Government chose over thisperiod to implement two sets ofrecommendations that would relieve the burdenson sponsoring employers while rejecting two setsof recommendations that would increase thedegree of protection afforded to schememembers.

5.106. It is also clearly not the case that thedecision-making approach taken by DWP wasconsistent in relation to each recommendationfrom the actuarial profession.

5.107. Decisions in relation to three of theprofession’s recommendations – those decisionstaken in relation to the sets of recommendationsmade in May 2000, September 2001, andFebruary 2003 – were all taken after the decisionby Government to replace the MFR. Thatreplacement was part (or all) of the reasoninggiven for rejecting both of the recommendationsthat would have strengthened the MFR.

5.108. And yet the decision made in March 2002 toimplement the profession’s recommendation to

weaken the MFR basis was also taken after it hadbeen decided that the MFR would be replaced.

5.109. Having carefully considered the above, I amnot satisfied that the 2002 decision to changethe MFR basis can be said to have been takenproperly simply because it rested on arecommendation from the actuarial professionthat was designed to maintain a policy intention.Nor am I satisfied that DWP’s decision was in linewith consistent practice in relation to the otherrecommendations made by the actuarialprofession.

5.110. No statement of reasons was set out in thesubmission to Ministers seeking approval of the2002 change to the MFR basis as to why thisparticular recommendation was more worthy ofimplementation than the 2000 recommendationswhich came from the same source and which hadthe same aim – and which was taken in the samecontext of impending replacement of the MFR.

5.111. I note also that the later decision in 2003not to amend the MFR basis to strengthen it alsorelied on the impending abolition of the MFR,despite recognition that the MFR wasconsiderably weaker then than had beenintended, provided, for example, in a Ministerialanswer given in July 2003 – which said that, byJune 2003, 50% of pension schemes were fundedbelow the MFR level but that, if no changes hadbeen made to the MFR basis since May 1997, 75%of schemes would have failed the MFR ‘test’.Clearly, the MFR by June 2003 was a considerablyweaker test than it had at first been – or than ithad been originally intended that it should be.

5.112. If the March 2002 decision to change theMFR basis was not one that was taken within aconsistent framework of implementing therecommendations of the actuarial profession toensure alignment of the MFR with its originalpolicy intention, on what basis was this decisiontaken?


5.113. The effects that the economic anddemographic context was having on the strengthof the MFR test were a prime factor in thedecision-making context. As I have said inchapter 3 of this report, my focus on consideringthis decision is on assessing whether it was takenwith regard to a properly documented evidencebase and that it was taken with a full assessmentof relevant considerations but without regard toirrelevant considerations. To do this, it is notnecessary to come to a view as to whether theadvice on that context, provided to DWP inSeptember 2001 by the actuarial profession, wassoundly based – or as to whether the assessmentof it by my advisers, which I accept wasundertaken some years later, is an accuratecritique, although, as I have said, I am satisfiedthat the advice I have received is robust.

5.114. When investigating complaints aboutdiscretionary decisions, I will first consider themanner in which a particular decision was takenand the evidence base on which that decisionwas taken. Clearly, when doing so, I must haveregard to the reasons given for the decision atthe time.

5.115. Before turning to consider the explanationprovided by DWP for its decision, it seems to methat the following can be established from theevidence I have seen:

(i) that, by May 2000, the MFR was weakerthan had originally been intended as a resultof a number of factors and trends, includingexternal economic conditions and theabolition of scheme tax credits (accordingto, for example, the actuarial profession’sbriefing submitted in November 1999, andMinisterial briefing provided by officials inOctober 1998, November 1999 and May2000);

(ii) that it was known at the time that the typeof change to the equity MVA that was

proposed both in May 2000 and inSeptember 2001 – if implemented alone –would have the effect of weakening theMFR (according to, for example, theSeptember 2000 DWP regulatory impactassessment of the 2000 proposals and alsothe actuarial profession’s letter to DSS inSeptember 2001); and

(iii) that the actual effects of the March 2002change were to weaken the MFR test(according to, for example, the answer to aparliamentary question given on 14 July2003, which bears out the significance anddirection of this change).

5.116. In that context, how did DWP go abouttaking its decision? DWP had said at the timethat it would undertake a ‘considered andbalanced’ assessment of the actuarial profession’sSeptember 2001 recommendation as part of a‘full consideration’ of reform of the MFR.

5.117. In order to establish whether the March2002 decision by DWP to approve the change tothe MFR was taken without maladministration,I evaluated the degree to which DWP undertooksuch an assessment prior to making its decisionto amend the MFR basis.

5.118. DWP has told me that they approved the2002 change having been ‘guided by the clearrecommendations from the actuarial professionas a whole, supplemented by advice from theGovernment Actuary’s Department’. As I have saidabove, such recommendations and such advicealone do not explain the reasons why DWPagreed to make this particular change to theMFR basis.

5.119. Yet, even if I were persuaded by such anexplanation, which I am not, I have a number ofconcerns about the way in which DWP tell methat they took this decision. These concernsrelate to whether DWP undertook the ‘full

5. Findings | 159

consideration’ of the evidence that it had saidthat it would undertake.

5.120. First, it appears that DWP did not ask theactuarial profession for evidence to support theirbrief assessment of the changed economic anddemographic context that would help explainwhy the profession argued that that context inSeptember 2001 was having the opposite effecton the strength of the MFR from what it had saidwas the case less than eighteen monthspreviously.

5.121. Secondly, I have seen only one email, senton 25 September 2001, from GAD to DWP inwhich these issues were discussed and in whichGAD’s advice was given. The advice on thisparticular proposal was given less than threeweeks after the actuarial profession’srecommendation had been made and amountedto two sentences.

5.122. Whether the economic context hadchanged in the way suggested by the actuarialprofession in the period from May 2000 toSeptember 2001 is not clear from the evidenceI have seen, although whether such was the caseshould have been critical to any determinationby DWP of whether a decision to change theMFR was reasonable in all the circumstances.

5.123. My advisers have expressed doubts that theadvice provided by the profession was accuratein all the then relevant circumstances.Nevertheless, I accept that it was the view of theactuarial profession in September 2001 thatchanges to the economic context between May2000 and September 2001 had had the effect ofso significantly changing the strength of the MFRthat it had in that period gone from affordingconsiderably less protection than had beenintended to being stronger than the policyintention had provided for. I also accept that thisview was communicated to DWP.

5.124. As with any decision, I should say that I donot consider that advice or a recommendationfrom the actuarial profession – or from GAD orany other professional adviser – absolved DWPfrom seeking to establish all of the relevant factsbefore making their decision.

5.125. A decision-maker, although acting with thebenefit of professional advice, retainsresponsibility for their decision. Regard shouldbe had to all relevant considerations and thosewhich are not relevant should be ignored. Itshould also be ensured that any decision taken ismade on an adequate evidence base and that thereasons for any decision can be demonstratedsubsequently.

5.126. Having examined the evidence before me, Iam not persuaded that DWP’s decision was takenafter proper consideration of all the evidencethat could have been available to it.

5.127. It seems to me, first, that the adviceprovided by the actuarial profession wasinsufficient in itself to enable DWP to come to a‘considered and balanced’ assessment as towhether to change the MFR basis. No supportingevidence or statistics were supplied in theprofession’s brief letter of 5 September 2001.

5.128. That being so, I am surprised that DWP didnot seek more detailed evidence from theactuarial profession to support the profession’sview – along the lines of that which had beengiven by the profession in relation to their 1998recommendation to make a similar change to theMFR.

5.129. Moreover, I recognise that GAD would havehad access to discussions within the actuarialprofession. However, I am not persuaded that theadvice provided by GAD to DWP was sufficient initself to enable DWP to ensure that the evidencebase on which it took its decision was properly


documented and that the reasons for its decisionwere set out clearly.

5.130. While I accept that DWP asked GAD toprovide a view as to whether DWP shouldaccede to the actuarial profession’srecommendation, I consider that the adviceprovided by GAD can be read as being limited ina significant way.

5.131. GAD had been asked to provide advice ontwo questions: first, whether ‘events in thefinancial markets since 11 September [2001] meanthat there is a case for taking action to changethe MFR regulations to extend the deficitcorrection period in advance of the planned dateof March 2002’.

5.132. Secondly, GAD was asked to give advice asto whether DWP should ‘accede to the requestfrom the actuarial profession that the MFR equityMVA should be amended, by replacing theassumed long-term dividend yield of 3.25%with 3%’.

5.133. Thus, DWP had asked GAD for advice onone issue – related to proposals concerning thedeficit correction periods – that was specificallylimited to their view as to the effects of marketvolatility since the events in New York on11 September 2001.

5.134. Its other request asked for advice onanother issue – related to the proposal to amendthe equity MVA – which was not time limited inthe same way as the first, but which was relatedto GAD’s view as to the fundamental premisebehind that proposal.

5.135. GAD provided detailed advice in responseto the first request related to the deficitcorrection periods. This answered the questionas put and provided evidence and analysis tosupport its advice. This was limited, as DWP hadasked it to be, to an assessment of whetherevents in the two weeks since the attack on New

York meant that it might be appropriate to bringforward the date on which the proposed changesshould be made.

5.136. In relation to the second request for adviceon whether the proposal to amend the equityMVA was appropriate, it is worth quoting herethe GAD chief actuary’s response to that requestin full:

In our view, recent events – in and of themselves– do not undermine the thrust of the argument ofthe actuarial profession. Accordingly, GAD wouldagree that the change to the equity MVAproposed by the profession is justified as a simplechange which adjusts the MFR to a level ofprotection consistent with that applying whenthe equity MVA was last adjusted in June 1998.

5.137. I do not consider that it is clear from thosetwo sentences whether the advice from GAD onthe MVA proposal was limited to an assessmentof whether events in the two weeks since11 September 2001 had undermined therationale behind the actuarial profession’srecommendation. If so, that was not what DWPhad asked. DWP was concerned to establishwhether the actuarial profession’s proposal wasin principle appropriate.

5.138. In addition, if supporting analysis –equivalent to that done to support its advice onthe proposal regarding the deficit correctionperiods – had been undertaken by GAD tosupport its advice on the proposal to amend theequity MVA, the chief actuary did not providedetails of it.

5.139. Furthermore, it now appears from theGovernment Actuary’s response to this report(set out in annex D to this report) that the adviceprovided by the GAD actuary was not based onany independent assessment of the profession’sproposals but was rather based on the work thathad been done by the actuarial profession.

5. Findings | 161

5.140. GAD’s advice therefore gave no clear basison which DWP could be satisfied that therationale put forward by the actuarial professionin relation to the effect of events in the periodprior to 5 September 2001 was in itselfreasonable. Nor does it appear to have beensupported by analysis other than that carried outby the profession itself.

5.141. It seems to me that DWP should havesought clarification so that it could documentand confirm precisely what the scope of GAD’sadvice was. In the absence of such clarification,DWP should have realised that they had not yetbeen given sufficient evidence on which to basetheir decision.

5.142. Moreover, it is surprising that, prior torecommending the MVA change to Ministers on11 January 2002, no further analysis other thanthe advice from GAD (which appears to belimited to a consideration of events in the periodfrom 5 September 2001 to 25 September 2001)was undertaken to establish whether the highlyvolatile economic conditions in the periodfollowing the attack on New York continued tohave the effects on the strength of the MFR thathad been ascribed to them four monthspreviously.

5.143. It seems to me that, if it were possible forsuch significant changes to the MFR strength tooccur over time – as it is claimed had happenedin the period between 1 May 2000 and 5September 2001 – then it was also possible thatevents between 25 September 2001 and 11January 2002 (and beyond) may also have hadsuch an impact – perhaps in a different direction.

5.144. This was a relevant consideration whichwas linked to the whole rationale for theactuarial profession’s proposal – the volatility ofevents – and one which therefore should havebeen analysed.

5.145. Indeed, I note that the actuarial profession,in its January 2001 response to the MFRconsultation, had advised that the case forinterim reform of the MFR ‘should be re-examined at the time any change is put forward,as... a different figure [for the equity MVAadjustment] may be supportable on the basis ofsubsequent movements’.

5.146. I also note the actuarial profession’s viewnow, which is set out in chapter 3 of this report,that ‘decisions about reacting to short termchanges in the level of protection afforded by theMFR test were far from straightforward’ and thatthe Government had known this at the time.

5.147. It seems to me that this was precisely whya ‘considered and balanced’ assessment wasnecessary.

5.148. Regardless of what professional adviceDWP had received, as this decision affected thefunding of many private sector final salarypension schemes and as it was related to thesecurity of the pension rights of many thousandsof people, it seems to me that DWP should havedone more to satisfy itself that it was right toimplement this recommendation.

5.149. Did all of the above constitutemaladministration? I consider that this decisionwas taken with maladministration as there isinsufficient documentary evidence that explainsthe rationale for that decision – and as I havedoubts about the reliance of DWP onprofessional advice which seems to me not tohave been sufficient in itself to enable DWP tocome to a decision that took account of allrelevant considerations and which ignoredirrelevant ones.

5.150. Thus my finding is predicated on what Iconsider to be failings in the process throughwhich DWP took the decision – and in the


completeness of the evidence considered by it inso doing.

Findings – NICO handling of wind-up5.151. I have set out the evidence uncovered bymy investigation in relation to complaints aboutdelays by NICO in the winding-up of schemes inchapter 3 of this report.

5.152. I am concerned that the process ofwinding-up routinely takes such a long time tocomplete and that the situation has not beenimproved in the almost seven years since theGovernment consulted on measures necessary tospeed up the process. This routine delay has adetrimental effect on the monies available tosecure the pension rights of scheme members.

5.153. Both the Association of British Insurers(ABI) and the National Association of PensionFunds (NAPF) believe that NICO is responsible fordelays in the winding-up process – and alsoquestion the time I have found is taken byscheme administrators to inform NICO that theirscheme is commencing wind-up.

5.154. The ABI told me that its members were:

...firmly of the opinion that 14 months [theaverage time taken for a scheme administrator tocontact NICO] is an inaccurately large figure andit is one which – universally – they do notrecognise. Although periods of over one year andlonger do occur on rare occasions, the averagetime is more in the range of 4 to 6 months. Ourresearch suggests the problems, when they doarise, generally lie outside of the direct controlof insurance companies.

5.155. NAPF told me, in a similar vein, that:

...we would be astonished if it takes an average of14 months to notify the surrender of a contractedout certificate. Evidence from our memberssuggests that 3 to 4 months is more typical.

5.156. On the role of NICO within the causes ofdelays to winding-up generally, NAPF told methat:

...we estimate that roughly 50% could beattributable to NICO, although this varies fromscheme to scheme. A scheme with good qualitydata might account for less than 50% while onewith poor data might account for most of thedelay.

5.157. The ABI listed a number of the causes ofdelay from their perspective. These includedfailures by employers or trustees to always returnthe necessary documentation and information ina timely fashion, which in their experiencehindered scheme administrators – and also issuesrelated to the time taken to appointindependent trustees and to deal with complexand often legal issues about pension entitlementand equalisation.

5.158. However, the ABI also said that NICO hada role to play among the causes of delay –principally in relation to the long-term effectsof delays in confirming GMP entitlements andassociated communication problems.

5.159. I have considered carefully the evidencebefore me. The statistical evidence I haveanalysed demonstrates that the fourteen monthaverage is correct for the total workload NICOundertakes. Not all pension schemeadministrators are members of the ABI or NAPFand it may be that their experience is notmatched among those other administrators.

5.160. In any case, with respect to the randomsample of 22 schemes we have analysed duringthe investigation, this pattern is broadlyreplicated – with a 15 month and 7 day averageand a median of approximately 11 months. Theposition for the four representative schemes ofwhich the lead complainants were members is,

5. Findings | 163

however, slightly better – being an averageof 11 months.

5.161. I also note that 22% of the respondents toa GAD survey of the administrators and trusteesof pension schemes in wind-up, which waspublished in April 2004, had not reported thattheir scheme was in wind-up to the regulatoryauthority.

5.162. I do not doubt that the difficulties whichNICO, the ABI and NAPF all highlight – related tothe quality of records both at NICO and amongscheme administrators, which both dependlargely on the accuracy of those provided bysponsoring employers or trustees – play asimportant a part in the systemic delays I haveidentified as the time taken to notify NICO atthe outset of the winding-up process. However,neither of these issues can be laid wholly atNICO’s door.

5.163. Having considered the available evidence, Iam satisfied that, while on occasion things mighthave been done differently, NICO is notresponsible for administrative error or othermaladministration which is the root cause of thisunsatisfactory situation.

Maladministration: summary of findings5.164. I have made three findings ofmaladministration, namely:

(i) that official information – about thesecurity that members of final salaryoccupational pension schemes couldexpect from the MFR provided by thebodies under investigation – wassometimes inaccurate, often incomplete,largely inconsistent and thereforepotentially misleading, and that thisconstituted maladministration;

(ii) that the response by DWP to the actuarialprofession’s recommendation thatdisclosure should be made to pension

scheme members of the risks of wind-up –in the light of the fact that schememembers and member-nominated trusteesdid not know the risks to their accruedpension rights – constitutedmaladministration; and

(iii) that the decision in 2002 by DWP toapprove a change to the MFR basis wastaken with maladministration.

Have individuals suffered injustice?5.165. Having determined that maladministrationdid occur, I now turn to consider whetherindividuals have suffered injustice as a result.

5.166. As I explained in chapter 2 of this report,those who have complained to me claim to havesuffered injustice which has four aspects:

(i) lost opportunities to make informed choiceswhen considering pensions and savingsoptions or to take remedial action inrelation to the funding position of theirscheme – due to misleading and incompleteinformation provided by public bodies andothers about the risks involved inmembership of a final salary scheme,which they promoted;

(ii) the financial loss of a considerableproportion (in some cases all) of theirexpected pension – once the wind-up oftheir scheme was triggered;

(iii) a sense of outrage – because the publicbodies responsible for the framework ofpensions law and regulation did not provideadequate protection through – or accurateinformation about the level of protectionprovided by – that framework; and

(iv) the distress, anxiety and uncertainty causedto them and their families – by the effectsof the above.


5.167. It is clear to me from the evidence I havereviewed about the personal circumstances of allthose who have complained to me that they andtheir families have suffered financial loss, a senseof outrage, and considerable distress, anxiety anduncertainty.

5.168. I am also satisfied that they have sufferedinjustice through an inability to make informedchoices or to take remedial action. It is not indispute that scheme members were not providedwith full information about the degree ofsecurity afforded by the MFR; what thisinvestigation has sought to establish was whetherthe information provided about these matters byofficial sources constituted maladministration.

Has this injustice been remedied?5.169. Before considering whether themaladministration I have identified above wasthe cause of – or a contributory factor to – thisinjustice, I must first determine whether theinjustice I have outlined has been remedied.

5.170. The FAS was established by the Governmentnot in recognition that it had a legal liability orother responsibility for the financial loss whichhad been suffered by members of defined benefitoccupational pension schemes – but as a meansof providing, in the words of the then Minister,‘significant help to those who have lost the most’.

5.171. This remains, however, the only attempt toprovide support to – in other words, to remedythe injustice suffered by – those pension schememembers who have lost their expected pensions.

5.172. I am aware that, at the time of writing thisreport, payments have begun to be made tothose covered by the FAS – more than one yearafter Royal Assent was given to the Pensions Act2004. However, DWP tell me that:

... monthly payments are now being made to 24scheme members in four different pensionschemes following applications from their scheme

trustees... These are all “initial” payments at 60%of expected pension rather than final paymentsat 80%... [such] payments have been introducedto ensure people do not have to wait until theirschemes fully wind up before getting help. Thelevel is set at 60% to seek to avoid people beingoverpaid and then being required to pay moneyback once their scheme has wound up.

5.173. That being so, it cannot be said on the basisof these few payments at the rate that they arebeing paid that the FAS has already remedied theinjustice claimed by complainants.

5.174. But what of whether the FAS will remedysuch injustice once it becomes fully operational?I am quite clear that the FAS will not constitutean adequate and appropriate remedy forthe injustice claimed by those who havecomplained to me, for the following reasons:

l first, it does not cover the position of thosemembers of a final salary scheme where thesponsoring employer is still trading orotherwise is not insolvent;

l secondly, it only provides at maximum 80% ofthe ‘core benefits’ expected by those schememembers it covers – it is payable to bring thetotal pension received by a member up tothat figure;

l thirdly, ‘assistance’ is only available to thosemembers within three years of schemeretirement age at 14 May 2004 and, in mostcircumstances, only from the age of 65 –regardless of normal scheme retirement age;

l fourthly, ‘assistance’ is to be paid at a fixedrate for life with no increases;

l fifthly, ‘assistance’ is subject both to a deminimis lower threshold (of £520 per year –below which nothing will be paid) and anupper limit on the ‘assistance’ to be paid(of £12,000 per year); and

5. Findings | 165

l finally, there is to be no payment of ‘non-core’benefits, such as in respect of additionalcontributions or for life cover. In addition,widows will only receive half their deceasedspouse’s FAS entitlement.

5.175. I am therefore satisfied that an injusticeexists, which has not been – or which it is notintended will be – remedied. I now turn to assesswhat were the causes of the injustice I haveoutlined above.

What caused this injustice?5.176. It seems to me that it must be commonground that the trigger for the financial lossesincurred by complainants and others in a similarposition to them was the winding-up of theirscheme with insufficient funds to meet its fullliabilities to all its members – in other words, thescheme’s inability to meet the ‘pensions promise’to all of its members.

5.177. However, I have found that thoseresponsible for the legislative and regulatoryframeworks within which final salaryoccupational pensions are provided did notadequately disclose the true position as regardsthe degree of protection offered to schememembers in such circumstances by the legislativeand administrative provisions Government wasresponsible for establishing, operating andenforcing. I have also found that DWP tookcertain relevant decisions withmaladministration.

5.178. In addition, as should be clear from above,the injustice claimed by complainants does notonly consist of financial loss – although ofcourse that is a significant component of theinjustice they have suffered.

Informed choice and lost opportunity to takeremedial action5.179. I will turn first to the lost opportunities tomake informed choices about saving for

retirement and to take remedial action inrelation to the funding of their pension scheme.

5.180. It seems to me that, had individuals had allthe information they needed, they would havebeen able to make properly informed choicesabout the options – whether in relation tomembership of their scheme or to seek toremedy funding issues concerning their scheme –that were open to them.

5.181. It is clear to me that they were not awarethat questions needed to be asked – other thanto ensure that their scheme met the MFR test.I consider that these lost opportunities floweddirectly from that lack of knowledge and froma ‘false sense of security’.

5.182. Furthermore, I am satisfied that officialinformation promoted the reasonable belief that,so long as a scheme was funded to the MFRlevel, it would be able to meet its liabilities to allits members in full.

5.183. Government had given itself responsibilitiesto properly inform citizens about their pensionoptions – and told them that theseresponsibilities were supported by itspublications. In addition, an ability to makeinformed decisions was an objective said byGovernment to be one that it saw as beingsupported by such official information.

5.184. It seems to me that Government assignedthese responsibilities to itself – and told othersthat it had done so. In addition, it wasGovernment policy to promote membership ofan occupational scheme and it also chose to dothat.

5.185. In that context, therefore, I consider that itwas all the more important that official sourcesshould have provided clear, balanced andappropriate information about the options opento people to enable them to ask the correct


questions to help them fulfil the ‘obligation’ tosave that the Government told them they had.

5.186. Taking all of the above into account, I amsatisfied that this form of injustice – these lostopportunities – was caused by the incomplete,inconsistent, unclear, and often inaccurateinformation given to scheme members, trusteesand sponsoring employers through officialsources.

Outrage and distress5.187. What caused the sense of outrage toindividuals whose pension schemes have woundup without sufficient funds to meet all itsliabilities to them?

5.188. I recognise that those who havecomplained to me also feel a sense of outragetowards – and have been distressed by – thosewho chose to close down their scheme – or, inrespect of those schemes which wound up dueto the insolvency of the sponsoring employer, bythe circumstances which caused them to losetheir job and their pension. Those are notmatters for me.

5.189. However, as the Prime Minister recognisesin the Foreword to the Ministerial Code, there isa ‘bond of trust’ between the British people andtheir Government. It seems to me that citizensshould be entitled to expect that thepublications of official bodies – which create,oversee, administer and enforce the legalframeworks which they are told are there toprotect their interests – do not mislead them.

5.190. I am satisfied that the individuals who havecomplained to me have suffered a sense ofoutrage that has primarily been caused by whatthey see as the failings of a system of regulationand control that they were told would actquickly to protect their interests, would providea secure environment for their pensions so thatanother ‘Maxwell’ could not happen, and would

provide the information necessary to enablethem to make perhaps the most importantfinancial decisions of their lives.

5.191. Finally, having reviewed many submissionsfrom those affected, I am satisfied that thestress, distress and uncertainty that theindividuals who have complained to me havesuffered was caused to a significant degree bythe shock that they felt when what they neverknew might happen to their pensions did occur –and when they realised that the officialassurances that they had trusted proved tobe misplaced.

Financial loss – the context5.192. In my view, maladministration causedinjustice in the manner set out above. But whatof the financial loss incurred by thoseindividuals?

5.193. I recognise that such losses werecrystallised – and, in many cases, exacerbated –by events that occurred within a system ofoccupational pension provision which had manycomponents other than the administrativeactions of the public bodies considered in thisreport.

Exacerbating loss – delays in winding-up5.194. I consider that, whatever the cause of thefinancial losses suffered by complainants, themany years that it routinely takes to wind up afinal salary scheme generally exacerbate thefinancial losses suffered by those whose schemewinds-up without sufficient funds to meet all ofits liabilities.

5.195. The longer it takes to complete winding-up,the more professional and other fees areincurred by the scheme. These take priority overscheme benefits and are deducted before theassets of the scheme, once realised, aredistributed among scheme members.

5. Findings | 167

5.196. While I have not found in this investigationthat the cause of these delays wasmaladministration on the part of NICO, Iconsider that these delays are an inherent part ofthe system of winding-up final salary schemes.

5.197. Those delays are the responsibility ofeveryone involved in the system, including NICOand OPRA (or those now undertaking OPRA’srelevant functions).

The causes of financial loss5.198. But how were such losses caused in thefirst place? As I have explained above, thefinancial losses sustained by complainants (andothers in a similar position to them) weretriggered by the wind-up of their scheme in sucha position as to be unable to honour the‘pensions promise’ to all its members.

5.199. That trigger – the winding-up of schemes –clearly was not caused by deficiencies in officialinformation about pension security. I considerthat there are a number of aspects of the systemof occupational pension provision which arerelevant when seeking to explain the cause ofthe financial losses suffered by those who havecomplained to me.

The actions of some employers5.200. First, it is clear that the voluntarydecisions by some ongoing and solvent firms toclose their schemes led directly to a situationwhere those schemes ended up with insufficientfunds to meet all their liabilities, as these – oftenunexpected – decisions triggered the winding-upof the scheme.

5.201. In addition, where a company has becomeinsolvent, it is sometimes the case that thecompany had not by that time made all of thecontributions due to the scheme and that, oninsolvency, there was little money left to rectifythe scheme’s resulting funding deficit.

5.202. In some senses, these decisions (or events)are the responsibility (or the misfortune) only ofthe companies themselves.

5.203. However, I note that the law allowedcompanies to voluntarily close schemes,although in later years more restrictions wereplaced on this right.

5.204. I also note that, even where a sponsoringemployer was deemed to have responsibilities inlaw to put in additional funding to their scheme,until 19 March 2002 the law only required themto bring the scheme’s funding level up to theMFR level – and even then, only over time. It wasnot until 15 February 2005 that all pensionschemes were able in law to seek to recoup thefull costs of buying-out pension liabilities fromsponsoring employers, whether the latter werestill solvent or not.

5.205. As I have established in this report, theposition prior to this did not mean that thefinancial losses sustained by the relevantcomplainants would not have occurred. This isbecause where an employer discharged in full itslegal liabilities in relation to scheme funding thismight still have led to significant – but lawful –shortfalls.

5.206. Thus the actions or demise of somesponsoring employers led directly to theinitiation of the wind-up of the scheme – withassociated significant funding shortfalls in somecases which led to some of the losses to somescheme members.

5.207. However, even where an employer hadfulfilled all of its legal responsibilities to itsscheme and had put in enough funding to bring itup to the MFR level, this did not necessarilymean that no losses have been incurred by thescheme’s members.

5.208. The actions of employers alone cannottherefore explain what caused the financial


losses incurred by complainants. If such lossesoccurred in situations where an employerfulfilled all of its legal responsibilities to ascheme, what other factors contributed tothese losses?

The legal framework5.209. Secondly, I consider that certain provisionsof the law itself had a direct impact on thecircumstances in which the losses I have outlinedin this report took place. Government developedthe statutory framework which governed thematters which have formed the subject matter ofthis investigation. Parliament enacted those laws.

5.210. There are five aspects of the relevant legalframework which are relevant to situations inwhich certain schemes wound-up withinsufficient assets to meet all of their liabilitiesto all of their members:

(i) the provisions of the statute andsubordinate legislation that governed theMFR established the context in whichfinancial loss was – quite lawfully – able tooccur. These included the design of the MFRitself, the provisions that allowed companiesto make up funding shortfalls over someconsiderable time, and also what wasprescribed as being required to be disclosedto scheme members;

(ii) the legal provisions which allowedemployers to take ‘contribution holidays’during periods when scheme funding wasstrong is also relevant. I note that there werelittle restrictions on such ‘holidays’, which insome senses reinforced the effect of theprovisions which enabled funding shortfallswhere identified to be made up over sometime;

(iii) the law relating to tax relief and the removalof such where schemes were deemed to besignificantly ‘over-funded’ may also have

been relevant to some schemes, as it actedas a potential disincentive to provideadditional funding in periods when a schemewas not ‘under-funded’;

(iv) the law relating to the insolvency ofcompanies is also relevant, in that itsprovisions meant that pension schemeswere unlikely to be able to obtain moniesdue to them from sponsoring employersbecause of the low and unsecured priorityafforded to schemes. I note in this contextthat, prior to 15 September 2003, certainpublic bodies had preference when theremaining assets of such companies weredistributed to its creditors; and

(v) the statutory priority order is also relevant,as it prescribed how a pension scheme’sassets should be distributed on wind-up.

5.211. However, it should be recognised that thelaw itself reflected the policy intention ofGovernment and the will of Parliament – andalso decisions made by Government, approved insome cases by Parliament, to make changes tothe legal framework over time.

Policy decisions taken by Government5.212. Therefore, thirdly, it is evident that certainpolicy decisions by Government – which werediscretionary and which I have not investigated –played a significant role in the context in whichthe financial losses suffered by complainantsoccurred.

5.213. In October 1998, briefing by officials inDWP’s predecessor department had recognisedthat the decision in the 1997 Budget to abolishthe system of tax credits given to pensionschemes had ‘shaken’ pension scheme funding.In November 1999, DSS officials told a Ministerthat that decision had ‘had the effect ofweakening the MFR test as prescribed at thattime’.

5. Findings | 169

5.214. I consider that it is evident that thisdecision had the effect of reducing the incomeavailable to all pension schemes every year. Italso appears that, at least to DSS officials at thetime, this decision weakened the protectionoffered to scheme members by the MFR. Thisalso had a differential impact on those schemeswhich were already less well funded. While Inote that there were compensating provisionsestablished at the same time, these related torelieving the tax burden on the sponsoringemployer – and did not relate to the pensionscheme. DWP tell me that these provisions weredesigned to produce positive changes inbehaviour and, as such, it is difficult to be certainof the benefit to pension schemes. Nevertheless,I consider that this decision is of relevance to thesubject matter of this report.

5.215. Furthermore, the Government chose, at thesame time as the second decision to weaken theMFR basis in 2002, to extend the periods duringwhich sponsoring employers had to make upshortfalls in their contributions to bring ascheme up to the MFR level. This meant that,where a scheme was not funded to the MFRlevel, employers could quite properly take up toten years to rectify the position. If in themeantime an employer became insolvent, thisdecision might have been highly significant.

5.216. In addition, while I have not found that the1998 decision to weaken the MFR basis was onetaken with maladministration, I consider that it isevident – not least from parliamentary answersgiven in July 2003 – that that decision had theeffect of reducing the amount of money thathad to be paid into pension schemes. This led toschemes operating prior to wind-up with fewerassets than they would have had a legal right toclaim had this decision not been taken.

5.217. It is not for me to question whether thesepolicy decisions were appropriate. I have sought

instead to ascertain whether they – with otherfactors – were a relevant part of the widercontext in which the financial losses suffered bythose who have complained to me occurred.

5.218. Having considered the available evidence,I am satisfied that these decisions played asignificant contributory role in the context inwhich the financial losses suffered bycomplainants occurred. Those decisions are, ofcourse, the responsibility of Government.

The role of maladministration in creatingfinancial loss5.219. The above four factors – delays in thewinding-up process, the actions of someemployers, the nature of the relevant legalframework, and some of the Government’s policydecisions – all relate to key component parts ofthe system within which final salary occupationalpensions were provided.

5.220. The actions of scheme trustees,administrators and their professional adviserswere another factor in this system. I note,however, that the law provided for compensationto be paid to remedy financial loss attributableto the unlawful actions of those responsible forschemes.

5.221. While it is not for me to question themerits of this system, or to make findings inrelation to any of those factors, it seems to meto be impossible to determine the degree towhich the maladministration I have identified inthis report has contributed to the financial lossesincurred by complainants without someconsideration of these other factors.

5.222. It may well be that the systemic featuresthat I have outlined above played a significantrole in enabling the financial losses sustained bycomplainants and those in a similar position tothem to occur. Parliament, Government and


others may wish to reflect on the degree towhich these factors were relevant.

5.223. However, I must ask whethermaladministration played any role in bringingabout financial loss.

5.224. Before considering this, I should say thatmy assessment of this question which follows islimited to the effects of the deficiencies inofficial information that I have identified.

5.225. It is clear that reducing the level to whicha pension scheme had to be funded – tomaintain the Government’s policy intention,albeit not one properly disclosed to schememembers – may have had an effect on thecircumstances relevant to the financial lossessuffered by complainants. The 2002 decision tochange the MFR basis – like the earlier decisionin 1998 – may thus have had an indirect effect onthe injustice suffered by members of someschemes.

5.226. Where I identify maladministration, it ismy usual practice to seek to put individuals backinto the position they would have been in hadthat maladministration not occurred. Taking thatapproach to the maladministration I haveidentified in relation to the March 2002 decision,it seems to me that, had the decision-makingdeficiencies not occurred, this would have madeno material difference to the degree ofknowledge that scheme members had – which inmy view is at the heart of these matters. Thatdecision would have still been taken – only on aproper basis.

5.227. That is why my assessment which follows isrestricted to considering the impact of thefailure by public bodies to disclose risk and toproperly inform scheme members of the degreeof security they could expect from their schemebeing covered up to the MFR level.

5.228. Had the members of schemes known fullythe risks to their pensions, I consider that manyof their financial decisions would unquestionablyhave been different.

5.229. For example, it seems to me highly likelythat those who transferred pension entitlementsinto their scheme from that of a previousemployer or from another savings vehicle wouldhave wanted to spread the risks to their financialfuture and would most likely have decided toleave their entitlements where they were.

5.230. Others, those who had money available tomake further pension provision – asrecommended by Government – would mostprobably have chosen not to make additionalvoluntary contributions to the scheme but wouldinstead have sought to spread the risks byinvesting that money elsewhere.

5.231. Had this maladministration not occurred,there were a number of things that schemetrustees, members and sponsoring employerscould have done – and in my view anyreasonable person most probably would havedone. These actions would have had as their aimthe significant improvement of the financialposition of a scheme or the diversification ofindividual risk. If successful, such actions mighthave prevented or minimised the financial lossessuffered by members in relation to the pensionand other benefits derived from nationalinsurance contributions and their contributionsto the scheme itself.

5.232. Had official information about the degreeof protection afforded by the MFR and theresulting risks to members’ pension rights beenaccurate, complete and consistent, I considerthat the actions I discuss in more detail in annexC to this report might well have ameliorated thefinancial position of schemes and wouldtherefore most probably have led to lesser,if any, financial loss of this type.

5. Findings | 171

5.233. These actions include the facts that:

(i) scheme trustees could have opted for a‘gilts-matching’ investment strategy whichwould have maximised the contributionsmade to the scheme by employers, whichwould have had a clear impact, especiallyin the cases where the scheme was notwound-up in due course due to theinsolvency of the employer;

(ii) scheme members could have pressuredemployers to raise contributions, perhapsthrough their organised representatives; and

(iii) sponsoring employers could have sought tomake additional arrangements – perhapsthrough merger with other businesses or byattracting new capital – to enable them tobe able to increase the contributions totheir schemes.

5.234. I have found that Government providedincomplete, inconsistent, misleading orinaccurate information about the degree ofprotection that the law provided.

5.235. Even what was intended by the MFR wasnot properly disclosed by the Government toscheme members in official information leafletsuntil April 2004, although it had been indirectlyalluded to – or on occasion been set out inbroad terms – in other official publications orstatements since September 2000. I considerthat these failings led to the members ofschemes and others being unaware of the needto take any of the possible forms of remedialaction that I have outlined above.

5.236. These lost opportunities were the result ofthe maladministration I have identified in thisreport and, in my view, contributed directly –with other factors – to the situation in which theloss of pensions and other benefits which wereto be derived from the members’ contributionsto their scheme were able to occur.

5.237. Members at the same time also lost thepension derived from their national insurancecontributions, described by Government inrelation to the majority of the relevant period asa ‘Guaranteed Minimum Pension’ which, had theynot contracted out, would have remained withinthe State additional pension system and wouldnow still be safe. Knowledge of the risks mightalso have influenced individual decisions oncontracting-out.

5.238. I consider that the financial loss ofpensions derived from contributions either directto schemes or by way of national insurancecontributions was therefore a consequence ofthe maladministration I have identified – as wellas of the other contributory factors I haveidentified above.

5.239. But what of whether thatmaladministration caused injustice? It seemsto me that the financial losses suffered bycomplainants did not come about as a result ofthe workings of a system about which individualshad been properly informed – and where therisks inherent in that system had beenhighlighted to them clearly by those responsiblefor it.

5.240. On the contrary, the financial lossesincurred by complainants were crystallisedbefore those individuals even knew that such aneventuality might befall them and in a contextwhere they had had no warning to enable themto take remedial action or to otherwise protecttheir position.

5.241. That seems to me to be a clear injustice.Not only did those individuals trust theinformation they were provided with about theframework put in place by Government toprotect their pensions, they were unable toproperly consider their financial position or tomake fully informed choices about their pensionoptions.


5.242. They were also unable to consider whataction they could take to remedy the financialweakness of their scheme, as the officialinformation given to them was deficient.

5.243. Official information effectively distortedthe reality of the position in which schememembers found themselves. As a result, theywere wholly unaware that their pension rightswere dependent on the ongoing security of theemployer sponsoring their scheme.

5.244. That constitutes an injustice which wascaused by maladministration. While I cannot saythat maladministration alone caused thefinancial loss suffered by complainants, I doconsider that it was a significant factor increating the environment in which those losseswere crystallised.

Injustice: summary of findings5.245. I have found that injustice – in the formsof a sense of outrage, lost opportunities tomake informed choices or to take remedialaction, and distress, anxiety and uncertainty –was caused by maladministration.

5.246. I have also found that themaladministration I have identified was asignificant contributory factor in the creationof the financial losses suffered by individuals,along with other systemic factors. A furtherconsequence of that maladministrationwas financial injustice – the distortion of thereality facing scheme members so that theywere wholly unaware that their pension rightswere dependent on the ongoing securityof their employer.

5. Findings | 173

Introduction6.1. In this chapter, I make recommendations toput right the injustice that I have found remainsto be remedied.

6.2. Before setting out my recommendations,I will first describe the remedies thatcomplainants are seeking. I will then set out myunderstanding of who might be fully covered byany recommendations that I make.

6.3. Once I have set out my recommendations,I will make a number of further observationsabout the subject matter covered by this reportwhich have been informed by the evidence I havereviewed during this investigation.

Remedies sought6.4. Complainants have sought through myinvestigation financial redress for the injusticethey have suffered and also financial recognitionof the outrage, distress, inconvenience anduncertainty that they have endured.

6.5. They have also sought a full explanation ofwhat has happened to them. I hope that myreport has now provided that explanation.

6.6. In terms of the financial remedies sought,these can be placed into three distinctcategories:

(i) financial redress that would providecomplainants with the pension (includingthat deriving from additional voluntarycontributions) that they would havereceived from their scheme had it notwound up without sufficient funds to meetall of its liabilities – we might call this corepension replacement;

(ii) financial redress that would replicate ‘lost’associated benefits – such as life cover,survivor benefits, and ill-health benefits –that have in some cases already beenforegone by many of the complainants and

in other cases will in future necessarily beforegone – we might call this therestoration of non-core benefits; and

(iii) financial redress to provide tangiblerecognition of the effects of themaladministration that I have identified oncomplainants and their families – we mightcall these consolatory payments.

Who is covered by my recommendations?6.7. The maladministration I have identified in thisreport occurred in the period from January 1996until April 2004 – being the period from whenthe first deficient official leaflet on the PensionsAct 1995 was issued until official leaflets aimedat the public were issued that were broadlyaccurate.

6.8. However, I am aware that the first officialleaflet was describing a regime – which includedthe protection offered by the MFR – which wasonly to come into force in April 1997. I do notconsider that anyone who read that leaflet,which purported to explain the future protectionthat would be provided by the MFR, couldexpect that that protection would extend tothose schemes which wound-up before the dateon which the MFR was said to come into force.

6.9. In light of the above, I have considered whoshould be fully covered by the recommendationsI go on to make. I have determined that myrecommendations should apply to thoseindividuals:

(i) who are or were a member of a final salaryscheme which commenced wind-up from6 April 1997 to 31 March 2004; where

(ii) their scheme wound-up with insufficientassets to secure pensions in payment and topay cash equivalent transfer values inrespect of full accrued pension rights to all


6. Recommendations

non-pensioner members or to secure thefull liabilities for each non-pensioner inother ways; and where

(iii) the scheme is not eligible for the pensionscompensation scheme – because it has notsuffered losses wholly attributable to fraudor other unlawful behaviour; and where

(iv) the individual has incurred an actualfinancial loss because of a shortfall in thepension promised in respect of any or all ofthe following:

l the contributions made by them and/ortheir employer to the scheme (that is,the scheme pension); and/or

l contracted-out national insurancecontributions that were rebated to thescheme (that is the ‘GuaranteedMinimum Pension’ and similar provision –which, despite its different provenance,was due to be paid with the schemepension); and/or

l other benefits due (such as survivorbenefits and life cover).

My recommendations6.10. Having set out the remedies sought andthose who are covered by my recommendations,I now turn to set out what I consider should bedone to remedy the injustice I have foundwas caused by maladministration.

6.11. In making these recommendations, I considerthat the following should be recognised:

l first, that, while I have found thatmaladministration has caused injustice, I havealso found that, insofar as the financial lossessuffered by complainants are concerned,maladministration was one of a number offactors which led to the circumstances inwhich those losses were sustained;

l secondly, that, as a result, I cannot say thatmaladministration alone caused the financiallosses suffered by complainants – althoughI consider that maladministration was asignificant factor among the causes of thoselosses;

l thirdly, that, accordingly, those public bodiesresponsible for that maladministration cannotbe held solely responsible for the financiallosses sustained by complainants;

l fourthly, that, nonetheless, I consider that thecontribution of public bodies to thecircumstances in which those financial losseswere sustained went beyond themaladministration I have identified. Throughthe policy behind – and the provisions of –the legal framework and certain decisionsconcerning both, those public bodies played asignificant role in the factors which led to thefinancial losses sustained by complainants;and

l finally, that, leaving strict responsibility aside,I consider that the position of thoseindividuals who have lost a significantproportion – in some cases all – of theiraccrued pension rights should not beforgotten among all of these considerations.Neither should it be forgotten that one formof injustice was caused by maladministrationin the form of the distortion of the realityunderpinning the financial security of pensionrights.

6.12. In the light of the above, it seems to methat those responsible for responding to myreport should consider whether – in addition totheir responsibility to remedy the injusticecaused by the maladministration I have found –there exists for other reasons a moral imperativeto put right the devastating effects of eventswholly beyond the control of the people sodeeply affected by them.

6. Recommendations | 175

6.13. It is with that in mind that I offer thefollowing recommendations.

First recommendation6.14. My first recommendation relates toremedying the financial injustice suffered bythose who have complained to me and alsothose in a similar position as those individuals.

6.15. I recommend that the Government shouldconsider whether it should make arrangementsfor the restoration of the core pension andnon-core benefits promised to all those whomI have identified above are fully covered by myrecommendations – by whichever means ismost appropriate, including if necessary bypayment from public funds, to replace the fullamount lost by those individuals.

6.16. I recognise that this would be a significantcommitment, although it seems to me that itwould be a commitment that could bedischarged over a number of years if the rightmeans were identified and that this would be acommitment that would decline over the years.

6.17. I recognise that it may be felt by theGovernment that it is possible to mitigate thecost to the taxpayer of pension replacementfrom monies due from other bodies –particularly any that they consider played asignificant role in the relevant events. If that isso, I consider that the Government shouldreflect on whether it would be more appropriatefor it to take action itself – rather than to expectindividual scheme members or trustees to do so– to recoup such sums using the considerablecollection and enforcement powers thatGovernment has.

6.18. I am aware, in addition, that the relevantpension schemes have assets that could assistpension replacement and that alternatives tosecuring pension liabilities for members of theaffected schemes through the purchase of

annuities have been suggested. Thesealternatives, as I understand matters, would stillrequire Government action.

6.19. I recognise that asking the taxpayer to meetpart or all of the cost of this recommendationraises significant public policy questions.However, I believe that the Government shouldconsider whether its response to myrecommendations should have regard to whatmight be considered by many – and certainly bysome of the people who have complained to me– to be a precedent.

6.20. I note that Government has recentlyrecognised that, even though there may besignificant financial implications, it shouldhonour the pension arrangements for existingpublic sector employees as those people havemade employment, financial and other choicesbased on the information that they were givenabout such arrangements in the past. Newentrants to the public services are to havesignificantly less attractive arrangements whichwill be made clear to them prior to entry.

6.21. It seems to me that there are some parallelswith the position of those whose pensionentitlements were crystallised prior to theintroduction of the new pension protectionarrangements in April 2005.

6.22. Those who have complained to me werealso given information in the past about theirpensions. They were told that their pensionswere safe, guaranteed and protected by law –and they acted accordingly. It seems to me thatsympathetic consideration should be given as towhether those assurances should now behonoured.

Second and third recommendations6.23. My second and third recommendationsrelate to the recognition of the effects of themaladministration on those who have suffered as


a result – and are directed in different ways atscheme members and scheme trustees.

6.24. I recommend that the Government shouldconsider whether it should provide for thepayment of consolatory payments to thosescheme members fully covered by myrecommendations – as a tangible recognitionof the outrage, distress, inconvenience anduncertainty that they have endured.

6.25. I also recommend that the Governmentshould consider whether it should apologise toscheme trustees for the effects on them of themaladministration I have identified,particularly for the distress that they havesuffered due to the events relevant to thisinvestigation.

6.26. I recognise that it may not be possible tomake a personal apology to every trusteeconcerned, not least because it would be verydifficult to identify them. However, I considerthat those people rightly feel that theirprofessional reputations have suffered and Ibelieve that official regret for this should bepublicly stated.

Fourth recommendation6.27. My fourth recommendation relates to thosepeople who otherwise would be fully covered bymy recommendations but whose scheme beganwind-up between 1 April 2004 and 6 April 2005,when the new pension protection arrangementsreplaced the regime covered by my investigation.

6.28. I recommend that the Government shouldconsider whether those who have lost asignificant proportion of their expectedpensions – but whose scheme began wind-up inthe year prior to the new regime becomingoperational – should be treated in the samemanner as those fully covered by myrecommendations.

6.29. In doing so, I recognise that, by this time,official information provided to the public wasbroadly accurate and that it could therefore besaid that there was an opportunity for suchindividuals to take whatever action they couldto mitigate their potential loss.

6.30. However, I nevertheless consider that theGovernment should also give sympatheticconsideration to the position of those whosescheme began wind-up in this year.

6.31. I believe that there are two grounds for suchconsideration. The first is that it should berecognised that, by the time the officialinformation was rectified, it was probably toolate for many of those people within this groupboth to seek to take some of the remedialactions that I have identified were open to them– and also for such action to have had any effect.In addition, some of the losses suffered by thisgroup of people may not have been recoverableeven had such action been undertaken, as therewould have been little time to transfer out priorto wind-up.

6.32. Secondly, it may be that any decision not toinclude this group of people would lead to theintroduction of considerable and unnecessaryadministrative complexity – and a feeling offurther unfairness – into whatever scheme isadopted.

Fifth recommendation6.33. My fifth recommendation relates to theprocess of winding-up final salary occupationalpension schemes.

6.34. I recommend that the Government shouldconduct a review – with the pensions industryand other key stakeholders – to establish whatcan be done to improve the time taken to windup final salary schemes.


6.35. The factors which together account for theoften considerable time it takes to wind up suchschemes appear to have been the subject ofconsensus for many years.

6.36. I am conscious that the Government’s initialresponse to the relevant head of complaint inthis investigation contained an almost identicallist of factors that it considered were pertinentas that provided by Government in its May 1999consultation on the same matters. Thoserepresenting scheme administrators appear toconcur in that view – as do those independenttrustees who we interviewed during the courseof this investigation. Furthermore, theGovernment’s initial response to the complaintsI have investigated also maintained that delayswere attributable to ‘the nature of the process’.

6.37. That being the case, I consider that actionshould be taken urgently – by Government inpartnership with others in the pensions industry– to establish what could be done to amelioratethis unsatisfactory situation.

Other observations6.38. Having set out my findings andrecommendations, I wish to make two furtherobservations concerning the subject matter ofthis report which have arisen from the evidence Ihave reviewed during this investigation.

Pension language6.39. First, it is apparent from all of thepublications that I have examined that thelanguage used by pensions professionals andrelated public bodies has often been unclear.

6.40. Examples include terms such as‘Guaranteed Minimum Pension’ – which in thecircumstances covered by this investigationproved to be neither ‘guaranteed’ nor a‘minimum’ – and in some cases would not evenprovide any pension at all. Another example is‘under-funded’ – which to the Government

meant not that a scheme had insufficient fundsto meet its liabilities, but rather related to ascheme’s relative position against the varyingbasis for the MFR.

6.41. It may be that the Government and allthose involved in the pensions industry mightwish to consider together how best to ensurethat language which has a natural andcommonsense meaning to most people is notused in relation to pensions in such a way as onlyto have a narrow, technical and potentiallymisleading meaning.

The Financial Assistance Scheme6.42. Secondly, I have begun to receive enquiriesfrom people who wish to complain about theadministration of the Financial AssistanceScheme (FAS) beyond the matters covered bythis investigation.

6.43. These appear to be mostly related to theunderlying policy behind the FAS or to constitute‘appeals’ against the operation of the scheme inrelation to particular schemes or individuals.However, I have also received complaints thatDWP Ministers and officials have not answeredreasonable questions about the FAS. I willconsider those complaints following publicationof the report – and in the light of theGovernment’s response to my recommendations.

6.44. Leaving this aside, it is also clear to me fromwhat complainants in this investigation have toldme that many people have been distressed bynot being covered by that scheme or, if they are,at the amount of ‘assistance’ that they mightreceive.

6.45. In addition to this, I am acutely aware thatmany people have also been distressed by twoother aspects of the FAS. These are the languageused – ‘assistance’ has deeply negativeconnotations for many people and also does notrecognise that what they seek is the


‘replacement’ of their pension, lost through nofault of their own – and the lack of cleareligibility criteria from the outset of the scheme.

6.46. I recognise the need for proper planningand preparation time before a particular schemebecomes fully operational. However, I amconcerned that the FAS eligibility criteria wereonly announced and clarified over many monthsand that this has added to the uncertainty anddistress felt by those affected.

6.47. In the light of my recommendations above,it is possible that the FAS may need to bereviewed fundamentally in any case. I wouldhope that part of any such review would dealwith the language used.

6.48. In addition, I would hope that any lessonslearned from this experience would be fed intowhatever arrangements are established by theGovernment as a result of this report.

6.49. Given all of the above, it may be that I willnot need to consider further those complaintsabout the FAS that I have recently received.


Introduction7.1. I recognise that the implications of whatI have recommended are significant and mightrequire a considerable amount of cross-Government discussion and consideration.I therefore asked the Government to respondto my report in two stages.

7.2. I asked the Government first to respondto my findings and to address those prior topublication of my report. I asked theGovernment, once that was done, to formallyrespond to my recommendations within twomonths of the publication of my report.

7.3. I received responses to my findings on27 January 2006 from Her Majesty’s Revenueand Customs and from DWP. The GovernmentActuary made a submission supplementary tothat made by DWP. The Pensions Regulatorconfirmed that they wished to make norepresentations on my report as it related totheir predecessor body, OPRA.

7.4. Annex D to this report sets out the initialresponse of DWP and the Government Actuaryto my report. At their request, this is done intheir own words, with only minor editing.

7.5. Annex E to this report sets out the responseof Dr Ros Altmann, on behalf of complainants,to my report. Again, this is done primarily in herown words.

7.6. The rest of this chapter does four things: first,it sets out the response to my report from HerMajesty’s Revenue and Customs; secondly, it setsout my assessment of the Government’s initialresponse to my report (see annex D); thirdly, itsets out the further response to my report thatwas provided at my request by DWP in responseto my assessment of their initial response; and,finally, it sets out my consideration of theGovernment’s further response to my report.

Response of Her Majesty’s Revenue andCustoms7.7. The Chairman of the Board of Her Majesty’sRevenue and Customs said that he welcomed thefact that I had not upheld complaints aboutmaladministration by NICO in the process ofwinding-up final salary pension schemes.

7.8. He said that his Department had noted myconcern about the routinely lengthy time ittakes to wind up schemes and also myrecommendation that the Government conducta review to establish what could be done tospeed this process up.

7.9. The Chairman said that he also welcomedthat recommendation and that his Departmentstood ready to participate fully in any suchreview.

7.10. He also informed me that NICO hadinitiated a new project, which was fullysupported by the main pensions industryrepresentative bodies. He said that they hadembraced the opportunity to collaborate withhis Department.

7.11. The Chairman told me that this initiativeaimed to reduce the time it takes to wind upfinal salary schemes and involved thedevelopment of a system that would enable theelectronic exchange of data between NICO andthose scheme administrators who choose to useit within a secure IT environment. It was hopedthat this would be tested through a trial withscheme administrators in the first half of 2006.

7.12. I welcome the positive response of HerMajesty’s Revenue and Customs to my report.

DWP’s initial response7.13. As is explained above, the response of DWPto my report is set out in annex D to this report.

7.14. In seeking to summarise that response (andthe supplementary submission of the


7. The Government’s Response to My Findings

Government Actuary), it seems to me that theirrepresentations revolve around four principalheadings: the quality of the content of officialinformation; the role that such officialinformation could reasonably be said to haveplayed in the events relevant to thisinvestigation; my finding related to the 2002decision to change the MFR basis; and questionsof causality between any shortcomings in officialinformation and any injustice suffered bycomplainants.

The content of official information7.15. The Permanent Secretary told me that DWPbelieved that my report did not substantiatefindings that official information issued aboutthe level of security provided by a scheme beingfunded to the MFR level was not consistent,accurate or complete – nor that the failure ofDWP to review existing leaflets, after it was toldthat people did not know of the risks to theiraccrued pension rights, constitutedmaladministration.

7.16. In support of this view, he said that myreport had had insufficient regard to fourpropositions:

(i) that ‘Ministers and others repeatedlystressed that the MFR was intended toprovide “greater” protection rather than anyabsolute guarantee’;

(ii) that ‘it was repeatedly stressed that the MFRwas intended as a balance between theinterests of scheme members and employers’;

(iii) that ‘all of the leaflets to which the reportrefers carried a general health warning thatthey were not complete explanations of thelaw and were for general guidance only’; and

(iv) that it had always been accurate for officialinformation to state that ‘most members of

an occupational pension scheme would bebetter off when they retire than they wouldbe if they did not join it’.

The role of official information7.17. DWP said that, for a number of reasons, itwas their view that ‘given the wide range ofsources of information available to thecomplainants, and the very general nature of theDepartmental publications, it is unlikely in theextreme that [official] publications would havematerially influenced’ the actions ofcomplainants.

7.18. Those reasons included:

(i) that only approximately half of therespondents to my survey coulddemonstrate that they had seen the relevantofficial publications;

(ii) that there was no substantial evidence that,even where an individual had seen therelevant publications, they had acteddifferently from how they would otherwisehave acted; and

(iii) that it could not be assumed that individualswho had acted differently as a result ofreading official publications had beenentitled to do so, in a position in which theprimary responsibility for safeguarding theinterests of scheme members lay withscheme trustees.

The 2002 MFR decision 7.19. DWP told me that it did not consider thatmy report substantiated a finding ofmaladministration in relation to the 2002decision, for the reasons set out in annex D tothis report.

7.20. In the light of those reasons, DWP could notagree that they had not given properconsideration to the issue. The GovernmentActuary said that he agreed with this assessment.

7. The Government’s Response to My Findings | 181

Causality7.21. DWP also told me that they do not acceptthat the necessary causal link had beendemonstrated between any maladministrationand the losses incurred by complainants.

7.22. They said that they found the examplesgiven in my report of actions that properlyinformed scheme members, trustees orsponsoring employers might have taken were‘unconvincing’, because:

(i) the suggestions that accurate officialinformation on scheme security might haveled to different action by employers ‘arewholly speculative’;

(ii) my report did not recognise the uncertaintythat any remedial action taken by schemetrustees or members would have had anyeffect;

(iii) there was no evidence that many of thecomplainants’ decisions would have beenunquestionably different had they knownthe true position; and

(iv) an individual who, knowing the potentialrisks to their final salary pension, chose totransfer out into, for example, a personalpension might have suffered a loss if theirfinal salary scheme never wound up ‘under-funded’.

7.23. In summary, DWP said that my report didnot acknowledge sufficiently the ‘myriaduncertainties’ which attach to any considerationof ‘how outcomes might have differed if thespecific actions criticised had been undertakendifferently’.

7.24. The Permanent Secretary continued:

Given the number of causal factors at work, thevast majority of which fall wholly outside thescope of [my] jurisdiction (and indeed whollyoutside the Government’s control), the

Department would suggest that the only rationalconclusion is that the matters criticised, even if(which we do not accept) such criticisms werejustified, are unlikely to have made any differenceto the outcomes for the individual complainants.

My assessment of the response from DWP7.25. I am not persuaded by the reservationsabout my report expressed in the response ofthe Permanent Secretary of DWP. As DWP knowsfrom my responses to their submissions, in myview some of the detailed points set out inannex D to this report are misconceived. Othershave been dealt with already elsewhere in thisreport. What follows is restricted to anassessment of what I consider are the keysubmissions made by DWP that have somerelevance to my findings and recommendations.

Content of official information7.26. In relation to whether the evidence set outin my report justifies a finding ofmaladministration in relation to the content ofofficial information, I should first state quiteclearly that Parliament has decided that it is myrole – and not that of any party to a complaint –to determine what constitutesmaladministration.

7.27. I also note that DWP in its response did notquestion the six conclusions I draw at thebeginning of my findings about the evidence setout in some considerable detail in chapter 4 ofmy report. Nor has DWP contested the factualdescription of the contents of the officialinformation to which I have had regard – or thepolicy and guidance frameworks within whichDWP and its predecessor placed their ownactions at the relevant time.

7.28. The Government has therefore notquestioned the factual basis on which my findingthat official information was deficient rests.While it may not agree with my approach, theGovernment has given no reasoned argument as


to why I should not assess DWP’s action inaccordance with the standards it set itself at therelevant time. Nor have I seen anything in itsresponse to persuade me that my approach toassessing whether the content of officialinformation constituted maladministration iseither unsound or unreasonable.

‘Greater protection’7.29. Turning to each specific submission on thecontent of official information made by DWP,I agree that Ministers have over many years saidthat the MFR was intended to provide ‘greater’protection than the regime that was in existenceprior to the commencement of the Pensions Act1995. References to such statements are set outwithin my report.

7.30. However, I do not consider that suchstatements mean that the information providedby DWP and its predecessor did not constitutemaladministration.

7.31. First, most of the public information leafletsto which my investigation has had regard do notcontain such statements about ‘greaterprotection’.

7.32. Secondly, it seems to me that recognitionthat this was said on occasion does not removethe need for consideration of the rest of theofficial information provided in parallel to suchstatements.

7.33. In other words, if official information saidthat a particular provision – in this case, the MFR– was intended to provide a greater degree ofprotection, I would rightly be expected to haveregard to the description from the same sourceof what that greater protection involved.

7.34. I consider that my report amply sets out thedeficiencies in official information already.However, taking one example, official publicityissued in June 1996, at the time when the MFRwas agreed, referred to the new regime as being

one that would provide ‘greater protection’ but,in relation to the MFR, went on to say that‘schemes funded to this minimum level will beable, in the event of an employer going out ofbusiness, to continue paying existing pensions andprovide younger members with a fair value oftheir accrued rights which they can transfer toanother scheme or to a personal pension’. Thatwas not accurate.

7.35. Giving another example, leaflet PEC3, issuedin January 1996, said, in response to a question‘Why was the Pensions Act needed?’, that ‘theGovernment wanted to remove any worriespeople had about the safety of their occupational(company) pension following the Maxwell affair’.It then went on to provide assurance that ascheme funded to the MFR level would,regardless of what happened to the sponsoringemployer, be able to continue to pay pensions inpayment and provide non-pensioners with a cashvalue of their accrued rights. That also was notaccurate.

7.36. Indeed, by the time this leaflet was issued,the Government had instructed the actuarialprofession to devise a basis for the MFR thatwould only give non-pensioners an ‘even chance’of replicating their pensions.

7.37. At no time until April 2004 did the DWP’sleaflets set out in clear and consistent termswhat scheme members might expect from theprotection afforded by being funded to the MFRlevel – even in answer to specific questions suchas ‘how do I know my money is safe?’ and ‘whatdo I need to think about?’

7.38. In any case, I do not consider that generalstatements to the effect that the regime ofwhich the MFR was a part was intended toprovide ‘greater protection’ could be seen to bea clear and consistent statement that pensionrights were at risk from scheme wind-up even ifa scheme were fully funded to the MFR level.


7.39. I consider that this is even more apparentwhen those statements are considered togetherwith the specific explanations that wereprovided in official information of whatprotection was provided where a scheme wasfunded to the MFR level.

7.40. Government bodies chose to supplyinformation that purported to answer questionssuch as ‘how do I know my money is safe?’ and toprovide information about ‘other things thatcould affect your pension’. It does not seem tome unreasonable that citizens would have hadregard to such information. Nor does it seemunreasonable that they would have trusted thatinformation.

7.41. It came, after all, from a source with noapparent interest in promoting a particularpension choice, was said to be part of a widerfinancial education programme, and wasproduced by those responsible for the relevantstatutory framework – and who therefore mightreasonably be seen as best placed to know whatthe relevant legal provisions entailed.

Balance between the interests of schememembers and employers7.42. I also agree that what was the appropriatelevel at which DWP and its predecessor shouldprescribe the MFR was a consideration thatwould naturally require regard to both theinterests of employers and those of schememembers.

7.43. That the often competing interests ofemployers and scheme members were – andindeed are – a prime factor in pension schemefunding must be accepted by everyone.

7.44. It is therefore all the more surprising thatsuch a key consideration was not mentioned inany of the official leaflets on these matters.

7.45. Moreover, I am not convinced that theexistence of general statements that pension

scheme funding is a matter of balancing theinterests of employers with those of schememembers can make acceptable specific butmisleading statements in a range of officialpublications as to the level of security that wasprovided by the MFR.

‘Health warnings’7.46. In relation to the existence of ‘generalhealth warnings’, it may indeed be the case thata statement that a particular leaflet was not acomplete statement of the law and was forgeneral guidance only might on occasion meanthat it was understood that not all particularcircumstances or possible scenarios werecovered in that leaflet. This would be particularlytrue if a reader was seeking to gain acomprehensive understanding of the law or wasseeking specific and tailored individual financialadvice. In any case, in my view it is alwayspreferable that such exclusions are set outexplicitly.

7.47. However, where an official leaflet purportsto answer the specific question ‘how do I knowmy money is safe?’, I do not think that such a‘health warning’ can excuse the omission ofperhaps the most significant factor in anyreasonable answer to that question – that apension was only as secure as the employerstanding behind it.

7.48. As my report shows, that question – whichDWP and its predecessor chose to pose – wasnever answered accurately. Only in April 2004was its replacement – ‘is my money protected?’ –answered in broadly accurate terms, withinformation provided about scheme wind-up as arelevant factor.

7.49. A failure to cover scenarios that might onlyreasonably arise in extreme or highly unusualcircumstances may be acceptable. However, afailure to mention the most highly materialconsideration in relation to a specific question


that a leaflet posed would not meet DWP’s ownstandard, agreed on 11 September 2001, thatthere should be ‘no significant omissions’ in theinformation provided by the Department.

7.50. It is also because it is so far short of whathas always been acceptable that I haveconcluded that it constitutes maladministration.

Accuracy of advice to join an occupationalscheme7.51. I do not doubt the statements in officialleaflets that, for the majority of members whojoin a final salary occupational pension scheme,there are considerable benefits to doing so.Nor have I said in my report that such generaladvice was inaccurate.

7.52. What I have found is that, while there wasa considerable degree of emphasis placed inofficial leaflets as to the benefits of joining sucha scheme, there was inadequate disclosure ofthe risks.

7.53. I have accepted that there was no obligationon DWP and its predecessor to provideinformation about occupational pensionschemes. However, as my report sets out, it haslong been accepted – not least by DWP itself –that where public bodies choose to provide suchinformation there are concomitant obligationson them to ensure that the information theyproduce is complete and accurate.

7.54. That did not happen in relation to theofficial leaflets covered by my investigation.

Role of official information7.55. Turning now to DWP’s submissions as towhether official information was actually read bycomplainants and, if so, whether it would haveprompted complainants to take remedial actionor otherwise have materially influenced theiractions, again I am not persuaded by theirsubmissions.

7.56. First, while it is true that only approximatelyone-half of those complainants who respondedto my survey can now demonstrate that theyhad seen the official information that I considerto be deficient, I think that it cannot beforgotten that a considerable time has passedsince many of the leaflets were issued and read.Nor is it the case that all of those who cannotnow demonstrate it did not see such informationin the past.

7.57. I do not consider that it is reasonable toexpect all individuals to now provide evidencein the form of copies of leaflets that were readmany years ago. Such an expectation does notaccord with the approach that my Office hastaken in previous similar cases – nor is it onethat DWP accepted in those cases.

7.58. Secondly, I do not accept that my reportis deficient because it ‘offers no substantialevidence’ that, even where individuals had readthe official leaflets that I have found weremisleading, those individuals acted differentlyfrom how they otherwise would have acted.

7.59. In my view the submission that, haddifferent information been provided, it wouldhave had no effect on complainants isincompatible with other submissions made byDWP that, had their information leaflets dealtwith risk, this might have ‘intimidated’ schememembers to leave the scheme to their likelydetriment should their scheme not eventuallywind-up. Nor is such a submission consistentwith evidence set out in DWP’s own researchamong scheme members, which was undertakenin 2002 and published in February 2003.

7.60. The official information provided –whatever it said – either was a proper source ofinformation to which citizens could reasonablyhave regard, or it was not – which begs thequestion as to why it was produced at all.


7.61. I note that the National Audit Office hasrecently said that ‘citizens should be able to relyon the accuracy and completeness of informationprovided by all government departments’ andthat ‘written communication (in particularleaflets, letters and paid-for advertising) isregarded by the public as the most trustworthysource of information from Government’.

7.62. The case of complainants is that they reador had regard to official assurances that, so longas their schemes were funded to the MFR level,they could expect that pensions would be paidin full and that non-pensioners would receive acash transfer of their full pension rights ascalculated by an actuary.

7.63. That being so, and being reassured that thiswas the case – a reassurance provided by thepublic body responsible for the system ofregulation over their pension provision and forthe relevant provisions of the law –complainants took no action to diversify the riskto their pensions or to take any remedial actionthat was possible in the particular circumstancesof their scheme.

7.64. Thus, what would have to be proved bycomplainants is a negative – that they didnothing because of the contents of officialleaflets. Seeking to prove a negative such as thisis notoriously difficult and does not seem to meto be a reasonable way to proceed.

7.65. When assessing what might have happenedhad maladministration not occurred, it is oftenthe case that I will need to assess conflictingassertions. When considering such assertions, Iwill normally proceed on the basis of a balanceof probabilities assessment, as it is oftenimpossible to demonstrate conclusively whichassertion – by a body under investigation or by acomplainant – is correct.

7.66. Having had regard to all the circumstances, Iconsider that it is highly probable that anyreasonable individual would have acteddifferently had they known the true positionabout the risks to their pension rights – forexample, by making different choices aboutadditional contributions, or by considering andtaking the other actions I discuss in this report.

The 2002 MFR decision7.67. I will now set out my assessment of thesubmissions of DWP and the GovernmentActuary related to the decision in March 2002to amend the MFR basis.

7.68. It seems to me that these rest on thefollowing three propositions:

(i) that the actuarial profession recommendedthe 2002 change to the MFR basis and theGovernment’s decision to implement it waswholly consistent with ensuring that theMFR was aligned to the original policyintention;

(ii) that the profession’s recommendation wassupplemented by advice from GAD, whichfurther reinforced the reasonableness of adecision to implement it; and

(iii) that the effects of the decision were in anycase not significant.

7.69. I will consider each of these propositions inturn.

The profession’s recommendation and alignmentwith the policy intention7.70. I have accepted that it was the case that theactuarial profession recommended the change toDWP – and I have not said that such arecommendation was unexpected by DWP orunwelcome among those who responded toconsultations on such matters.


7.71. It should be remembered, however, that theMFR consultation had been published withoutreference to the actuarial profession’srecommendations of 5 September 2001.

7.72. The actuarial profession had subsequentlyinformed its members that it had made thoserecommendations, but no other publicity at thattime had been given to their specificrecommendations regarding the MFR basis.Many individual actuaries responded to theMFR consultation – largely on behalf of schemeadministrators or trustees. Some seeminglycombined their response to the matters coveredby the MFR consultation – which were inthe public domain – with comments on theactuarial profession’s September 2001 proposalsto amend the MFR basis – which were not yet inthe public domain.

7.73. Thus, any responses received by DWPsetting out views on the actuarial profession’sSeptember 2001 recommendations to amend theMFR basis would have been received withina context in which many of those most affectedby the MFR – such as scheme members – did nothave an equal opportunity to comment on thoserecommendations.

7.74. Turning to the other submissions madeby the Government, it may well be that theactuarial profession’s September 2001recommendation was thoroughly discussedwithin the profession and that the professionhad evidence which supported its analysis.Such evidence, however, was not provided toDWP at the relevant time.

7.75. Nor do I question that the Government hadinstructed the profession to devise a basis forthe MFR that would provide only a certaindegree of security for scheme members – andthat it had asked the profession thereafter tomonitor the economic and demographiccontexts to ensure that the MFR maintained that

original intended level of security. It seems tome that the profession undertook thoseresponsibilities entirely properly within theremit that Government had set.

7.76. However, for the reasons I have alreadygiven I am not persuaded that the reasons forDWP’s decision can be explained by the fact thatthe profession had made a recommendation andthat that recommendation aimed to realign theMFR with the Government’s original policyintention.

7.77. My investigation has shown that it was notthe case that DWP generally or consistentlyimplemented the recommendations of theactuarial profession in relation to the MFR basis.

7.78. In fact, the actuarial profession had madefour sets of recommendations concerning theactuarial basis of the MFR and only two of themhad been implemented.

GAD’s advice7.79. Similarly, I accept that GAD gave advice toDWP and I also accept that GAD had access tothe discussions within the actuarial professionabout the MFR and other issues.

7.80. As is made clear in my discussion of thishead of complaint, my focus has been on thedecision-making process within DWP – and noton assessing the soundness of the professionaladvice provided to DWP.

7.81. My concern about this particular decisionrelates to whether DWP could be satisfied, as areasonable decision-maker acting withoutmaladministration, that the evidence base itcould document and had verified was sufficientto enable it to make the decision it did in March2002.

7.82. Given what I have said about the apparentmismatch between the approach taken to thedecision on this particular recommendation and


that used in relation to deciding whether toimplement other similar recommendations fromthe actuarial profession, it seems to me all themore important that a fully documentedevidence base was in place.

7.83. Both DWP and the Government Actuarydisagree with my interpretation of the scope ofthe advice provided by GAD to DWP inSeptember 2001. I note also DWP’s suggestionthat too much is being read into the precisewording of that advice.

7.84. However, that the scope and content ofsuch important advice is open to interpretationat all – not on its merits or substance, but onwhat it purported to encompass – is a matter ofconcern. That is especially so if the email inquestion is the only documented record ofadvice regarding a proposed change to themechanism that, to use the words of the Ministerwho piloted the legislation that created itthrough Parliament, ‘[underpinned] theemployer’s pension promise’.

7.85. Finally, much has been made of alignmentwith an original policy intention. It should not beforgotten that that intention had never beendisclosed to the public. Nor should it beforgotten that the decision to amend the MFR in2002 was taken after DWP had been informed inclear terms that scheme members had no idea ofthe degree of protection that it was intendedshould be afforded by the MFR.

7.86. Official statements made at the time thatthe decision to amend the MFR basis was takenin March 2002, which referred to the change asbeing one which aligned the MFR with theGovernment’s policy intention, were of nopractical use to scheme members. They were atthat time labouring under the misapprehension –promoted by official information – that beingfunded to the MFR level meant that theirpensions were secure.

Significance of change to MFR basis7.87. It should be clear from the above that myfindings do not relate to the effects of the 2002change to the MFR basis but rather to the way inwhich the decision to effect that changewas taken.

7.88. However, for completeness, I should saythat I do not accept the submissions of theGovernment Actuary on the question of whetherthe 2002 MFR change – or indeed any other suchchange – was not material or significant whenconsidering the complaints I have investigated.

7.89. Such decisions involved the level of assetsthat a scheme had to hold (or bring its fundinglevel up to over time) to meet the MFR ‘test’ –and also the amount of money that a scheme onwind-up could legally reclaim from thesponsoring employer. The level of the MFR alsowas key in setting cash equivalent transfer valuesfor members leaving the scheme and also forsetting compensation where that was due.

7.90. It seems to me that the exact funding levelat which a scheme operated – and to which itcould, on wind-up, realise its assets in order todischarge its liabilities – is highly significant.

7.91. In addition, the Government Actuary’ssubmission that a change of around 3% to theMFR strength was not significant runs counter toanother made by DWP. The Permanent Secretaryof DWP told me that, according to complainants:

...it was thought that, if a scheme was funded upto the MFR, any accrued rights were safe.

Even if we accepted this proposition, which... wedo not, it must follow that members of schemeswhich were not funded to the level of the MFRcould not have had such an expectation and,therefore, that their losses cannot be attributedto any alleged maladministration...


By definition, a scheme that was not funded up tothe MFR could not have been thought by itsmembers to have satisfied this requirement,whatever protection they may have thought thisoffered.

...we simply do not regard as remotely plausiblethe argument [set out in annex C to this report]that a member of a scheme under-funded againstthe MFR could have drawn the inference that, ifthe MFR offered full protection, those who werenot funded up to the MFR could expectproportionate protection.

7.92. I should explain that I am not persuaded byDWP’s view of whether it was reasonable forscheme members to assume ‘proportionateprotection’. Such a view would seem to becontrary to the statement by the then Secretaryof State in the December 1994 ‘Butterfill letter’that the statutory requirement would ‘provide animportant, objective measure of the adequacy ofa pension fund; something which members andtrustees will be able to monitor and againstwhich the performance of the fund... can bemeasured’. It would also seem inconsistent withthe Government’s contemporaneous descriptionof the MFR as a ‘benchmark’.

7.93. Nevertheless, it appears that theGovernment’s current position is that being 100%funded on the MFR basis invoked the protection,however limited, that was provided by coverageto that level – but that members of thoseschemes that were less than 100% funded couldnot expect ‘proportionate’ protection. AMinisterial answer given in July 2003 said that theeffects of the 2002 decision to amend the MFRbasis may have weakened the MFR test ‘byaround 3 per cent’. My advisers suggest that thefigure may be somewhat higher.

7.94. In my view, it does not matter whichassessment is correct. If what I have describedabove is indeed the Government’s position, then

even a very small percentage point shift in thestrength of the MFR would have had very seriousimplications indeed for schemes broadly fundedaround the MFR level. Weakening the MFR testwould have increased the protection given to thenon-pensioner members of schemes just below100% on the MFR basis – as a scheme funded at,say, 99% on the MFR level (whose memberswould not, according to the Government’saccount, have been protected) would becomemore than 100% funded, with the resultingextension of protection – and strengthening thetest would have had the opposite effect.

7.95. In addition, as it appears that manysponsoring employers only funded to theminimum level, such shifts might therefore havehad a very widespread effect.

7.96. Leaving aside the question of whether suchimportant facts should have been disclosed byGovernment, it seems to me that the MFR – andtherefore any change to its basis – was the coreof a very central concern for all members ofthose final salary occupational pension schemesthat were covered by it – namely, the security oftheir pensions.

7.97. As was recognised in the Myners report thatwas commissioned by Government and publishedin March 2001, one of the failings of the MFRsystem was that it was ‘treated as a technicalquestion, for resolution by the actuarialprofession’. Such an approach, it was said, wasnot justified – as the MFR basis was ‘not anobscure technical question, but the very heart ofthe question of whether the fund is adequatelyfunded or not’.

7.98. Given the nature of the complaints I haveinvestigated, any changes to the MFR basis seemto me to have been both material and significant.


Causality7.99. Turning now to issues of causality, again I amnot persuaded by the submissions made by DWP.

7.100. First, I have not said in this report thatfinancial losses were caused by deficiencies inofficial information alone. I have found that suchmaladministration played a role – with otherfactors – in creating the conditions in which suchlosses were sustained. That role was to providefalse assurance to the extent that no reasonableperson reading that information would realisethat, in certain circumstances, they needed toconsider and/or take action both to seek toremedy scheme funding shortfalls or tootherwise protect their own position. I have alsofound that financial injustice was a consequenceof the maladministration I have identified, asscheme members were unaware that theirpensions were only as secure as their employerdue to deficient and misleading officialinformation.

7.101. I am recommending that Governmentconsider whether it should take the lead inremedying the injustice identified in this report. Ido so because I have found thatmaladministration was a significant contributoryfactor to that injustice and because it seems tome that Government is best placed to do so.

7.102. Secondly, it appears that DWP is suggestingthat any recommendations I make to remedy theinjustice that is a consequence of themaladministration I have identified must berelated to each individual complainant – andmust be based on those individuals eachseparately demonstrating beyond reasonabledoubt many years later:

l first, that they had read official information;

l secondly, which information they had readand exactly when; and

l thirdly, what effect reading that informationhad had on them.

7.103. It seems to me that this approach, were Ito accept it, would in an unreasonable mannerreverse the burden of proof in situations where Ihave found that maladministration had occurred.In such situations, I look to those responsible forthe maladministration I have identified to satisfyme that the relevant shortcomings in theiractions have not caused or contributed to theinjustice claimed by those individuals affected bythose actions.

7.104. The Government’s current approach wouldalso be inconsistent with the approach that mypredecessor and DWP have taken in relation tocases which involve deficiencies in widelyavailable public information leaflets in the past –such as in relation to my Office’s inherited SERPSinvestigation.

7.105. In that case, my predecessor’s view, asreported in paragraph 32 of his report ‘Stateearnings-related pension scheme inheritanceprovisions’, which was published on 15 March2000, was that:

...individuals who claim to have been misled ormisdirected by information given by adepartment are normally expected to providesome evidence that they have been misled intoacting, or failing to act, in a way that has been totheir disadvantage. Only then is compensationconsidered.

However, I questioned whether that approachwas tenable in the circumstances of thecomplaints being referred to me. As I saw it,anyone who had read the relevant DSS leafletsmight reasonably claim to have been misled bythem.

Whatever such a person then did or did not do, itseemed to me that the burden of proof that he or


she would not have acted differently had he orshe not been misinformed rested on thedepartment.

I therefore considered that, whatever theapproach the department decided upon in orderto make good the effects of theirmaladministration, it would need to be capableof providing due redress on a global, rather thanan individual, basis. I also felt that any evidentialhurdles pertaining to eligibility for compensationshould have regard to the principles concerningthe burden of proof which I had set out.

7.106. The Government accepted this approach atthe time and also accepted that the burden ofproof lay with them. In a statement to the Houseon the day that my predecessor’s reportwas published, the then Secretary of State forSocial Security said:

The giving of wrong information by a governmentdepartment is inexcusable. There is a clearresponsibility to ensure that the informationprovided is accurate and complete.

7.107. Moreover, the Government accepted thatredress was not to be limited to those who couldthemselves prove that they had definitely madealternative choices. As the then Secretary ofState continued to say in the same statement(with emphasis added):

...we will also provide redress for those peoplewho were wrongly informed and who, had theyknown the true position, might have madedifferent arrangements... As a matter of principle,we believe that when someone loses out becausethey were given the wrong information by agovernment department, they are entitled toredress.

7.108. After announcing the creation of a newdesignated pensions agency, which becametoday’s Pensions Service, the then Secretary ofState concluded his statement by saying:

We also have a responsibility to provide clearinformation to the public... The public rely ongovernment information. They are entitled to bereassured that leaflets are accurate andcomprehensive... In future, DSS leaflets will besubject to external audit, so that people can relyon clear and accurate information.

7.109. I see no reason to depart from theapproach adopted by my predecessor andaccepted by the Government at the time.

7.110. In both the inherited SERPS case and in thisinvestigation, the maladministration identifiedwas the omission of significant considerationsfrom the information that the Government saidwas included in official leaflets. In both cases theleaflets in question contained ‘health warnings’and were said to be of a general nature that,in their own right, would not be a sufficient basison which individuals could make importantfinancial decisions.

7.111. In both cases, a financial loss was notcaused by that deficient information – withinherited SERPS, the losses were caused bychanges to entitlement which had been enactedby Parliament some years previously – but ratherin both cases the people affected had had noidea until too late that they might suffer such aloss due to the distorted reality that resultedfrom the deficient and misleading information inofficial leaflets.

7.112. In the end, with inherited SERPS, theGovernment decided to devise a ‘global’ solutionto the problem due to the practical problems indevising and administering an ‘individual’ redressscheme where the burden of proof lay on theDepartment. It may be that similar practicalobstacles exist in this case.

7.113. Nevertheless, it seems to me that there isa public interest in asking those whom I havefound were responsible for the


maladministration I have identified in this caseto seek to develop a solution to the lossessustained by those who have had their expectedpensions taken away through no fault of theirown.

7.114. If an ‘individual’ approach is taken, it alsoseems reasonable to me that the burden ofproof when determining whether or notindividuals read the deficient leaflets and acted– or refrained from action – as a result should beon those who placed misleading information inthe public domain.

Further response from Government7.115. In the light of my assessment of theirresponse to my findings which is set out above,I asked DWP for the Government’s final responseto my findings.

7.116. DWP provided a further response on behalfof the Government on 28 February 2006. I havereproduced this response in the words of itsPermanent Secretary, below.

The Department wishes to make clear at theoutset that it has the utmost sympathy withthose individuals whose pension schemes havebeen wound up and who have, as a consequence,lost a significant part of the occupational pensionthey had been led to expect by their scheme.

That cannot mean, however, that the Departmentis responsible for the losses. It is clear that theresponsibility for such losses must fallfundamentally to the companies whose schemeswere wound up and the trustees who, with thebenefit of professional advice, were responsiblefor ensuring their scheme was funded to a levelcompatible with their liabilities and the strengthof the employer’s commitment to his scheme.All of the issues covered in this report have, inthe Government’s view, to be seen within thisfundamental context.

As regards the decision to change the MFR in2002, the Department’s view is that it actedwholly responsibly in implementing therecommendations of the actuarial professionwhich had received the full backing of theGovernment’s own professional advisers in theGovernment Actuary’s Department. TheDepartment’s view is that that is precisely whatwould have been expected of any responsibleDepartment acting reasonably in an area ofacknowledged complexity. In the Department’sview, it would have been far more vulnerable tojustified criticism had it substituted an alternativejudgement in the face of clear and consistentadvice from the actuarial profession and fromGAD without good reason.

There were good reasons for not implementingthe recommendations made by the actuarialprofession in 2000 and 2003. Both of thoserecommendations involved more complexchanges which would have required longadministration lead-in times. In both cases theMFR was expected to have been abolished by thetime the changes would have had much, if anypractical effect.

As regards the issue of alleged misinformation invarious speeches, statements and leaflets, theDepartment – for the reasons set out before –holds strongly to the view that the informationput forward was, and was only ever intended tobe, of a general nature and carried numerousdisclaimers and health warnings making clearthat it could not be relied upon by any individual,or their adviser, in reaching detailed decisionsabout their own best course of action.

Even more importantly, however, leaving asidethe issue of whether individual statements inindividual leaflets or communications might ormight not have been differently worded, theDepartment takes the view that the primaryresponsibility for ensuring that individual


members of pension schemes were not misled asto the viability and security of those schemesrested fundamentally and clearly with thetrustees of those schemes, supported by theirprofessional advisers.

In that context, there is no doubt whatsoeverthat, whatever misconceptions may have beenheld by individual scheme members as to thedegree of assurance afforded by the MFR,professional advisers to pension schemes wereclear from the outset as to the true position. Inthis connection we believe that the report fails toconsider adequately whether individual schememembers received, or should have received,information from their scheme’s trustees(informed as this would have been by advice theyreceived from actuaries or other professionaladvisers).

The report attaches great significance to thereassurance which scheme members might havegained from funding to the MFR level. We believethat the report pays insufficient regard to the factthat very few schemes involved in thisinvestigation were actually funded to the MFRlevel when they wound up.

Finally, the Department takes the view that, evenif all of the foregoing did not apply, the reporthas failed to establish the necessary degree ofcausality between the information by theDepartment and the decisions taken byindividuals. Put at its simplest, the Departmentbelieves that the report fails to demonstrates thatthe decisions which individual complainants took,or did not take, were directly influenced by theinformation which the Government did or did notmake available.

In conclusion, the Department, while reiteratingits sympathy and understanding of the distresscaused to individuals by the failure of theirpension schemes to deliver the benefits to whichthey believed they were entitled, reiterates its

view that this report does not establish anysound basis on which the Government can, orshould, accept liability on behalf of taxpayersas a whole for these events.

7.117. The Permanent Secretary told me that,accordingly, the Government was minded toreject the first four of my recommendations butto accept the fifth. He also told me that, whilehe was grateful for my offer that they shouldhave two months from publication of my reportin which to consider and respond to myrecommendations, ‘we consider that such anextension is unnecessary and, given the potentialfor raising false hopes, undesirable’. DWP told methat, while the Government was minded not toaccept my findings or recommendations, itwould only provide its final response to myreport after it was published.

My response to the Government’s position7.118. The Government says that DWP is notresponsible for the losses suffered by schememembers and that responsibility lies with thecompanies whose schemes were wound up andwith the scheme trustees who, acting with thebenefit of professional advice, were responsiblefor safeguarding the interests of schememembers.

7.119. For the reasons I have already set out inchapter 5 of the report, I have found thatmaladministration was a significant contributoryfactor in the creation of financial loss and that italso caused injustice of other kinds. Nothing inDWP’s submissions persuades me otherwise.

7.120. The Government says that the informationit provided was only intended to be of a generalnature and carried disclaimers and ‘healthwarnings’, so it should not have been relied uponby individuals, or their advisers, in reachingdecisions about their own best course of action.


7.121. For the reasons I have already set out inchapter 5 of the report, I have found that theinformation provided by DWP did not meet thestandards that it set for itself and, beingincomplete, unclear, inconsistent and ofteninaccurate, that it was so far short of what isacceptable administrative practice that itconstituted maladministration. Nothing in DWP’ssubmissions persuades me otherwise.

7.122. The Government says that my report failsto demonstrate that decisions taken byindividual scheme members were directlyinfluenced by Government information.

7.123. Chapter 2 of my report shows thatcomplainants told me that this was the case –and many of them provided examples of theleaflets on which they relied. I have found noreason to doubt what those people told me. Inmaking this response, the Government appearsto question both the credibility of the peoplewho have complained to me and my judgementin assessing their credibility. Nothing in DWP’ssubmissions persuades me that my judgementwas unsound or unreasonable.

7.124. The Government says that my report placesinsufficient emphasis on the role that trusteesand their advisers might have played among thecauses of financial loss to scheme members as aresult of their investment decisions or throughnot properly informing members of risk.

7.125. I have recognised in chapter 5 of the reportthat trustees were an integral part of the systemand context in which those losses weresustained. It is not for me to investigate theactions of the trustees of each scheme coveredby the report.

7.126. Where trustees have acted unlawfully, analternative remedy exists for any losses causedas a result. I also note, in respect of the actionsof trustees that are not unlawful, that, during the

relevant period, official statements made orpublished by the bodies I have investigatedsuggested that it was the employer alone whobore any risk associated with investmentdecisions in final salary schemes.

7.127. In addition, what trustees had to tellscheme members was prescribed in lawsdeveloped by Government and approved byParliament. I see nothing in DWP’s submissionsthat makes me consider that my report isdeficient in the way it suggests.

7.128. The Government says that, in March 2002,it acted wholly responsibly in implementing theclear and consistent recommendations of theactuarial profession, which were backed by GAD.The Government also says that, had it notimplemented those recommendations withoutgood reason, DWP would have been subject toserious criticism – and that there were goodreasons for not implementing otherrecommendations made in 2000 and 2003, asthey were complex and as the MFR was due tobe abolished and thus there would be little timefor those changes to have had any effect.

7.129. For the reasons I have already given inchapter 5 and above, I have found that the way inwhich DWP took its decision in 2002 to weakenthe MFR basis constituted maladministration. Iam not persuaded by the reasoning provided byDWP to explain why it decided to weaken theMFR basis in 2002 but decided, on twooccasions, not to strengthen it.

7.130. The complexity of one recommendationcan hardly be a reasonable explanation of suchdecisions when Government acknowledges thatthe MFR was by necessity always complexand technical.

7.131. Neither can the short time before theexpected abolition of the MFR account forDWP’s decision as, if it was a factor in the


decision in 2000 not to strengthen the MFR,it was all the more relevant in March 2002, bywhich time that abolition was closer and therewas less time for the change to have any effect.

7.132. Nor can the risk of serious criticism explainthe inconsistency with which DWP approachedthe matter of the strength of the MFR basis. IfDWP had to implement the 2002 change to theMFR to avoid such criticism, I fail to see why thatfactor did not also mean that the 2000 and 2003recommendations to strengthen it were not alsoimplemented.

7.133. DWP says that very few schemes to whichthe people who have complained to mebelonged were ever funded to the MFR level orwere so when they wound up.

7.134. I have already provided my assessment ofthis submission in annex C to the report. Nothingin DWP’s submissions persuades me that myassessment is unsound or unreasonable.

7.135. The Government says that there is no soundbasis on which the Government should acceptliability on behalf of taxpayers as a whole for theevents relevant to my investigation.

7.136. As I have already explained above, that isnot what I have suggested. Nothing in DWP’ssubmissions persuades me that my conclusionsthat maladministration played a significantrole in causing injustice to individuals or thatGovernment is best placed to take the lead indeveloping a solution to remedy that injusticeare unsound or unreasonable.

7.137. I have carefully considered all of thesubmissions made by DWP on behalf of theGovernment in response to my report. Havingdone so, I remain wholly unpersuaded by thosesubmissions.

7.138. The Government has told me that it intendsto provide its ‘final response’ to my report

following publication. At the time of publication,the Government has not accepted my findingsand has told me that it is minded not to complywith all of my recommendations. Therefore,there is no basis on which I can be satisfied thatthe injustice I have identified will be remedied.

7.139 . I am therefore laying this report beforeboth Houses of Parliament pursuant to section10(3) of the Parliamentary Commissioner Act1967 to denote that I have found injustice inconsequence of maladministration which theGovernment does not propose to remedy.


8.1. The subject matter of this report is one thatis linked to many of the current debates withinpublic policy. The wind-up of occupationalpension schemes – and the losses that haveoccurred as a result of many of those wind-ups –also touches on a number of critical issues at theheart of public administration and on therelationship between citizens and those whogovern them.

8.2. On the one hand, it has long been stressed –and recent evidence from a range of sources hasre-emphasised this – that savings and pensiondecisions are critical decisions on which thefuture, long-term security of individuals and theirfamilies depend. Much concern has beenexpressed about ‘savings gaps’ – and about theinadequacy of reliance both on state retirementprovision alone and on the insufficient additionalpension provision that citizens are acquiring forthemselves.

8.3. On the other, it has also been a matter ofconsensus for some time that one of the keydisincentives to individuals acquiring pensioncover additional to that provided by the Statehas been a lack of trust that investment in aprivate pension is a secure and worthwhilemeans of providing for the financial future ofindividuals and their families.

8.4. It has often been said that pensions is apartnership between the individual, the State,and the pensions industry. Where privatepensions are provided through membership ofan occupational pension scheme, thatpartnership also extends to the employer whosponsors such a scheme.

8.5. Individuals have clear interests in securingtheir future through planning ahead for theirretirement. Employers often see the provision ofgood pension arrangements as a means ofattracting and retaining high quality staff. Thepensions industry provides the means to do all

this. It seems to me that, as a partner in thissystem, the State also has incentives to ensuresecure and adequate retirement provision for allthose who can afford to make such provision –not least as such provision reduces reliance onmeans-tested support for pensioners.

8.6. The events which have formed the focus ofthis investigation are naturally distressing forthose whose financial security has been soprofoundly affected by the loss of part or all ofthe pensions they had been promised when theydecided to make additional provision for theirretirement and for their family’s security.

8.7. However, it seems to me that these eventsshould concern us all – as they go to the heart ofthe – perhaps unwritten if not unspoken –contract between the various parts of thepensions partnership. They also relate in a mostfundamental way to such key considerations asthe role of the State, the purposes of regulationand of the information provided by publicbodies, and the bond of trust between thecitizen and Government.

8.8. In considering the evidence I have reviewedin this investigation, I have been struck by anumber of mismatches – but also by a degree ofcontinuity.

8.9. It will be obvious to readers of this reportthat I have found that there was a clearmismatch between the level of security that finalsalary occupational scheme members couldexpect from the legal, regulatory andadministrative frameworks in place and theinformation that was put into the public domainabout such protection.

8.10. Nobody doubts that pensions – andpension scheme funding – is a technical andcomplex subject. But if citizens are to beempowered to make informed choices aboutsavings and pensions options, which is an


8. Conclusion

admirable and necessary objective, then thosewho devise, administer, and enforce the rules andframeworks within which those choices willinevitably be made should be as clear as possibleabout what citizens can expect from others andabout what their own responsibilities are.

8.11. It seems to me that clear, complete, accurateand consistent information, tailored whereappropriate to different levels of knowledge andexperience, is a necessary part of creating anenvironment in which informed choice canflourish.

8.12. Another mismatch that emerges from theevidence set out in this report relates to the roleof Government in the private pensions world and,in particular, to its own perception of that role.

8.13. Considering the evidence I have examined inconducting this investigation, it seems to me thatinsufficient regard was had by such public bodiesover many years to the influence that they – andthe information they provided – would have onthose who were seeking to make choices aboutprivate pension provision.

8.14. While I understand why Government mightnow consider that its role within this context waslimited and its view that others – particularlyindividual citizens – should have alwaysrecognised that this was the case, this was notwhat they said at the time. Nor do I have anydoubt that information provided by Governmentwas widely seen as being authoritative andpersuasive.

8.15. Readers of this report will also know that Iconsider that such a view was a reasonable onefor citizens to hold. After all, if those whocreated laws to provide protection for pensionrights and to define and determine theresponsibilities and rights of the various parts ofthe pensions ‘maze’ could not be relied on to set

out that protection and those responsibilitiesand rights clearly, then who could?

8.16. I believe that it is a proper public functionfor Government to seek to identify the need foradequate retirement provision and to informpeople clearly of the options they have. It alsoseems entirely proper that public bodies shouldoversee frameworks of regulation and controlthat support pension provision of all types, toensure that investment in pensions is undertakenin a reasonably secure environment.

8.17. However, I consider that many of theproblems I have identified in this report arerelated to insufficient clarity about whatGovernment’s role was during the relevant periodin relation to the framework of final salaryoccupational pension scheme funding. It is onething to set standards or to provide safety nets.It is another to prescribe in great detail the levelat which each scheme should be funded.

8.18. It seems to me, when Government did thelatter, that it was hardly surprising thatcomplaints were directed towards those publicbodies which designed and oversaw the fundingframework when that prescribed level provedinadequate – or rather, when it failed to providethe protection that scheme members had beentold it would provide. Nor does it seem thatsuch an eventuality would have been a surpriseto Government – after all, a GAD actuary hadtold them in June 1999 that he was ‘waiting forthe edifice to collapse’ and for complaints aboutthese matters to be made.

8.19. This brings me to some continuities.

8.20. The events I have investigated took placewithin a statutory and regulatory frameworkwhich has now been replaced. I hope that thepension protection arrangements that form partof this new regime are being properly explainedto scheme members and others in clear and

Chapter 8 Conclusion | 197

consistent terms. As a recent NAO report shows,ensuring that the information provided to thepublic is accurate and complete while beingaccessible remains a challenge for DWP.

8.21. Despite the very different nature of the newregime, many issues relevant to the old regimecontinue to be of central importance to thoseoperating the new arrangements – and to theother members of the pensions partnership.

8.22. Such continuities include the desire tobalance the interests of sponsoring employersand those of scheme members, the desire toensure that pension rights are afforded areasonable degree of security while not imposingso stringent a burden that there is a sustainedand irreversible retreat from occupationalpension provision, and the desire to promoteopportunity and real choices for those seekingto secure their financial future.

8.23. However, there is perhaps one othercontinuity that is of direct relevance to thesubject matter of my report.

8.24. The then Secretary of State for Work andPensions said in the House of Commons on 2March 2004, when moving the Second Readingof the Pensions Bill which contained provisionsto replace the old regime, that ‘I am clear that apensions promise made should be a pensionspromise honoured’.

8.25. Concluding that debate, the then PensionsMinister said:

When we vote this evening, the House has anopportunity to take the first steps to make thePensions Protection Fund a reality, a major socialpolicy innovation, a consistent piece of pensionsarchitecture – to build confidence that a pensionpromise made will indeed be a pension promisehonoured.

8.26. Yet this aspiration was nothing new. Thethen Secretary of State for Social Security in theprevious Government said in a debate in theCommons on 3 November 1993 on the proposalsof the Goode Committee – which, as is noted inchapter 4 of this report, were the foundation onwhich the Pensions Act 1995 was built – that:

Professor Goode spelled out his intention whenhe said that he wanted to make a reality of thepensions promise. We want to make sure that thepromise inherent in membership of a pensionfund is fulfilled – that its assets are there toensure it is fulfilled and properly funded, and thatabuses do not occur.

8.27. A Minister in that Government later saidthat the MFR had been designed to underpin theemployer’s pension promise.

8.28. Governments have never said that fraud orabuse can be totally prevented. Indeed, the 1995Act was very much a response to the Maxwellaffair. However, as is also noted in chapter 4 ofthis report, the then Government urged supportfor the introduction of the MFR in clear terms:

After everything that has happened in the pastfew years... we could not be proud... if we werenot in the end able to say that schemes musthave sufficient assets available within a certaintime to keep pensions in payment and give non-pensioners the value of their accrued rights... Thatis the least that we should require of schemes.

Without that requirement, what on earth wouldwe say to people who ask whether their pensionfunds will be able to keep their pensions inpayment or give them the value of their accruedrights if the scheme winds up?

Without the MFR, the answer to such a questionwould be no. What on earth would we haveachieved then? The Minimum FundingRequirement would mean that the answer wouldbe yes. That is all we seek with the MFR.


8.29. Those who have complained to me askedthat question. Having been assured by officialinformation for many years that their pensionswere safe if their scheme was funded inaccordance with the MFR, they now look tothose who provided this assurance – which theytrusted – to honour the pensions promise thathas been broken.

8.30. This Government is, in the words of aMinister on 3 April 2000, ‘aware of theimportance of protecting members’ rights. That isthe bottom line. If we cannot do that, they haveno-one else to look to’.

Chapter 8 Conclusion | 199

Introduction1. This annex describes in broad terms the system of pension provision in the UK and some key

aspects of the statutory framework that governed final salary occupational pensions in therelevant period.

2. Before doing so, I should explain that many of the provisions I go on to describe have beenreplaced since the commencement of the new regime governing private pension provision inApril 2005. Other aspects remain in force. In this annex, I generally use the past tensethroughout. This is in recognition that the events relevant to this investigation took place from24 January 1995 to 6 April 2005.

Pension provision in the UK 3. One way of describing the system of pension provision within the UK is to categorise pension

provision according to the different sources of the various elements of possible retirementincome and how these sources interact with each other.

4. Using this approach, we might say that there were five principal categories of pensionprovision in the UK:

(i) state retirement pensions;

(ii) retirement annuity contracts – which have ceased to be entered into since July 1988;

(iii) personal pension plans (from July 1988 onwards) and stakeholder pensions (from April2001 onwards);

(iv) public sector occupational pension schemes, including those for current members (andveterans) of the armed forces; and

(v) private sector occupational pensions.

5. Before setting out both the main features of the occupational schemes relevant to thisinvestigation and how the contracting-out provisions affected pensions provided by suchschemes, I will summarise the main features of state pension provision insofar as these wererelevant to the matters I have investigated.

State retirement pensions6. A state pension is payable to all individuals who have reached state pensionable age, who have

made or been credited with (or whose spouse has made or been credited with) sufficientnational insurance contributions, and who have made a claim for a state pension.

7. There are four principal categories of state retirement pension:

(i) a Category A retirement pension – which is payable to someone who reaches the relevantstate retirement age and who has in their own right made or been credited with sufficientnational insurance contributions to qualify for the basic state pension;


Annex AThe context

(ii) a Category B retirement pension – which is payable to someone who reaches the relevantstate retirement age and whose spouse has made or been credited with sufficient nationalinsurance contributions to enable their spouse to qualify for the basic state pension;

(iii) a Category C retirement pension – which is payable to those people who were alreadyover pensionable age on 5 July 1948, regardless of their contribution record; and

(iv) a Category D retirement pension – which is payable to people aged 80 or over, whoeither get no basic state pension or whose pension is below a given amount and who havelived in the country for at least ten years after reaching age 60.

8. A state retirement pension payment may include one or more of the following elements,namely:

l the basic state pension – a flat rate payment at generic rates set for single people and, foreach couple, a payment to reflect the total rate of Category A and B pensions;

l the additional state pension – an earnings related element with respect to an individual’sspecific earnings between April 1961 and April 1975 (graduated retirement benefit) and/orafter April 1978 (the State Earnings Related Pension Scheme – SERPS – and, since 6 April2002, the State Second Pension);

l increases for qualifying dependants or for invalidity;

l an age addition for those aged over 80;

l increments in respect of periods of deferred retirement, where the individual has electednot to take their state pension as soon as they were entitled to do so; or

l a Christmas bonus and/or winter fuel allowance.

9. Where an individual’s national insurance contribution record falls short of the minimumqualification requirements, which are set out in legislation – or where an individual movesabroad to certain countries on retirement – a reduced or frozen state pension may be payable.

10. There are three classes of national insurance contributions which may qualify an individual fora state pension in his or her own right:

(i) class 1 contributions, of which there are two types:

l primary contributions, which are made by all employees whose earnings are in excessof a primary threshold and are paid on all of their earnings up to an upper earningslimit (both limits are set out in statute); and

l secondary contributions, which are payable by employers in respect of theiremployees whose earnings are in excess of a secondary threshold (there is no upperlimit for secondary contributions);

(ii) class 2 contributions, which are flat rate contributions payable by the self-employed; and

Annex A The context | 201

(iii) class 3 contributions, which are voluntary contributions which may be made by anindividual to boost their contribution record so as to ensure that he or she has made orbeen credited with sufficient contributions to qualify for a state retirement pension.

11. For class 1 contributions, individual employees pay additional national insurance contributionsof 1% of their earnings above the upper earnings limit – towards the National Health Service.

12. In addition to the basic element of the state pension, which is dependent on nationalinsurance contributions, there is, as noted above, a further, earnings-related component to thestate pension, known as the additional pension.

13. The additional state pension over time has had three manifestations: graduated retirementbenefit, SERPS, and the State Second Pension.

14. Graduated retirement benefit is payable as an increase in the weekly rate of state retirementpension and was introduced by the National Insurance Act 1959. It is now governed by theprovisions of the National Insurance Act 1965, which remain in force in order to ensurepayment of the benefit for those who had actual or prospective rights prior to 6 April 1975,from when this form of additional pension no longer accrued.

15. Through SERPS, an individual may qualify for an additional pension through contributionsmade in relation to earnings received in the period from April 1978 to April 2002, in respect ofearnings for each year between the lower and upper earnings levels, as determined in law.

16. At retirement, once an individual’s earnings up to the upper limit for each year have beendetermined, they are increased in line with the rise in national average earnings (as set out inthe relevant Revaluation of Earnings Factors Order, a statutory instrument made by theSecretary of State) to take account of inflation. Finally, an amount equal to the lower earningslimit in the last complete tax year before the one in which the individual attains state pensionage is deducted to produce that individual’s surplus earnings for each tax year.

17. Prior to 6 April 1999, an individual reaching state pension age would qualify for an annual rateof additional pension which was calculated by multiplying the aggregate of his or her surplusearnings for all the years which counted for additional pension by 1.25%.

18. After 6 April 1999, the annual rate of SERPS that a person reaching state pension age wouldreceive would consist of:

(i) the aggregate of their surplus earnings in the tax years from April 1978 to April 1988,multiplied by 25% and then divided by the total number of years between 6 April 1978 (or6 April immediately preceding their 16th birthday, if later) and the 5 April immediatelypreceding their 65th birthday (or their 60th birthday, in relation to a woman); plus

(ii) the aggregate of their surplus earnings in the tax years from 6 April 1988 to the 5 Aprilimmediately preceding them attaining state pension age, which is multiplied by therelevant percentage (which varies between 20% and 25% depending on the year in which


they reach state pension age) and then divided by the total number of years between 6April 1978 (or 6 April immediately preceding their 16th birthday, if later) and the 5 Aprilimmediately preceding their 65th birthday (or their 60th birthday, in relation to a woman).

19. From 6 April 2002, SERPS was reformed to provide a more generous additional state pensionfor low and moderate earners, and to extend access to include certain carers and people witha long-term illness or disability. The reformed additional state pension is known as the StateSecond Pension. The State Second Pension is based upon earnings between a lower earningslevel and an upper earnings level.

20. Where a person is contracted-out of the additional state pension (see below), theirentitlement to additional pension for the period during which they are contracted-out isreduced or removed to recognise the pension derived from contributions made to anoccupational or personal pension scheme instead of towards the state scheme.

21. For earnings in the tax years from 1978/79 to 1996/97, a member of a contracted-outoccupational pension scheme accrued additional state pension in the same way as someonewho was not contracted-out, but the rate payable was reduced by a contracted-out deduction.

22. For earnings in the tax years from 1997/98 to 2001/02, a member of a contracted-outoccupational pension scheme did not accrue additional state pension in respect of earnings incontracted-out employment.

23. For earnings in any tax year starting from 2002/03, a member of a contracted-outoccupational pension scheme earning between £4,264 and £27,800 (in 2005/06 terms) in a taxyear will get a State Second Pension top-up in respect of that year. The top-up reflects themore generous additional state pension provided by State Second Pension and is paid as partof the state pension.

Occupational pensions24. During the relevant period, there were three types of occupational pension scheme:

(i) defined benefit schemes (also known as final salary schemes), which are the principalfocus of this report;

(ii) money purchase or defined contribution schemes; and

(iii) mixed benefit schemes, which combine features of the above.

Scheme governance and membership25. Pension schemes in the private sector were established by trust law. Schemes were governed

by trustees, whose role it was to apply the scheme assets for the benefit of scheme membersand other beneficiaries in accordance with the law and the scheme’s trust documents.

26. Trustees were largely appointed by the employer or employers who sponsor the scheme,although since 1997 there has been a requirement (although certain schemes may in specifiedcircumstances opt out of this) that each scheme has a number of member nominated trustees.


27. Sometimes an insolvency practitioner may be appointed in relation to the sponsoringemployer of a scheme or the official receiver may become the liquidator of the relevantcompany or the manager of the estate of a bankrupt employer. In those circumstances, it wasthe duty of the insolvency practitioner or official receiver to satisfy themselves at all timesthat at least one of the trustees of the scheme was an independent person.

28. If that was not the case, an independent trustee had to be appointed, who could not have aninterest in the assets of the employer or the scheme, who could not have been associatedwith the scheme in a professional capacity during the preceding three years, and who couldnot be connected with or be an associate of the employer, the insolvency practitioner orofficial receiver, or other persons with a direct interest in the scheme.

29. All trustees had a duty not to profit from their position as trustee and were obliged to act asa prudent person would, not only in their own conduct but also in relation to third parties.Trustees had to act in accordance with the trust deed and other rules and had to actimpartially as between different classes of beneficiaries. Finally, trustees had to familiarisethemselves with their investment powers and seek appropriate professional advice to enablethem to apply the assets of the scheme in the best interests of its beneficiaries and to complywith the relevant legislation.

30. Trustees were obliged to disclose certain documents and information to scheme members,prospective members, other beneficiaries and to appropriate trades unions. Each scheme wasalso obliged to establish an internal dispute resolution mechanism.

31. Since 1988, membership of an occupational scheme could no longer be compulsory and anyterm of a contract of service purporting to make membership of a particular schemecompulsory was void unless it related to death-in-service benefits within a scheme which wasnon-contributory.

32. There were broadly four types of members of final salary pension schemes:

(i) active members – those who were working for the sponsoring employer and havingcontributions made on their behalf (and who may themselves be contributing) to thescheme;

(ii) pensioners – those who were receiving benefits from the scheme;

(iii) deferred members – those who had left the service of the sponsoring employer but whoretained benefits in the scheme; and

(iv) other qualifying individuals – those in receipt of a survivor pension (for example, awidow) paid in respect of the benefits accrued by a deceased member.

Scheme funding and benefits33. In defined benefit pension schemes, the trust deed and rules set out the basis on which

benefits were paid. Typically these defined the amount of benefit and the circumstancesunder which it was paid.


34. The amount would normally be defined as a proportion of an individual’s salary (‘salary’ forthis purpose was defined in the rules) and typically depended upon the length of service theemployee had completed as a member of the scheme. Benefits were paid from an age laiddown in the scheme rules. The rules also stated whether benefits were payable in othercircumstances, for instance where a member left work on ill-health grounds.

35. If an individual left to take up employment elsewhere, the benefits would usually becalculated based on service and salary as at the date of leaving. The individual had theopportunity to leave the benefits in the scheme (i.e. to become a deferred member of thescheme) or to take a transfer value to another scheme.

36. In order to provide these benefits, the employer (and the employee, if required under therules) made contributions. These contributions are said to ‘fund’ the benefits. Upon receipt ofcontributions, the trustees arranged for them to be invested. The invested contributions thenbecame the ‘assets’ of the scheme.

37. The obligation to pay the benefits of a given amount and in the specified circumstances,became the scheme’s ‘liabilities’.

Setting contribution rates38. The current value of a scheme’s liabilities was not generally known in advance with any

certainty and in most schemes the employer picked up the balance of cost in terms of avariable rate of contributions to fund the liabilities. Members’ contributions were usually afixed percentage of salary although in some schemes their contributions could vary too.

39. The trustees of a scheme were bound to follow the trust deed and rules and relevantlegislation with regards to the funding of members’ benefits. The terms of schemes’ legaldocumentation varied widely but might have stated either that the sponsoring employerdetermined the rate of contributions to the scheme or that the trustees decided on this, afterhaving taken advice from the scheme actuary, after consultation with the employer, andsubject to the provisions of the MFR legislation.

40. The common reference to the MFR legislation was a reminder to the trustees that this was thelegal minimum at which they must plan to fund the scheme. This would have been the defaultposition in the absence of agreement to higher amounts.

41. In this situation, the employer had a duty, after consultation, to pay the contributions decidedon by the trustees. Consultation between trustees and employers took place at variousdifferent levels. There were also schemes where the employer held more of the contributionsetting powers.

42. In rare cases the scheme actuary may have had the power to set contributions. There may havebeen other constraints on the employer(s) contributions contained in the schemedocumentation.


43. However, in all cases, shortly after an actuarial valuation had been carried out, the trusteesand employer needed to jointly agree on a schedule of contributions which specified thecontributions that the employer(s) and employees would pay in future.

44. The scheme actuary was a statutory role with responsibilities to carry out MFR valuations,generally every three years, on the prescribed basis and to certify that the contributionsagreed between the trustees and employer would be sufficient to satisfy the MFR – that is, toremain above or restore the scheme to a 100% MFR funding level within prescribed time limits– for the period of the schedule of contributions.

45. Legislation also required ongoing valuations, generally every three years, and individualschemes’ documentation may have placed additional requirements on the actuary in terms ofcarrying out valuations and recommending rates of contributions.

46. The MFR only provided a minimum level at which schemes needed to aim to be funded. Therange of contribution setting powers of different schemes, the interpretations given to thesepowers and the employer’s willingness and ability to fund at higher levels meant that thedispersion within which schemes were funded was very wide.

47. The pace of funding, or the level to which a scheme was funded, was a major factor indetermining the level of security for members’ benefits in that scheme.

Actuarial valuations48. Formal actuarial valuations involved the carrying out of calculations on a number of possible

different funding measures by the scheme actuary.

49. However, in essence any actuarial valuation had two main purposes:

l to compare the liabilities for benefits that members have accrued in respect of theirservice to date against the assets in the scheme at the same date (known as a past servicevaluation); and

l to value the liabilities for benefits that active members will accrue in respect of futureservice.

50. This enabled the scheme actuary to make recommendations on the funding – that is, thecontributions – required to be paid for the future service benefits with possible adjustmentsupwards or downwards to take into account the deficit or surplus of assets held to meet thepast service liabilities.

51. In order to make these assessments, the scheme actuary made assumptions about how thescheme would develop in the future.

52. For an MFR valuation, these assumptions were prescribed. However, for an ongoing valuationthe scheme actuary would make assumptions – about such things as future wage growth, lifeexpectancy, future increases to pensions once in payment, the probability that people wouldleave by early retirement, retirement at the normal scheme age or by other means – in orderto project forward the cash flows out of the scheme.


53. Having projected forward the cash flows from expected benefit payments, the scheme actuarythen ‘discounted’ these future payments back at an assumed rate of interest in order to give a‘capital value’. The capital value of the liabilities earned in respect of service up to thevaluation date was commonly called the value of the past service liabilities.

54. In considering the asset value, the scheme actuary would typically either take the marketvalue of the assets (as provided by the auditor in the scheme accounts) or the ‘assessed’ or‘actuarial’ value of the assets.

55. The ‘assessed’ or ‘actuarial’ value took the income from the assets and projected it forwardusing assumptions about growth (equity dividends, property rental income and so on) andinflation and then discounted this income stream back at the valuation rate of interest to givea figure which could be compared with the past service liabilities to assess whether a surplusor deficit existed.

Different funding measures56. A formal valuation exercise generally included the production of valuation results on several

different measures for different purposes. These could be broken down into two maincategories as follows:

l ongoing valuations: with liabilities valued assuming that active members remain in service– in order to check that the pace of funding is on track; and

l discontinuance valuations: with liabilities valued assuming that active members leaveactive service immediately – principally as a check on the security of benefits.

57. An ongoing valuation typically made allowance for future wage inflation in projecting forwardactive members’ benefits from the valuation date to their eventual retirement date.Discontinuance valuations, on the other hand, treated active members as having leftemployment; that is, as deferred pensioners. The projection of such benefits therefore onlyallowed for statutory deferred pension increases.

58. The valuation rate of interest for placing a capital value on the discontinuance liabilitiesdepended on the nature of the valuation. There were three common bases on whichdiscontinuance valuations were made. These related to either a position where the liabilitieswere run off on a ‘closed scheme’ basis, or where they were secured by the payment oftransfer values, or where they were secured by the purchase of annuities.

59. Prior to the abolition of tax credits on UK equity dividends in 1997, ongoing valuationstypically used a discounted income value of assets (see above). This reflected the longer termnature of these valuations and a desire to smooth out market volatility in the asset valuation.

60. Subsequently, the use of market values (or market-related values) became increasinglycommon in ongoing valuations.

61. However, discontinuance valuations were designed to show a current or at least a muchshorter term view of the scheme’s financial position. As such, they more commonly usedmarket values of assets.


62. Tax approved occupational pension schemes were also required to carry out an assessment oftheir funding position against a prescribed surplus valuation basis. The legislation for thisstatutory surplus test was designed to prevent over-funding and schemes risked the loss of taxrelief if they found themselves over the prescribed limit.

Disclosure of valuation results and related guidance63. Scheme actuaries are bound by the professional guidance issued by the Faculty and the

Institute of Actuaries on what they need to include in their valuation reports to trustees.The relevant professional Guidance Note is GN9, of which version 5.1 was current forvaluations signed from 1 June 1994 until 31 July 1997 and version 6.0 was current for valuationssigned from 1 August 1997 until 19 March 2004.

64. There are a number of sections of version 6.0 of GN9 which have particular relevance to thisinvestigation:

2.1 The purpose of the Guidance Note is to ensure that reports contain sufficientinformation to enable the current funding level of a scheme to be understood and also, inthe case of a defined benefit scheme, to enable the expected future course of a scheme’scontribution rates to be understood. It is not intended to restrict the actuary’s freedom ofjudgement in choosing the method of valuation and the underlying assumptions...

3.1.3 A report on a scheme subject to the Minimum Funding Requirement may incorporatethe actuary’s statement (prepared in accordance with Guidance Note GN27) on thatRequirement if it is appropriate to do so, i.e. the prescribed calculations have been madeby the appointed Scheme Actuary and the report is addressed to the trustees. Care should,however, be taken that the results of calculations with different objectives are clearlyidentified...

3.4.1 In the case of a defined benefit scheme, the report should explain the fundingobjectives and the method being employed to achieve those objectives. A statement shouldbe made as to the extent to which there have been changes in the objectives or the methodsince the last report of a similar nature. Implications in terms of stability of contributionrates and of future funding levels should be explained. If the scheme is subject to theMinimum Funding Requirement, comment should be made on the difference from theobjectives of that requirement...

3.7.1 In the case of a scheme subject to the Minimum Funding Requirement, the MinimumFunding Requirement funding level as given in the most recent statement should be statedwith appropriate explanation.

65. Under the heading ‘current funding level – discontinuance assumption’, GN9 stated:

3.8.1 The purpose of the statement on this subject is to give an indication of the accruedsolvency position of a scheme in discontinuance or were the scheme to become a schemein discontinuance at the valuation date and, in particular, if there were no furthercontributions due from the scheme sponsor. The actuary should adopt an approach withthat principle in mind.


66. The actuary is further required to give an opinion on whether the assets would have beensufficient to cover the discontinuance liabilities of pensioners, deferred pensioners and activemembers. If the assets were not sufficient, an indication of the level of coverage was to beincluded.

67. The statement of which liabilities are covered in this way needed to reflect the priority orderfor securing benefits that applies in a winding up. At a basic level, pensioners’ benefits wouldbe secured fully with remaining assets being used to secure deferred and active members’benefits.

68. Under the heading ‘current funding level – on-going assumption’, GN9 stated:

3.9.1 If the scheme is not already in discontinuance, the report should include a statementas to the funding position on the assumption that both scheme and the scheme sponsor(s)are on-going. The statement should include, where relevant, a comparison between assetsand accrued liabilities, the latter with pensionable salaries projected where appropriate toassumed end of pensionable service, if this is not otherwise conveyed by the comments onthe funding objectives and the contribution rate.

69. Valuation reports were therefore required to provide trustees with information on thedifferent funding measures and the differences between them – and members had the right torequest copies of actuarial valuation reports.

70. Regulations also required an ‘actuarial statement’, as appended to the valuation report, to beincluded in the scheme’s annual report and accounts. These accounts were also disclosable tomembers.

71. Version 6.0 of GN9 contains guidance to actuaries preparing these actuarial statementsincluding the following:

4.3 ...the Statement requires an opinion from the actuary on the adequacy of the resourcesof a scheme “in the normal course of events”. In interpreting this expression at the date ofeach Statement, the actuary should take a prudent view of the future without taking intoaccount every conceivable unfavourable development...

4.5 Care should be taken to avoid confusion between MFR liabilities, liabilities on anongoing valuation basis and discontinuance liabilities.

72. Again the actuary was required to make sure that the reader was aware of differences betweenthe different funding measures.

MFR: actuarial methodology and assumptions73. The MFR became operational from 6 April 1997. However, much of its development took place

before then to allow for consultation and time for actuaries to become familiar with the MFRand to update their systems.

74. The methodology and actuarial assumptions for the MFR test, and for determining thestatutory minimum level of employer contributions, were during the relevant period


prescribed by The Occupational Pension Schemes (Minimum Funding Requirement andActuarial Valuations) Regulations 1996, which referred to a mandatory actuarial guidance note(GN27) for the technical actuarial details underlying the calculations.

75. The specifics of the methodology and assumptions underlying the MFR calculations werecontained in the actuarial guidance note and were set by the actuarial profession – the Facultyand Institute of Actuaries – with the approval of the Secretary of State.

76. The actuarial profession’s remit was to devise a methodology and assumptions which met theGovernment’s objectives for the MFR and which:

l did not impact unduly on compliance costs for employers;

l was consistent with the actuarial valuation methods that were in practice at that time(hence a methodology based on a true market based model was not considered, as suchmethods were not commonly in use for ongoing valuations at that time);

l did not rely on complex mathematical models for compliance (hence the MFRmethodology did not explicitly tackle market value volatility);

l took account of instructions from Government on the extent to which the MFR basisshould include an equity risk premium, that is the expected out-performance of equitiesrelative to gilts (advice to DSS from the Pensions Board of the actuarial profession hadbeen that, if it were desired to give the member increased security, then a greaterweighting would be required in bonds with a consequent increase in compliance costs); and

l was objective in its nature to the extent that different actuaries should not produceanswers which were more than 2% different given the same data.

77. When the MFR was introduced, its basis was also used to provide a ‘floor’ to the calculation ofcash equivalent transfer values (CETV) when an individual left a scheme and transferred his orher benefits to another suitable pension arrangement.

78. From 6 April 1997, a CETV had to be underpinned by the value of the MFR liability in respect ofthe member to whom the CETV related – except if the scheme was not fully funded on theMFR basis, in which case the transfer value could be reduced to reflect this under-funding.

79. Legislation introduced a change to the calculation of the debt (if any) due from the employerto the pension scheme when a scheme starts to wind up. From 6 April 1997, the amount ofsuch a debt was calculated as the difference between the amount of the scheme’s assets andthe value of its liabilities calculated on the MFR basis.

MFR valuations80. The past service valuation under the MFR specified that:

a) the pension scheme assets were taken at market value;


b) pensions in payment were generally valued as if they were backed by long dated UKGovernment stock (‘gilts’) and without allowance for the possible higher returns thatother asset classes such as equities might produce;

c) accrued benefits for non-pensioners – that is, active members who were still in serviceand deferred members who had left employment – were valued as if they were backed byUK equities before retirement and by gilts once in payment (unless the scheme’s trusteeshad formally adopted a ‘gilts-matching’ investment strategy); and

d) a prescribed expense allowance equal to a percentage of the calculated liabilities wasadded on to the liabilities.

81. The past service MFR valuation result was therefore derived from a) – b) – c) – d). If theanswer were positive, there was an MFR surplus and the MFR funding level, calculated as a)/[ b) + c) + d)], would be greater than 100%. If the answer were negative, there was an MFRdeficit and the MFR funding level would be less than 100%.

82. One of the purposes of an actuarial valuation was to recommend the contributions to be paidto a scheme in the future taking into account the cost of benefits that would accrue tomembers in respect of future service and an adjustment up or down for any past servicedeficit or surplus.

83. The MFR also did this by prescribing calculations for the minimum contributions (to becertified by the scheme actuary) in a scheme’s schedule of contributions. The broad purposeof determining MFR minimum contributions was to determine the contributions required toget a scheme back to an MFR funding level of 100% (or to keep it above this level) withinprescribed periods.

84. However, this aspect of the MFR only set a minimum level of contributions. The actual level offunding was generally a matter for discussion between the scheme’s trustees and its sponsoringemployer(s), in accordance with the terms of their own trust deed and rules. In some casesschemes were, some time after the MFR came into force, only funded at the MFR minimumlevel, whereas others were funded at levels well in excess of this.

MFR methodology85. The prescribed basis for carrying out MFR valuation calculations was set out in the actuarial

profession’s GN27.

86. The calculations were different for pensioners and non-pensioners. The following represents asummary of the main principles that applied to the majority of pension schemes. However,other complications existed, such as ‘gilts matching’ and an easement for valuing pensionerliabilities for larger schemes.

87. A gilts-based valuation was prescribed for pensioners’ liabilities using market yields, taken fromthe FTSE Actuaries range of gilt indices, at the MFR valuation date. These yields were used asthe rate of return, also known as a ‘discount rate’, for placing a capital value on the liabilities.


88. Compared with ongoing funding bases, in use at the time of the introduction of the MFR, thisapproach to valuing pensioner liabilities represented quite a strengthening, i.e. an increase inliability values. At the introduction of the MFR in April 1997, this also provided a reasonableapproximation to the cost of securing pension benefits by purchasing annuities.

89. The valuation for non-pensioners used the principle of first calculating a capital value usinglong term assumptions which were specified in GN27. These long term values were thenadjusted through the use of market value adjustments (MVAs) into liability values that werethen intended to reflect market conditions at the calculation date.

90. The principal long term return, or discount rate, assumptions for valuing non-pensioner MFRliabilities, as prescribed in GN27, were as follows:

l the effective rate of return on equities before MFR pension age was to equal 9% perannum; and

l the effective rate of return on gilts after MFR pension age was to equal 8% per annum.

91. The calculated liability value was then adjusted to smooth the jump between the two rates ofreturn in the ten years before MFR pension age. MFR pension age was defined as the earliestage from which a member may retire, as of right, taking all of his or her benefit withoutactuarial reduction for early payment.

92. As noted above, instructions were given by Government to the actuarial profession on theextent to which the MFR basis should include an equity risk premium to reflect the expectedout-performance of equities relative to gilts.

93. This equity risk premium was set at 2% per annum but deducting an annual allowance of 1% forthe expenses of investing in a personal pension vehicle resulted in the 1% annual net equityrisk premium shown in the long term assumptions above.

Market value adjustments94. The rates of return above were selected as the long term assumptions for valuing non-

pensioner liabilities and then they were adjusted using MVAs to reflect current marketconditions.

95. In this way, the MFR set out to produce a market-consistent valuation where both the assetand liability sides of the valuation balance sheet reflected market conditions at the calculationdate.

96. For non-pensioners more than ten years under MFR pension age, only one MVA came into play– the equity MVA. For members within ten years of MFR pension age, a combination of twoMVAs (the equity MVA and the gilt MVA) was used.

97. The gilt MVA depended on the financial nature of the benefits. Effectively the gilt MVA wasdifferent for benefits that had fixed increases in payment and those where increases wereindex-linked:


l the fixed interest gilt MVA was the value at the annualised yield on the FTSE ActuariesGovernment Securities 15-year Yield Index of a 15-year stock with coupon equal to thelong term rate of return on gilts; and

l the index linked gilt MVA was the value at the annualised yield on the FTSE ActuariesGovernment Securities Index-Linked Real Yield over 5 years (5% inflation) Index of a 15-year stock with coupon equal to the corresponding long term MFR real rate of return onindex-linked gilts.

98. A further variation existed for lump sum retirement benefits (although this did not refer to taxfree lump sums which could be taken by the member as an option).

Contracting-out99. The employment of an earner who is a member of an occupational pension scheme may, if

their employer so elects and certain statutory requirements are satisfied, become contracted-out employment, with the result that a lower rate of national insurance contributions will bemade to – and a lower rate of retirement pension will be received from – the state scheme.

100. Prior to November 1986, employment which qualified an individual for membership of a finalsalary scheme could only become contracted-out if the relevant scheme satisfied two tests:

l the ‘requisite benefit test’, which involved the provision of at least one-eightieth ofpensionable salary for each year of pensionable service; and

l the ‘guaranteed minimum pension’ or ‘GMP’ test, which involved the scheme providing apension broadly equivalent to the additional state pension entitlement being given up.

101. After November 1986, the requisite benefit test was abolished and, from then until 6 April 1997upon the commencement of the Pensions Act 1995, a scheme had only to meet the GMP test.

102. From 6 April 1997, final salary schemes wishing to contract-out were once again required tomeet a test of scheme quality, called the ‘reference scheme test’, which aimed at ensuring thata certain overall level of benefits would be provided for members of the scheme generally.

103. From the same date, the GMP requirement was abolished, although GMP entitlements accruedup to and including 5 April 1997 were retained within the scheme after that date.

104. In order to deduct and pay national insurance contributions at the reduced rate, an employermust have a valid contracting-out certificate, which have been issued since 6 April 1997 by theSecretary of State.

105. Each certificate stated both an employer reference number (known as an ECON) and a schemereference number (known as an SCON). An employer will only have one ECON but maysponsor more than one scheme and so may have more than one SCON. These referencenumbers are the principal ways in which NICO monitor national insurance contributions andliabilities to secure contracted-out rights.


106. A scheme qualified to contract-out of the state additional pension:

l in relation to service completed before 6 April 1997, where it complied with therequirements of the Pension Schemes Act 1993 related to the provision of GMPs andwhere its rules related to GMPs were framed so as to comply with any requirements laiddown by NICO in relation to contracted-out matters; and

l in relation to service completed after 6 April 1997, where NICO was satisfied that:

i. the scheme met the ‘reference scheme test’;

ii. the scheme was subject to, and complied with, the provisions of the Pensions Act 1995regarding employer-related investments;

iii. the scheme was funded to the MFR level or would, in the opinion of its actuary, be sowithin a period specified in the scheme’s schedule of contributions, usually within fiveyears (although there was a transitional period during which schemes were initiallyallowed a longer period to get their funding position back on track);

iv. the scheme did not permit the payment of a lump sum instead of a pension, unlessthe amount were trivial or otherwise allowed by Inland Revenue rules;

v. the scheme provided benefits payable by reference to an age that was equal for bothmen and women and otherwise permitted by Inland Revenue rules; and

vi. the rules of the scheme were framed in such a way as to comply with any requirementprescribed by NICO as to contracted-out matters.

107. For the period of service from April 1978 to April 1997, a contracted-out defined benefitscheme had to ensure that the benefits provided to each member for that period were at leastas good as the GMP.

108. The law also provided that GMPs in payment which were attributable to service completedsince 6 April 1988 had to be increased each year by the lesser of the retail prices index and 3%.

109. GMP entitlement was calculated according to a pension scheme member’s ‘earnings factors’during the relevant period – which were derived from an individual’s earnings between thelower and upper earnings limits specified in legislation, revalued in accordance with theincrease in the earnings index over the relevant period. A member was only entitled to GMPsin respect of periods of contracted-out pensionable service where the member’s earningsexceeded the lower earnings limit.

110. The basis on which the GMP earnings factors were calculated changed in 1988 and so separatecalculations for each individual must be made in respect of service prior to and after this date.The method of calculation was:

l for those within twenty years of state pension age on 6 April 1978, 1.25% of their revaluedearnings factors for each year between 6 April 1978 and 5 April 1988 plus one per cent oftheir revalued earnings factor for each year between 6 April 1988 and 5 April 1997; and


l for others, 25% of their revalued earnings factors for each tax year between 6 April 1978and 5 April 1988, divided by the number of complete tax years after 5 April 1978 (or thestart of working life) up to state pension age, plus 20% of their revalued earnings factorsbetween 6 April 1988 to 5 April 1997, divided by the number of complete tax years after 5April 1978 (or the start of working life) up to state pension age.

111. Thus, while GMPs were broadly equivalent to SERPS entitlement, they were not calculated inthe same manner.

112. A scheme member would be treated as having terminated contracted-out employment:

l where their contract of employment expired or was terminated; or

l in the absence of such a contract, where the employment had itself been terminated; or

l where the individual had ceased to be a member of a contracted-out scheme; or

l where the certificate by virtue of which the individual’s employment had beencontracted-out of the additional state pension had been surrendered or cancelled; or

l where the relevant certificate had been varied in such a way that it no longer covered theparticular employment of that individual; or

l where the employment could not be treated as continuing in circumstances in which afirm was taken over or otherwise ownership or activity were substantially altered.

113. Where a member’s pensionable service terminated after they had completed two years ofqualifying service, that individual was entitled to a preserved benefit under the scheme whichhad to be appropriately secured. If an individual left pensionable service prior to thecompletion of two years, then they would normally only be entitled to a refund of their owncontributions.

114. The options available for securing the contracted-out rights of early leavers were fourfold:

l reinstatement into the state additional pension – by means of a contributions equivalentpremium (although after 6 April 1997, it was only possible to buy an employee back intoSERPS if they had served less than two years and had received a refund of their owncontributions on leaving the scheme – prior to this, it was possible to buy any memberback into SERPS by way of a State Scheme Premium);

l the purchase of a deferred annuity from an insurance company;

l retention of liability within the scheme – where the member became a deferred memberof the scheme; and

l transfer to another contracted-out pension arrangement – whereby the individual’saccrued rights were secured outside the scheme by membership of another occupationalor personal pension scheme.


Key aspects of the relevant regime115. A winding up of a final salary occupational pension scheme occurs when a scheme is

terminated and its assets are used to secure the scheme’s benefits through other means.

116. Final salary occupational pension schemes may be wound up for four principal reasons: first,as a result of a decision to do so by scheme trustees; secondly, as a consequence of themerger or restructuring of the sponsoring employer(s); thirdly, due to a decision to discontinuethe provision of an occupational scheme by the sponsoring employer; and, finally, as a resultof the insolvency of the sponsoring employer.

117. The subject matter of this investigation is related to schemes which have either wound up dueto a decision by the sponsoring employer or as a result of the insolvency of that employer.

118. The events which will trigger the voluntary winding-up of a scheme depend on the scheme’sgoverning trust deed and rules but typically involve formal notification by the employer to thetrustees that it requires the scheme to be wound up. Where a scheme is wound up due to thefailure of an employer, this is triggered when a relevant insolvency event – for example, thecommencement of the employer’s bankruptcy or the liquidation of it – occurs. Wherewinding-up began after 5 April 1997, statutory provisions related to the winding-up processover-ride any particular scheme rules which are not consistent with those provisions.

119. Where any scheme winds up, trustees must take action to secure all a scheme’s assets – thatis, to realise its investments and to ensure that all contributions due to it have been made –and then to discharge its liabilities to beneficiaries of the scheme.

120. In some schemes, winding-up can be achieved by securing the pensions of those alreadyretired through the purchase of annuities and by providing a full cash transfer value to – or bythe purchase of a deferred annuity on behalf of – non-pensioner members. Where a schemewinds up under-funded, it may not be able to secure the full accrued benefits. The schemeswhich form the focus of this report are those in which there are not enough assets to meet allof the scheme’s liabilities.

121. There are two aspects of the statutory regime related to final salary occupational pensionschemes, not described above, which are relevant to the subject matter of this report.These are:

(i) that relating to the insolvency of sponsoring employers and the realisation of a pensionscheme’s assets; and

(ii) that relating to the winding-up of schemes and the discharge of their liabilities.

Realising a scheme’s assets122. Where a scheme seeks to realise its assets, its investment managers may liquidate the scheme’s

investments which will then be valued by the scheme auditor. The scheme actuary will thencalculate whether monies are due from the sponsoring employer(s) in order to bring thescheme up to funding at the MFR level.


123. If the value of the scheme’s assets was certified by the scheme actuary as being less than thevalue of its liabilities as defined in legislation and as measured with reference to the MFR, thedifference became a debt due from the employer to the scheme trustees.

124. Where the sponsoring employer is still trading, trustees may take legal action to enforcethe debt.

125. Where the employer is insolvent, the law provides for the way in which such an employer’sassets must be apportioned between its various creditors.

126. Prior to 15 September 2003, the assets of companies that were being wound up weredischarged according to the following order of priority:

(i) first, to meet the costs and expenses of winding the company up;

(ii) secondly, to meet debts due to preferential creditors;

(iii) thirdly, to meet debts due to ordinary creditors;

(iv) fourthly, to pay post-liquidation interest on debts due to preferential and ordinarycreditors;

(v) fifthly, to meet debts due to deferred creditors; and

(vi) finally, to make payments to members of the company in accordance with their rights.

127. Priority was given to secured debts, that is, those loans, mortgages and other debts that weresecured on the assets of the company.

128. During this period, the preferential creditors were, in order of priority: debts due to the(former) Inland Revenue in respect of employees’ tax deductions; debts due to (the former)HM Customs and Excise in respect of VAT and other excise duty; outstanding nationalinsurance contributions; certain unpaid contributions due to an occupational pension schemein the year prior to the insolvency; outstanding payments to a company’s employees; andlevies due to the EU for industrial production.

129. Where insufficient funds were available to meet all a company’s liabilities, the secured debtswere discharged in full before discharging those unsecured debts given preference and, if anymonies were remaining, ordinary creditors would receive a proportion of the remnant.

130. Legislative change that had effect from 15 September 2003 abolished the Crown’s preferentialrights in all insolvencies and made provision to ensure that unsecured creditors received alarger proportion of the assets being discharged in the insolvency proceedings.

Discharging a scheme’s liabilities131. Where there are insufficient assets to secure all the liabilities of a pension scheme, there is a

statutory order in which a scheme must discharge what assets it has. The priority order wasmodified following commencement of the 1995 Act’s provisions and this modified priorityorder was supposed to be in place during a transitional period from April 1997 to April 2007.However, this order has, with the commencement of the 2005 Act’s provision, now been


replaced as part of the reform of the statutory provisions governing final salary schemes inwind-up.

132. After meeting scheme expenses and debts to third parties, the transitional order of priority was:

(i) pensions in payment (excluding increases in those pensions) and any liabilities forpensions or other benefits derived from voluntary contributions;

(ii) pensions or benefits paid by insurance contracts purchased before April 1997 that cannotbe surrendered or where the surrender value does not exceed the liability secured by thecontract;

(iii) a transfer value for non-pensioners (derived on an MFR basis) of Guaranteed MinimumPension (GMP) entitlements and post-April 1997 contracted-out rights;

(iv) increases on pensions in payment;

(v) increases in the value (on an MFR basis) of non-pensioners’ GMP and post-April 1997contracted-out rights;

(vi) a transfer value (derived from the MFR) of pre-April 1997 accrued pensions not derivedfrom GMPs; and

(vii) the residual buy-out costs of other deferred benefits.

Reconciling contracted-out entitlements on wind-up133. In order to be able to discharge a scheme’s liabilities to its beneficiaries, the trustees of a

scheme in wind-up must calculate the entitlements of each scheme member within eachcategory.

134. When a scheme ceases to contract-out, the scheme administrators or trustees must notify HerMajesty’s Revenue and Customs in writing. Prior to May 2003, notification of cessation wasdirected to NICO Elections Section. However, as part of the Government’s ‘Joint WorkingInitiative’, NICO Elections work was merged with and transferred to Her Majesty’s Revenue andCustoms’ Savings, Pensions and Share Schemes section, which had been responsible forgranting tax approval for pension schemes. The merger introduced a single point of contact forits customers on contracting-out election and tax approval matters.

135. On receipt of written confirmation that a pension scheme has ceased to contract-out, HerMajesty’s Revenue and Customs writes to the employer, trustees and pension provider toconfirm the cessation date. They then cancel the relevant contracting-out certificate andassociated tax relief certificates and notify NICO of the cessation/wind-up event.

136. This formal notification is the trigger for NICO’s ‘initial action’, which is to to raise a file andenter the scheme details on the NIRS2 Benefit Scheme Provider file. NIRS2 – NICO’s computersystem – identifies all individual scheme members in respect of whom the employer orscheme administrator had previously informed NICO of their details.


137. Scheme enquiry lists are created and appropriate pension calculations are produced andre-input schedules supplied for each individual current member if all of the earnings andcontributions details are available.

138. These are then provided to the scheme administrator who, with trustees, will seek to reconcilethe records held by the scheme with those held by NICO in respect of national insurancecontributions.

139. Once reconciled, agreed re-input schedules are used to notify NICO formally of the methodsby which the rights are to be preserved or protected. It is not necessary to secure everymember’s pension rights by the same method. Trustees must provide members withinformation about their pension rights within the scheme and options available for preservingthem. Scheme administrators must inform NICO once a decision has been taken about thearrangements that have been made, detailing the appropriate methods of preservation.

140. There are two main areas where queries arise: scheme administrators frequently dispute bothmembers’ periods of contracted-out employment and pension calculations undertaken inrespect of individual members. This may be a consequence of incorrect or conflictingcontributions information being submitted to NICO from either the scheme administrator orthe employer over a number of years.

141. NICO has introduced a system of ‘Customer Account Management’ and a series of roadshowsand face-to-face meetings with pensions professionals in order to improve the service itprovides.

142. NICO is also responsible for work to deal with requests for ‘deemed buyback’ calculations formembers of final salary schemes in wind-up, which would restore those members into thestate additional pension scheme.

143. An individual may be eligible for deemed buyback where the funds available to the scheme inrespect of the member are less than the amount required to restore their state scheme rightsfor the period of contracted-out employment, where the scheme has insufficient resources tomeet the MFR level, and where the amount available in the scheme in respect of the member isless than the amount which would have been available had the scheme wound up 100% funded.

144. If the criteria are met, NICO will on request perform and issue provisional deemed buybackcalculations either for samples or for the whole membership of schemes.

145. NICO says that, at the time of writing, 109 schemes have met the criteria for deemed buyback.20 schemes have been issued with full scheme calculations, 66 schemes have been issued withsample calculations and work on 8 schemes is still in progress. Of the 86 schemes that havebeen issued with either sample or full scheme calculations, 15 schemes have confirmed thatthey have no qualifying members and therefore they will not be pursuing deemed buyback.

146. Since November 2003, NICO have issued over 7,000 deemed buyback calculations tocustomers. However, to date, only 58 members have opted to pursue deemed buyback.


Introduction1. This annex sets out the technical scope of – and gives further detail about – the actuarial

advice I commissioned to help me to investigate complaints about the various changes to theactuarial basis of the MFR test and an alleged failure to inform scheme members and trusteesof the effects of those changes.

2. The report produced by my advisers is over 60 pages long. This annex therefore can only be abrief summary of their advice.

3. The work done for me by my advisers included:

(i) an assessment of whether the MFR – at both its original level and at those after thesubsequent changes to it – provided to non-pensioner members of a final salary scheme a‘reasonable expectation’ of achieving equivalent benefits through a personal pension onwind-up;

(ii) an assessment of whether the principal changes to the MFR were significant; and

(iii) an assessment of whether those changes had the effect of strengthening or weakeningthe protection afforded to the accrued pension rights of final salary schemes as measuredon the MFR basis.

Technical scope of advice4. This work involved the application of a stochastic model developed by my advisers (and also

used by them in relation to their other work).

5. It also involved the use of statistical methods to generate a large number of possibleoutcomes for asset values – in this case equity and bond values – over a given term.

6. My advisers generated sets of possible outcomes at the four key dates in the developmentof the MFR basis: January 1996, April 1997, June 1998 and March 2002.

Assumptions used7. At each date, they also generated the outcomes based on the economic conditions at the

time, as an attempt to avoid the use of hindsight – to put them in the position that they mighthave been in, if they had been assessing the MFR in this way at that point in time.

8. My advisers recognise that this calibration of their modelling to the historic economicconditions cannot be perfect. The stochastic outcomes were generated by a model that itselfis based around a set of long term assumptions.

9. They therefore used the same long term assumptions at each of the four dates in order toavoid introducing distortions to the results, although they advise me that, if required, theycould have provided analysis on the effect of varying the assumptions.

10. As a result, there might have been minor differences in the probabilities had my advisersselected different long term assumptions.


Annex BActuarial advice to the investigation

11. I am told that it is therefore more helpful to focus on the movements in the probabilitiesbetween the different dates – rather than the absolute level of the probabilities at the startingdate.

Process of modelling12. The starting value (the initial investment) and the target value (the amount required to provide

the deferred pension given up when the transfer value was taken) are both set with referenceto values derived on the MFR basis.

13. For simplicity, the starting value was the MFR transfer value, i.e. dependent on the equityMVA, which would have been paid in respect of an accrued annual pension of £1,000, which isindex-linked in payment and payable from age 65.

14. This starting value was then run through the stochastic model to generate 5,000 simulatedfund values (net of investment fees and expenses) that might result from the investment ofthis amount, on a 100% equity basis, in a personal pension vehicle.

15. The model also allowed for the switch from equity to bond investments over the 10 yearsbefore retirement age, as implied by the MFR basis.

16. My advisers then assessed the percentage of these fund values that exceeded the MFR targetvalue.

17. The MFR target value was calculated as the accrued pension increased, between the date thetransfer value was assumed to be taken and retirement age, in line with the MFR assumptionfor deferred benefit revaluation (4% p.a.).

18. This projected amount was then converted to a value using the MFR pensioner basis, which islinked to gilt yields at the relevant date.

19. This then provided an assessment of the probability of the MFR transfer value being sufficientto provide the pension being given up.

Summary of advice20. In relation to whether the MFR delivered the ‘reasonable expectation’ policy intention –

defined as a 50% chance – for non-pensioners at the time of its conception and at the time ofits implementation, my advisers tell me that, at those times, on the basis of their analysis asoutlined above it is their opinion that the design of the MFR was consistent with that policyintention.

21. They also tell me that, although the MFR was a measure which was intended to test theposition upon the ‘discontinuance’ of a fund, it was derived from an actuarial valuationmethod used for funds which were ‘ongoing’. For this reason, the MFR had a number of designflaws which meant that, whilst it delivered the policy intention at the time of its introduction,it was not robust to changing market and other economic conditions.

22. Such changes included:

l lower inflation;

Annex B Actuarial advice to the investigation | 221

l lower nominal interest rates;

l changes in the make up of the All Share Index;

l changes in annuity buyout costs;

l the removal of tax credits on dividends; and

l changes in dividend policy.

23. In addition, they advise me that the MFR contained a ‘discontinuity’ in that the amountrequired to be held immediately before retirement was often less than the amount requiredto be held immediately afterwards.

24. In relation to the ability of the MFR to deliver the policy intention for non-pensioner membersover time, my advisers firstly considered the position if there had been no changes to the MFR.

25. They calculated the change in the probability that a non-pensioner would achieve their fullaccrued benefits if their scheme wound up. Their advice is that (if there had been no changesto the MFR basis) the initial probability asserted by the Government of an even chance(i.e. 50%) would have fallen by March 2002 as follows:

a) (ignoring the detrimental effect of rising annuity buyout costs) to a little under 45%; and

b) (including that detrimental effect) to around 35%.

26. The advice to me is that the MFR’s inability to adapt to changing market conditions alonewould have resulted in it reaching levels where it failed to achieve the policy intentionascribed to it.

27. My advisers then tested the effect of the changes made in 1998 and 2002. They advise me thatthe changes had the effect of reducing the probabilities above to just above 35% andpotentially to less than 30%, respectively.

28. It is the opinion of my actuarial advisers that at that time the MFR was already failing todeliver the Government’s policy intention and that the changes exacerbated that failure.

29. My advisers then considered whether the changes were ‘significant’. They told me that theMFR was a minimum. To varying degrees, depending on the wording in schemes’documentation, trustees had powers to enforce contribution rates higher than the minimum.

30. However, I am told that, in fact, while most trustees could take steps to reduce investment riskand thereby increase the MFR minimum contributions, few did so. In practice therefore asignificant number of schemes only enforced the minimum required by the MFR.

31. I am told that, for some companies, particularly where the employer set the contribution rate,the reduced protection afforded by the changes and the 2002 extension to the period overwhich deficits could be corrected meant that, in practice, lower employer contributions werepaid than would otherwise have been the case and some other steps available to companiesand trustees were not considered.


32. I am advised that the impact of these changes would have been very scheme specific – forexample, for well funded schemes they might have had very little impact.

33. However, where the MFR ‘bit’ and where employers went insolvent, it is the opinion of myadvisers that the combination of the changes to the MFR formula and deficit recovery periodsdid constitute a significant weakening of protection to members.

34. For the Government’s policy intention to be met, my advisers inform me that the changesmade by it would have needed to be in the opposite direction.

Annex B Actuarial advice to the investigation | 223

Introduction1. This annex sets out certain submissions made to me by DWP during the course of the

investigation – and my assessment of those submissions.

2. These relate, first, to initial concerns I had about the official information provided about thesecurity afforded to scheme members by the MFR. Secondly, they relate to whether, had DWPprovided clear, complete, consistent and accurate information – as complainants assert that itshould have done – this would have prevented the injustice claimed by them.

DWP’s submissionsOfficial information3. DWP’s representations in relation to my initial concerns – that official information about the

degree of security provided by the MFR was not clear, complete, consistent and alwaysaccurate – can be classified as being in relation to four aspects of that information.

4. These were:

(i) about the context in which (principally early) statements about the MFR were made andwhat Ministers and others meant by those early statements;

(ii) about whether schemes of which complainants were members were in fact fully fundedon the MFR basis at wind-up and thus whether official statements about the effects ofbeing 100% funded on that basis were relevant to complainants’ positions;

(iii) about whether all of the statements about which I had concerns were known tocomplainants – and whether they were referred to in their original complaints; and

(iv) about whether trustees might reasonably have been entitled to have regard to officialinformation.

5. DWP also made representations as to whether individuals would still have suffered loss evenhad they known about the risks to their pension rights following disclosure of those risks byGovernment. It also submitted actuarial advice, produced for it by the Government Actuary,to support those representations.

Early statements about MFR6. In relation to the context and content of early statements about the MFR, DWP said that:

... It should be noted that before the 1995 Act – except for limited facilities in respect ofcontracted-out schemes – no general funding requirements existed for UK pension schemes,and the amount of protection depended on scheme rules and the actions or inaction of thetrustees in each case.

With no minimum requirement for funding, all categories of member, even those in apriority position at wind-up, might suffer substantial reductions in pension entitlement.


Annex CFurther DWP submissions made during the investigation andmy assessment of those submissions

7. DWP continued:

It is therefore understandable that Government statements at the time of the 1995 Actwould tend to emphasise the fact that the MFR offered a mechanism for protectingpension entitlement.

However, these statements generally made a clear distinction between full protection forall members, regardless of age, and the concept of a ‘fair transfer value’ (or similar phrase)for younger members.

8. On the former point, DWP said that Ministers had made clear that the MFR did not offer totalprotection and gave as an example the following excerpt from a Ministerial speech madeduring parliamentary consideration of the Bill that became the 1995 Act:

Let me dispel some misconceptions about the minimum requirement. It will not providethat scheme members’ benefits can be absolutely secured in full, which would require thepurchase of guaranteed insurance annuities. We accept... that that would be an unrealistictarget giving rise to excessive costs for employers...

If the scheme is at least 100% funded on the statutory basis, pensioners can expect theirpensions to continue to be met in full, while younger scheme members will be entitled to afair actuarial value of their rights which they can then transfer to another scheme or to apersonal pension.

9. DWP said that a ‘fair actuarial value’ was not the same as an expectation of full benefits forall scheme members. DWP said that the idea of ‘fair’ or ‘reasonable’ value related to an evenchance that non-pensioners would secure at least the value of their accrued rights in thescheme at retirement.

10. Moreover, DWP said that the various other parliamentary statements at this time, whichmentioned ‘fair value of accrued rights’, or ‘actuarial value of accrued rights’ needed to beseen in this context.

Funding position of complainants’ schemes11. DWP said that schemes could comply with the MFR legislation notwithstanding that they were

at any one time funded below MFR levels, as the relevant legislation had only required them insuch circumstances to have a schedule of contributions that would bring the scheme fundingup to at least the MFR level over a specified period.

12. DWP said that it was also worth noting that the MFR regime did not immediately apply to allschemes; under transitional arrangements, schemes had not been required to undertake theirfirst MFR valuation until approximately three years after their last valuation on the pre-April1997 basis.

13. In other words, individual schemes that wound up may not in any case have been funded tothe level at which it is alleged that a ‘false sense of security’ existed.

Annex C Further DWP submissions made during the investigation and my assessment of those submissions | 225

14. DWP said that they could have been – and probably were – funded to less than that level; or(until 1999/2000) they might still have been funded on a pre-MFR basis and would never haveoperated on the basis of an MFR valuation.

15. Furthermore, DWP said that their official statements about which I had concerns were madein relation to the aim of the MFR policy in respect of schemes that were funded to MFR levels.However, DWP said that, in practice, it was their understanding that most, if not all, of theschemes whose wind-up had given rise to complaints to me were below (and possiblysignificantly below) the MFR funding level when they went into wind-up.

16. Thus, DWP did not consider that statements about the level of protection afforded toschemes in a position not similar to those of which complainants were members were relevantto the current position of those complainants.

Complainants’ knowledge of leaflets17. In addition, DWP said that some of the early information about the 1995 Act was long out of

print and, as far as it was aware, had been withdrawn from public use some years before thetime of the events which gave rise to the complaints, let alone the time the complaints to mewere made.

18. Moreover, DWP said that it was surprised that official statements which were alleged to havean important opinion-forming role and which apparently influenced trustees and schememembers to take or not to take significant financial decisions had not been emphasised in theoriginal complaints.

The position of trustees19. DWP told me that it did not accept that any statements made about the MFR could

reasonably have given trustees a false sense of security.

20. DWP said that every certificate prepared by a scheme actuary when undertaking an MFRvaluation had to include a statement to the effect that the valuation did not reflect the costof securing full buy-out of liabilities in the event of wind-up. Furthermore, every certificateshowing the adequacy of a schedule of contributions had had to include a similar statementand, from May 1999 onwards, the OPRA ‘Guide to the Minimum Funding Requirement’ hadstated that achieving MFR funding levels did not necessarily ensure that all liabilities could bemet on wind-up.

21. Given this, DWP said that trustees should have been aware that on winding-up, schememembers would not necessarily be entitled to the full buy-out value of their accrued rightseven if the scheme was fully funded on the MFR basis.

Whether disclosure would have prevented injustice22. DWP put it to me that individuals might still have suffered losses, even had the information

provided to individuals by public bodies been clear, complete, consistent and accurate.

23. DWP submitted analysis done by the Government Actuary to support the proposition thatanyone leaving a final salary scheme that did not wind-up would have suffered financial loss by


doing so. This complements the submissions made to me earlier in the investigation by DWPthat the actions which complainants typically claim they might have taken if they had beenwarned about the risks associated with employer insolvency were important actions with verysignificant personal financial risks and implications.

24. DWP said that, had their official information contained a warning about such risks, this wouldhave been no use to individual scheme members. Worse, it might have had significantlyadverse consequences for both individuals and occupational final salary schemes generally,because it could have given no clue as to which schemes might in practice be affected. In itsmost general sense it might potentially have applied to virtually every scheme, hardly anybeing in a position in 2002-3 to fund to full buy-out levels in the event of the sponsoringemployer immediately becoming insolvent; and it might well therefore have intimidatedindividuals in a wide range of schemes into thinking that their pensions were at risk, with theresult of encouraging them to leave these schemes.

25. However, DWP said that leaving an occupational scheme in such a way was – in any normalcircumstances – a decision fraught with financial risk. Such a decision should certainly nothave been taken without serious thought and only after seeking advice, as one would almostinvariably lose their employer’s contributions going forward; one would be obliged to take outa personal pension and thus assume all the risks of transferring out of a defined benefit into adefined contribution scheme – principally investment risks, but also expense and mortalityrisks; and one would be required to take a transfer value which would reflect the overallfunding level of the scheme at the time of the departure – which was unlikely to be robust ifthe reason for leaving was fear of impending insolvent wind-up.

26. DWP further said that I should consider the issue of relative loss and the limited choicesavailable to individuals who might have left their occupational pension scheme in the light offull disclosure of risk. DWP said that the examples set out in GAD’s analysis suggested that, inthe prevailing circumstances, reductions to the benefits available at wind-up would have hadto be substantial for members to have incurred materially greater losses by staying in thescheme rather than leaving it early.

27. DWP said that it believed that GAD’s analysis illustrated two very important points: first, that,as with decisions such as to contract out or contract in, the specific circumstances ofindividuals making decisions between different types of pension scheme needed to beexamined carefully. It could not be assumed that individuals necessarily suffered a greater loss– by being members of a scheme which wound up under-funded – than they would have doneif they had made some other choice in the months or years before the insolvency occurred.

28. Secondly, this showed that a general warning about insolvency risk in DWP literature couldeasily have intimidated members of those schemes (DWP said that this constituted at least95% of the total throughout the period in question) which did not in the event wind-up,whether under-funded or not.

29. DWP said that, if such people had decided to leave their scheme, such a decision wouldalmost inevitably have left them worse off.


My assessment of these submissions30. I have carefully considered these submissions by DWP, but I am not persuaded by them.

Early statements about the MFR31. I turn first to DWP’s submission that reference in some Ministerial statements and in some

later official publications to the aim that, if their scheme were funded to the MFR level, anon-pensioner would receive a transfer value of a ‘fair value’ or ‘reasonable value’ of theiraccrued rights meant that this would only give them an even chance of replicating their lostbenefits on retirement.

32. First, my actuarial advisers tell me that, in their professional opinion and from their experienceof actuarial work, the term ‘fair actuarial value’ is not a technically defined term within theactuarial profession. In their view, an ‘actuarial value’ is no more than a reference to a valueplaced on an asset or liability, due to be paid in the future in certain circumstances, ascalculated by an actuary. Without further explanation of the reasons for and the assumptionsbehind the calculation, there was no single generally accepted actuarial interpretation forwhat such a value might be.

33. In addition, I am aware that a ‘fair value’ in the financial markets is generally accepted to referto the amount of money for which an asset or liability could be exchanged with a knowing andwilling third party, in an arm’s length transaction. Whilst there may be some variations on this,I also understand that this is broadly the commonly accepted definition of that phrase withinthe accounting profession.

34. Secondly, I do not think that any commonsense reading of either term would lead to a clearunderstanding that non-pensioners would only have an even chance of replicating theirpension benefits by investing the cash equivalent transfer values that they would receive weretheir scheme to wind-up funded to the MFR level. Even if the explanation proffered by DWP inits submission was the intended meaning behind those statements as to what non-pensionerswould receive, this would be an unclear and potentially misleading formulation, which might initself have constituted maladministration.

35. I therefore do not accept that the use of the words ‘fair actuarial value’ could have beenunambiguously interpreted by actuaries or by others in the way that DWP now suggests.

The position of trustees36. I now turn to DWP’s submission on whether trustees might have been misled by OPRA’s

publications or by other official pronouncements on the issues relevant to this investigation.

37. On the one hand, I recognise that scheme trustees were in a different position to individualscheme members who were not trustees, in that they had access to professional advice andalso to the funding and valuation certificates to which DWP has referred. I am advised thatscheme funding and valuation certificates were rarely requested by scheme members but thattrustees were indeed required to have regard to them.

38. On the other hand, I note that it was recognised in DSS research, published in September2000, that trustees’ knowledge of their duties varied. Furthermore, the Myners report,


commissioned by Government, showed that the majority of trustees had received less thanthree days’ training. It also recognised that more than three-quarters of trustees had no in-house professionals to assist them and were thus reliant on securing advice from external andoften costly commercial advisers.

39. Moreover, I also note that OPRA had recognised in July 1999 that, while professional advicewas often necessary, ‘trustees still need a grasp of the subject to be able to ask the rightquestions and understand fully the advice they are given’.

40. In addition, I consider that member-nominated trustees – who were usually scheme membersand not pensions or business professionals – were in a substantively different position fromthose appointed by sponsoring employers. I also note that the actuarial profession had asearly as March 1995 warned the Government that a signed minimum funding certificate mightgive a misleading impression to scheme members.

41. Having considered these matters carefully, I do not accept that a requirement on trustees toseek professional advice or to have regard to various certificates can mean that informationissued by a regulatory body or by other official bodies can reasonably be incomplete,misleading or inaccurate – and that this requirement might absolve those providing any suchinformation from a finding of maladministration.

42. This is reinforced by the – in my view quite proper – recognition by the regulatory body thattrustees would need to know what questions to ask before such advice or certificates couldproperly be understood.

43. It also seems to me that official publications issued by those responsible for the legal andregulatory regimes in which pension schemes operated were a reasonable source ofinformation about the issues that affected pension scheme trustees and that trustees mighttherefore be expected to rely on them.

Scheme funding levels44. I now turn to DWP’s submission that the schemes of which complainants are (or were)

members were all funded to a level below – or considerably below – the MFR level. I alsoconsider whether, if that were the case, statements concerning the security offered by beingfunded to the MFR level were relevant to their complaints.

45. First, where a scheme was funded below the MFR level, it is not the case that schememembers would necessarily have had no regard to official information about what wasdenoted by being funded to that level.

46. If a scheme was, for example, 95% funded on the MFR level, it seems to me reasonable toassume that a scheme member might consider that any shortfall that would occur on schemeclosure might be minimal (that is, approximately 5%), if they believed that any scheme couldmeet all of its liabilities on wind-up if it were funded at the MFR level.

47. It seems to me also reasonable to assume that a scheme member would make otherassumptions about the security of their pension rights. They might have done this by, for


example, a direct comparison of the position of their scheme against the 100% MFR level thatofficial information told them was a benchmark that would enable their scheme to havesufficient assets to meet its full liabilities.

48. Therefore, for those members of schemes which wound up below 100% on the MFR basis, I donot consider that official information about the degree of security that being funded to theMFR level provided was irrelevant to their position or is now unrelated to their complaint.

49. Secondly, and more importantly, it is not the case that those who have complained to me areor were all members of schemes that were funded to well below the MFR level on wind-up.

50. In relation to the four schemes of which the representative complainants were members,I have only been able to ascertain to my satisfaction the position as regards two of thoseschemes – those of which Mr G and Mr B were members.

51. In relation to Mr G’s scheme, it was finally valued at 101% on the MFR basis. Mr B’s scheme wasfinally valued at just over 100%. As can be seen from chapter 2, Mr G may only receive 24% ofhis expected pension and Mr B – without ‘assistance’ from the FAS – may only receiveapproximately 10%.

52. In relation to Mr J’s scheme, I am aware that his scheme was not fully funded on the MFR basisand that a substantial shortfall existed on wind-up. However, I am not aware of the currentposition or the exact funding level in either that scheme or in that of which Mr D was amember.

53. In addition, the schemes of which other complainants were members were by no means allfunded below 100% on the MFR basis. For example, in relation to those among the randomsample of schemes whose records I scrutinised (see chapter 3) and where information isavailable, it appears that the majority of those schemes were valued as being near to, at, orabove the MFR level.

54. In another scheme funded above the MFR level, at least seven of whose members havecomplained to me, non-pensioner members are likely to receive approximately 80% of the‘Guaranteed Minimum Pension’ in respect of national insurance contributions and nothing at allfor their other contributions. I have also seen at least ten similar cases of schemes that werefunded at or above the MFR level but where non-pensioners are likely to receive a significantshortfall in their expected pension.

55. Furthermore, perhaps one of the best known examples is the ASW Sheerness scheme, whichwas 104% funded on the MFR basis but where non-pensioners are likely to receive only aminimal proportion of their expected pensions.

56. This position – that schemes funded to the MFR level would not necessarily be able to pay tonon-pensioners the value of their accrued rights – was something recognised in private byGovernment at the time and was, my actuarial advisers tell me, inherent in the design of theMFR.


57. This was reflected, for example, in a letter from GAD to DSS in June 1999, in the actuarialreport seen by OPRA in draft that was produced in November 1999, in the September 2000MFR consultation issued by DWP and the Treasury, and in the actuarial profession’s briefingpaper for DWP provided in March 2002. It was also recognised in the NAO report on OPRApublished in November 2002, by an OPRA spokesperson in December 2002 and in OPRApublications issued in 2003. A GAD official also recognised this in a meeting in March 2000.

58. However, I note that in public – in, for example, parliamentary debates in March 1995 rightthrough to as late as a December 2001 statement by OPRA – official sources sometimesappeared to suggest that shortfalls in non-pensioners’ rights would only occur – where ascheme was funded to the MFR level – if fraud had occurred.

59. Thus, on the one hand, it is clearly the case that public bodies knew at the time that financialloss on scheme wind-up would not be restricted to those in schemes which were either‘under-funded’ on the MFR basis or which had been the subject of fraud or other unlawfulactivity.

60. On the other hand, the public assurances given by Government were that the MFR wasdesigned to ensure that a scheme, if funded to that level, would have enough assets to meetits liabilities in full. Such assurances were given during parliamentary consideration of whatbecame the Pensions Act 1995, in parliamentary answers to questions given in June 2000 andFebruary 2001, and in a Westminster Hall debate in July 2001. In the former debates, assuranceswent further. It was stated that, even where a sponsoring employer became insolvent and wasunable to make further contributions, funding to the MFR level would enable a scheme tomeet all of its liabilities.

61. What, in the light of all of the above, could non-pensioners reasonably have expected fromreading or hearing official sources of information about positions where their scheme wasfunded to 100% on the MFR basis? I consider that they would have expected in suchcircumstances to receive a cash transfer value calculated by an actuary that would reflect theirfull accrued pension rights.

Did complainants have regard to official information?62. In relation to DWP’s submission that some of the leaflets about which I have concerns are long

out-of-print and thus were irrelevant to the complaints I received in 2004, that seems to meto be a submission wholly without merit.

63. Complainants have told me that they took decisions – or refrained from action – some timebefore the winding-up of their scheme. Their complaints were directed at assurances in officialpublications that were provided some time before either the complainants’ schemes woundup or the injustices that they claim to have suffered had crystallised. Thus the officialstatements that they claim lulled them into a sense of ‘false security’ were precisely thosewhich were available many months before their scheme wound up, and many of thosepublications may indeed be no longer in print.


64. As for why some of the official statements about which I had concerns did not feature in theoriginal individual complaints or in Dr Altmann’s submissions in support of those complaints,it should be remembered that the description of the alleged deficiencies in officialinformation that were set out in the statement of complaint for this investigation only gaveexamples and was not intended to be exhaustive.

65. Many of the complainants have sent me copies of old leaflets from their records and othershave pointed me to contemporaneous press cuttings or original excerpts from Hansard.Indeed, in the case of some of those publications that are now out of print, it has largely beenthrough the material sent to me by complainants that I have been able to establish what wasin them.

66. I am satisfied that many complainants had regard either to the specific statements made bypublic bodies or had read scheme and other documentation which, I have seen, oftenreplicated excerpts from official information.

Would disclosure of risk have prevented injustice?67. Turning now to whether disclosure of risk would not have led to a similar – or greater –

injustice, it seems to me that the Government’s submissions appear to assume that, had allmembers known the true risks, the only options open to them were to stay in or to leave theirscheme.

68. However, I am not persuaded that this was necessarily the case. For example, had trustees hadmore and better information available to them, and assuming such information was absorbedand fully understood, it would have enabled greater understanding of the strength of thesecurity offered by the MFR and of the background to and effect of the changes made to theMFR in 1998 and 2002.

69. In that context, trustees might have:

l attempted to seek higher levels of funding from sponsoring employers, in recognition thatthe MFR represented a funding benchmark that fell short of the monies that would beneeded on discontinuance;

l attempted to seek even higher funding, as the costs of buying out benefits ondiscontinuance rose over time;

l disclosed the security issues to their members if they were unable to secure such extrafunding;

l opted for a ‘gilts-matching’ investment strategy, to move to a stronger MFR calculationbasis and hence maximise the MFR minimum employer contributions;

l opposed early retirements unless the employer provided sufficient additional funds tocover the annuity buy-out cost of the resulting pensioner liabilities, to avoid the ‘prioritydrift’ effect; or


l taken other steps to reduce security risks – such as minimising the financial strain fromother sources such as generous or out-of-date benefit options, refusing to accepttransfers into the scheme, following less risky investment strategies, cutting back transfervalues sooner, reining in discretionary benefits, containing future costs by supportingreductions in benefits for future accrual and, ultimately, where permitted, winding upschemes sooner rather than later.

70. If members had also had more information and absorbed and fully understood the level ofsecurity provided to their benefits by the MFR, they might have:

l pressured employers to raise contributions (in some cases employees arguably had astronger negotiating hand than trustees in this respect, especially where strong andorganised trades unions existed);

l elected not to transfer benefits from other pension arrangements into the scheme(if applicable);

l opted not to make additional voluntary contributions or otherwise spread theirinvestments;

l retired from schemes sooner in order to secure their place higher up the winding-uppriority order; or

l sought to take transfer values from schemes in financial distress (before reductions forunder-funding were applied to transfer values).

71. Furthermore, there were also options available to sponsoring employers of pension funds thatsubsequently went into wind-up, had they understood more fully the level of securityafforded by the MFR or had their employees put pressure on them to act. For example:

l some employers would have contributed more if the MFR had not been weakened,meaning less of a shortfall for the schemes where the sponsoring employer subsequentlyfolded;

l for others in greater trouble, a stronger MFR would have hastened the pension fundwind-up (and in some cases the corporate insolvency), and limited the benefits that wereexposed to being reduced;

l some employers would have taken remedial action sooner, which could have preventedpension fund wind ups – such as closing the scheme to new entrants, reducing futurebenefits, raising retirement ages, ceasing future accruals or cutting other business coststo enable higher pension contributions; and

l others would not have done deals that weakened employer covenant strength (or, conversely,may not have passed up opportunities to do corporate deals that could have enhanced thesecurity of the pension fund). Some corporate restructurings that weakened pension fundingor employer covenant strength might not have happened if all the parties had had a betterappreciation of the true extent of the pension funding problems. Conversely, other


companies might not have turned down opportunities to sell a business to a ‘white knight’that could have prevented the company failing because they thought that the pensionscheme funding position was better than it really was.

72. It seems to me that the absence of clear, consistent, accurate and complete information fromthose who were responsible for the statutory basis for pension scheme funding led to ill-informed corporate decision-making by sponsors of pension funds that subsequently wentinto wind-up and equally ill-informed decisions taken by scheme trustees and members.

73. I recognise that it would not have been a straightforward decision for active members to leavetheir scheme and take a transfer value when, in many cases, such action might have resulted inthem losing valuable death-in-service and ill-health retirement cover.

74. I also accept that the analysis done by GAD for DWP may well reflect a true position forcertain people who chose to leave their scheme but found later that their scheme did notwind up with insufficient funds.

75. In my view, however, it is not enough to suggest that, had an individual known that theirpension was at risk, they would still have suffered a financial loss because they necessarilywould have transferred out of their scheme.

76. I consider that there were clear alternatives to such an action and, as a result of themaladministration I have identified, the individuals who have complained to me have beenprevented from taking such action through having been misled as to the need to do so.

77. My general approach to resolving complaints that maladministration has caused injustice toindividuals is, where maladministration has been identified, to seek to put those individualsback into the position they would have been in had that maladministration not occurred.

78. In this case, it seems to me that it is impossible to put those who have complained to me backinto a position in which they had been properly informed as to the potential effects of thelimitations of the relevant legislative provisions that aimed to protect their accrued pensionrights.

79. As their scheme no longer exists, I also consider that it is far too late to seek to provide thoseindividuals with an informed choice about their membership of it or about what else theycould do to protect their position.

80. Those individuals have been prevented from being able to make those choices for themselvesat the appropriate time. That is an injustice.


Introduction1. This annex sets out the response of DWP to my report. It includes a supplementary submission

made by the Government Actuary to support DWP’s response.

2. The words used in this annex, insofar as they are italicised, are those of the authors. Inclusionin this report does not denote that I accept that all of what follows is an accurate reflectionof the relevant facts.

Text of letter dated 27 January 2006 from the Permanent Secretary of DWP3. I would like to say, at the very outset, that we greatly sympathise with those individuals whose

schemes have been wound up and who have, as a consequence, lost a significant part of theoccupational pension they had been led to expect by their scheme. However, as the PermanentSecretary, I must inevitably concentrate on the key issue of whether those losses were caused byany maladministration by my Department or resulted from other causes.

Findings 4. Having considered the report in considerable detail, I have to tell you that we are not able to

accept your findings in respect of the actions taken by my Department for the reasons set outbelow.

5. There are a number of findings, to which I draw attention below, which the Department isunable to accept and considers to be flawed. But the most fundamental point is that, howevergreat the sympathy one may feel for the individual complainants, the report, as drafted,provides no proper basis for concluding that the alleged maladministration, even if we were toaccept that it had occurred, which we do not, would have had any material impact on theoutcomes for those individuals.

6. Let me now turn to the major issues and findings of the report.

Information 7. Your report, in relation to official information, concludes that the information about the level

of security provided by the MFR was sometimes not consistent, accurate or complete and, assuch, was potentially misleading. It also says that the failure of the Department to reviewexisting leaflets after we were told that people did not know the risks to their accrued rightswas maladministrative.

8. We do not consider that the report substantiates these findings. Nor does it demonstrate (evenif we were to accept these findings, which we do not) that all of the individual complainantsread any of the supposedly misleading information.

9. Even if they did so the report does not demonstrate, in our view, that any of the complainantswould have acted differently as a result of having done so.

10. We believe that the report also fails to consider adequately whether individual schememembers received, or should have received, information from their scheme’s trustees (informedas this would have been by advice they received from actuaries or other professional advisers).

Annex D The Government’s response to my report | 235

Annex DThe Government’s response to my report

11. In other words, it appears to assume that they had read and were guided solely, and wereentitled to be guided solely, by the supposedly misleading information about the MFR,notwithstanding the duty on trustees to exercise reasonable care in handling their scheme’saffairs.

12. In terms of the information itself, we believe that the report fails to recognise that:

(i) while individual statements can be questioned, Ministers and others repeatedly stressedthat the MFR was intended to provide ‘greater’ protection rather than any absoluteguarantee;

(ii) it was repeatedly stressed that the MFR was intended as a balance between the interests ofscheme members and employers; by its nature that implies that neither was gettingabsolute protection;

(iii) all of the leaflets to which the report refers carried a general health warning making clearthat they were not complete explanations of the law and were for general guidance only.As such they could not be absolutely relied upon; and

(iv) the advice in a number of the leaflets, that most members of an occupational pensionscheme would be better off when they retire than they would be if they did not join it,was accurate.

13. In terms of whether any individual complainants read the disputed information, we note thatless than half of the respondents to your survey said that they had seen the publications inquestion.

14. Even more importantly the report offers no substantial evidence that, even where they did so,they acted differently from how they would otherwise have acted because they read thesepublications. Given the wide range of sources of information available to the complainants,and the very general nature of the Departmental publications, it is unlikely in the extreme thatthese publications would have materially influenced their actions.

15. Furthermore the report appears to rest on the assumption that, even where an individual readthe information and did act differently as a result, they were entitled to rely on it as ajustification for doing so. In this respect it is quite clear that the primary responsibility forsafeguarding the interests of scheme members, and communicating accurately with them,rests with the scheme trustees.

16. Indeed, since April 1997 it has been a legal requirement that all of the defined benefit schemesunder consideration in the report must appoint an actuary. Even if individual scheme membersmight not have understood the limitations of the MFR, the actuarial profession most certainlydid.

17. Moreover, each MFR valuation certificate carried a statement that meeting the MFR did notmean that, in the event of the scheme’s winding up, full benefits could be secured.


18. It seems to us to follow from this that no scheme member, properly guided by their schemetrustees, in turn properly advised by the scheme’s actuary, should have been in doubt aboutthe actual level of protection offered by the MFR.

19. Finally, in this regard, we are advised that statements made by Ministers to Parliament duringthe passage of a Bill are not statements made in exercise of an administrative function.Ministers, in explaining and debating the 1995 Pensions Bill, were participating in the legislativeprocess and so exercising a legislative function.

20. Consequently we do not think you have the powers to investigate such statements, and so, tothe extent that any findings of maladministration are based on such statements, we believethat they should be disregarded.

21. Similarly, since it is... outside of your jurisdiction, we do not think you should include, or relyupon, any information given by the Financial Services Authority in reaching your conclusionsin this respect.

The 2002 decision to amend the MFR 22. Turning now to your third finding of maladministration in respect of the 2002 decision to

amend the MFR, we similarly do not consider that the report substantiates a finding ofmaladministration.

23. [The annex] to this letter [which is below] sets out a number of detailed considerations whichwe have taken into account in reaching that conclusion.

24. More generally, however, as the report acknowledges, it is clear that the MFR is a subject ofvery considerable complexity. Accordingly, the technical detail for calculating the actuarialbasis of the MFR was set out in a guidance note (GN27) prepared and issued by the actuarialprofession after approval by the Secretary of State.

25. The actuarial profession also then kept the actuarial basis of the MFR under continual reviewand recommended to the Government such changes as they considered appropriate to keepthe strength of the MFR in line with the level of the original policy intention.

26. It is clear that the recommendations given to the Department in respect of the 2002decision represented the considered view of the profession as a whole at that time; therecommendations were informed by extensive analysis by the Technical Support and ResearchCommittee of the Pensions Board of the actuarial profession which, at that time, contained anumber of the leading technical actuaries from all of the major firms of actuaries.

27. The formal approval of the recommendation was the responsibility of the Pensions Board,whose membership also encompassed the major actuarial firms. The Department was alsoguided... by the advice of its own professional advisers in the Government Actuary’sDepartment.

28. Against this background, we simply do not understand how a finding of maladministration canbe justified. The Department acted on the advice of the actuarial profession, which had beenconfirmed by the Government Actuary’s Department. Even if, which we very much doubt, a


different decision, going against the professional advice, might properly have been taken inthose circumstances, we cannot see how a decision to follow such professional advice (fromtwo independent sources) can possibly be considered to amount to maladministration.

29. Indeed we consider that it would have left the Department open to very substantial criticismand risk of challenge not to have accepted the profession’s recommendation in thesecircumstances without good reason.

Issues of scope and timing 30. You have decided that the coverage of your recommendations should begin with members of

schemes that wound up after 6 April 1997... But this decision ignores the issue of relating thealleged maladministrative documents to the individuals who have lost financially.

31. Even if we accepted that individuals were misled by Departmental publications, which for thereasons set out above we do not, they cannot by definition have been misled by a leaflet thatwas produced after their scheme had begun to wind-up.

32. The only allegedly maladministrative document in circulation in April 1997 was the PEC3.

33. It surely follows, therefore, that the coverage of your recommendations should be limited toindividuals who had read the leaflets the report characterises as maladministrative. Theseconsiderations do not appear to have been taken into account.

34. A similar issue arises in respect of whether schemes were in fact funded to the MFR level. Thereport says that it was thought that, if a scheme was funded up to the MFR, any accrued rightswere safe.

35. Even if we accepted this proposition, which for the reasons set out above we do not, it mustfollow that members of schemes which were not funded to the level of the MFR could not havehad such an expectation and, therefore, that their losses cannot be attributed to any allegedmaladministration.

36. The report refers to only two of the four schemes of which the representative complainantswere members as having been funded up to the MFR.

37. By definition, a scheme that was not funded up to the MFR could not have been thought byits members to have satisfied this requirement, whatever protection they may have thoughtthis offered.

38. I am afraid we simply do not regard as remotely plausible the argument [set out in annex 3 tothis report] that a member of a scheme underfunded against the MFR could have drawn theinference that, if the MFR offered full protection, those who were not funded up to the MFRcould expect proportionate protection.

39. Even if (which we very much doubt) any complainants did draw such an inference, they wouldhave had no basis whatsoever for doing so. In addition, at least some of the schemes thatwound up would not even have had an MFR valuation, as the MFR was phased in over threeyears in line with schemes’ normal valuation cycles.


40. Similarly in respect of your finding of alleged maladministration in respect of the 2002 decisionto amend the MFR calculation, that, self-evidently, cannot have had any impact on schemesthat wound up before March 2002, or that had the employer debt certified before that point.Indeed, unless an insolvent employer’s scheme had reached the end of its valuation cyclebetween 2002 and wind-up, the employer would still (prior to insolvency) have been requiredto pay contributions based on the previous “stronger” (in your terms) level of the MFR.

Causal link 41. We do not find that the necessary causal link has been demonstrated between the

maladministration, which we do not in any event accept, alleged in this [report] and thelosses incurred by the complainants.

42. The report does not show that, but for having been misled by the alleged maladministration,the complainants would have taken steps to protect their accrued rights and that this actionwould have been effective in preventing the losses.

43. The examples [you have] given of actions that could have been taken to avoid or reduce thelosses are unconvincing. The report says that the alleged maladministration was a significantcontributory factor in causing the financial losses. However, it offers no substantive reasoning toback up this statement. In summary, the report does not acknowledge the myriad uncertaintieswhich attach to any consideration of how outcomes might have differed if the specific actionscriticised had been undertaken differently.

44. Given the number of causal factors at work, the vast majority of which fall wholly outside thescope of the present jurisdiction (and indeed wholly outside the Government’s control), theDepartment would suggest that the only rational conclusion is that the matters criticised, evenif (which we do not accept) such criticisms were justified, are unlikely to have made anydifference to the outcomes for the individual complainants.

Recommendations 45. We would also wish to comment on the specific recommendations in the report. The well-

established standard applied by Ombudsmen (endorsed by the Government and the PublicAdministration Select Committee) is that a person should be put back into the position hewould have been in had the maladministration not taken place. Given that, as noted above,the report does not indicate what part, in your opinion, the alleged maladministration playedin the losses incurred by the complainants or what could be done to correct it, we are unableto consider this issue.

46. You have also asked us to consider whether it is appropriate to use taxpayers’ money to pay forlosses which are not the responsibility of this Department and which arose from the actions ofothers. We would of course expect a strong evidence base to justify incurring such expenditure.

47. The report provides no such base. It would be especially difficult to justify such a decisioninsofar as the recommendations in your report take account of issues which, I am advised,go beyond the powers given to you under the Parliamentary Commissioner Act.


48. You have offered the Department a further two months... after publication to respond to yourrecommendations and we were grateful for your consideration in doing so.

49. However, given that, on the basis of the report as drafted, we are minded not to accept yourfindings of maladministration, we believe that any delay in responding to the recommendationscould only serve to raise false hopes amongst the complainants concerned.

50. We therefore need to inform you now that... we are not minded to accept the first fourrecommendations in your report.

51. We are minded to accept your fifth recommendation – to review the time taken to wind-upfinal salary schemes – and indeed have already set some work in hand on this; although weneed to recognise that the delays are largely outside the control of Government.

Other issues 52. You refer in the report to the Financial Assistance Scheme... We acknowledge your view that the

FAS does not provide full compensation – nor was it intended to do so. Nevertheless, the FASwill provide, in our view, a significant measure of help to some of the worst affected individuals.

53. The Government has made it clear that it will review the FAS in the forthcomingComprehensive Spending Review and, whilst it does not accept liability for individuals’ losses,it will take account of the issues raised and the individual experiences highlighted in your reportwhen carrying out this review.

54. Finally, I would like to stress again the point made [at the beginning] of this letter.

55. No one reading the opening paragraphs of Chapter 2 of your report can fail to have enormoussympathy with the predicament of many of those individuals who have complained to you.

56. But that, I am afraid, can not absolve us of the responsibility to respond to your report and itsrecommendations on their merits, particularly in considering whether any liability for theevents attaches to my Department.

57. Having done so, we are firmly of the conclusion that your report does not substantiate anymaladministration on the part of my Department.

The 2002 reform of the Minimum Funding Requirement (MFR) 58. Your report makes frequent reference to “weakening” and “strengthening” the basis of the MFR.

59. Lest there be any misunderstanding on this point, it is worth saying again that the adjustmentsto the MFR were always on the principle of maintaining its April 1997 level.

60. This was the principle on which the actuarial profession kept the basis of the MFR under reviewand made recommendations to the Department. It was also the basis on which the GovernmentActuary’s Department (GAD) advised the Department.

61. [D]uring the second half of 2001, the Department had regular meetings with the representativesof the Pensions Board of the actuarial profession on a range of matters of mutual interest, the


most significant being the abolition of the MFR and the package of interim changes pendingabolition then being developed.

62. At a meeting between DWP and the profession on 9 July 2001, the profession indicated thatit expected to write to DWP about the MFR basis, recommending a 0.25 percentage pointreduction in the benchmark dividend yield used in calculating the equity market valueadjustment (MVA).

63. A further meeting took place on 4 September 2001, the day before the profession wrote to theDepartment, at which the Pensions Board confirmed that it would be writing to DWP in thenext few days to recommend a reduction in the dividend yield from 3.25 per cent to 3 per cent.

64. This demonstrates that the 5 September 2001 letter was expected; both the Department and itsadvisors from GAD were aware that there was support for the change to the dividend yield inthe MVA and the reasons why it was being proposed.

65. This was borne out by subsequent responses to the DWP consultation initiated in September2001, the profession having informed all actuaries of the proposal that it had made to myDepartment (as indicated in their letter of 5 September 2001).

66. The Department was conscious that any change would need to be considered in the context ofthe detailed interim changes proposed by the profession in May 2000.

67. The net effect of the changes proposed in May 2000 had been small... [p]aragraph 5 of Annex Cto the September 2000 consultation document “Security for Occupational Pensions” sets outthe overall effect.

68. Consultation on those changes revealed little support for them, particularly if the MFR was tobe replaced in the near future. Implementing all three proposed changes would have requiredschemes and their advisors to have made complex adjustments to their systems.

69. In their letter of 5 September 2001, the profession made clear that they considered that changesin the economic circumstances since their recommendation of May 2000 did now warrantmaking a change and that they were recommending a single change to the dividend yield in theequity MVA to keep the change as simple as possible in the light of the Government’sannounced intention to abolish the MFR.

70. Nonetheless, the profession made clear that their proposed change from 3.25% to 3% in thedividend yield in the MVA was to take account of two factors – further reductions in dividendyields since the May 2000 recommendations had been made, together with a change to themortality assumption.

71. Although not quantified in the letter from the profession, the change to the mortalityassumption would have been in the region of an increase of some 9% for non-pensionermembers more than 10 years away from scheme pension age.

72. The profession said in their letter that, if a separate change had been made for mortality, theywould have proposed a greater reduction in the benchmark dividend yield from 3.25% to 2.75%.


The change to 3% was to take account of both factors whilst keeping the change simple forschemes to administer until the MFR was replaced.

73. Thus, the recommendation made in September 2001 was not inconsistent with therecommendation made in May 2000, as you say in... [your] report.

74. The recommendation was still based on improved longevity and falling dividend yields.But, whereas in May 2000 the overall effect of these two factors was to cause the MFR to beoperating at a lower level than when it was introduced, by September 2001 the overall effectwas to cause the MFR to be operating at a higher level because dividend yields had fallenfurther since May 2000.

75. The Department believes that inferences are being drawn from the precise wording of the GADadvice... that are not warranted by the context.

76. The Department does not read the reference in that advice to events since 11 September 2001 –which is understandable in all the then circumstances – as limiting the scope of that advice.

77. The advice given in the email of 25 September 2001 was in confirmation of earlier discussionsand so not the only component of the advice given to the Department on a recommendationwhich had been anticipated. That advice would have been informed by the access which GADhad, through its involvement in professional affairs, to the detailed work carried out by theTechnical Support and Research Committee of the Pensions Board of the actuarial profession.In addition it was certainly open to GAD to raise any further issues that they thought wererelevant.

78. The Department received no representations to the effect that this recommendation – madepublic by the profession after it was submitted to the Government – was unreasonable. Indeed,the representations received were in support of the change.

79. In the light of these facts, the Department cannot agree that it did not give properconsideration to the issue.

Official Information Maladministration 80. There is, of course, always room for improvement in the presentation and management of

official information. The Department takes its role of producing leaflets and information forthe public very seriously.

81. However a balance inevitably needs to be struck between the information needs of the rangeof readers.

82. A recent report by the National Audit Office has provided a useful basis for the Departmentto make improvements in a number of places.


83. Areas the Department is treating as a priority for improvement are:

l the consistent application of standards for all the Department’s information products,which we plan to take forward by centrally monitoring our information output forconsistency and accuracy;

l an increase in staff awareness of their obligation to provide accurate and up to dateinformation to the public (be that verbally or in writing); [and]

l better management of the risks associated with our information output by examiningleaflets individually as well as collectively.

84. But, notwithstanding the need for continuous improvement, publications cannot be regarded asmaladministrative simply because they fall below the standards set down in internal guidance.

85. Indeed, such a judgement could of course be counter-productive, deterring Departments fromissuing such guidance in the first place lest they should ever fall short of their own standards.

86. It is not clear that a judgement has been made as to whether or not the alleged failingsidentified fell so far short of acceptable standards and were of sufficient seriousness as towarrant being considered maladministrative.

87. In particular, it cannot be maladministrative simply for the Department to have taken adecision, with regard to what should be covered in a leaflet, that was different from theassessment which the Ombudsman would have made: two reasonable people can makedifferent decisions based on the same evidence.

Outrage and distress 88. No one would wish to minimise the feelings of the complainants which are extremely

understandable.

89. However, the report fails to examine whether these quite natural feelings are properly directedtowards the Government, or whether they are a consequence of the alleged maladministration.The amount of funds left in the scheme at the point of wind-up (which is the cause of thelosses) was the outcome of investment decisions made by trustees, the level of contributionfrom both the employer and the employee set by either the employer or the trustees and thesharp fall in the stock market.

90. None of these involved the Department. While the DWP did decide to issue information onoccupational pensions generally, it did not assume any responsibility for advising individualcomplainants on their pension options.

Offsetting action91. Suggestions that different official information on scheme security in general could, for instance,

have led sponsoring employers “...to make additional arrangements – perhaps through mergerwith other businesses or by attracting new capital – to enable them to increase thecontributions to their schemes.” are wholly speculative.


92. The report considers that, had the members of schemes been warned about the possibleconsequences to accrued rights, should their scheme wind-up, that “many of their financialdecisions would unquestionably have been different”.

93. However there appears to be nothing in this report to support that contention. Those changingemployers might have decided to leave their accrued rights where they were. But this does notmean they would have done so, nor that this would have offered them greater protection. Whatif their old scheme wound-up but their new one did not? There appears to be no evidence forsaying, as the report does, that those who had money to make additional pension provision“would most probably have chosen not to make additional voluntary contributions”.

94. Furthermore, ... a person might have taken other actions, such as putting the value of theiraccrued rights into a badly performing personal pension, which could have left them in a worseposition than they currently find themselves in. This possibility does not appear to have beenconsidered.

Supplementary submission by the Government Actuary95. I also received a letter from the Government Actuary, the text of which follows.

96. My comments on the report... relate to the section dealing with the 2002 changes to the MFR,which is the only part of the draft report which refers substantively to the role of theGovernment Actuary’s Department (GAD).

97. Our response has been co-ordinated with that from the Permanent Secretary of theDepartment for Work and Pensions (DWP).

98. Accordingly, we have not duplicated points made in that response, although we have sought toamplify certain points where we considered that would be helpful to you.

99. There is considerable discussion in the report as to whether security was made less or more forscheme members as a result of changes to the Minimum Funding Requirement (MFR).

100. However, it has not been demonstrated that the change in the level of security afforded wasmaterial.

101. Changes to the MFR were intended to provide incentives to schemes to improve their fundinglevels, although these changes could not achieve this immediately.

102. Thus, if the profession’s May 2000 recommendations had been implemented, this would simplyhave led to schemes, in the short run, showing a lower percentage of coverage against the MFR.

103. Under the MFR process, schemes were required to bring their funding up to the revised level, butthis would only happen gradually. In the short term there would be no material improvement inthe security afforded to members unless the employer chose to wind up the scheme and thefunding of the scheme, on wind-up, fell short of the strengthened MFR level, triggering a debtpayment from a solvent employer to the scheme. Where wind-up was triggered by employerinsolvency, it is unlikely that any strengthening of the MFR would have had a material impact,


given that any employer debt payments due to the pension scheme did not have preferentialcreditor status.

104. There certainly were reasons at the time of the May 2000 recommendations to strengthen theMFR basis, notably because of the need to recognise improving mortality. However, there werealso reasons to adjust the equity MVA calculation to avoid the unintended strengthening of theMFR that had taken place as a result of changing market conditions.

105. Overall the increase in MFR liabilities required was not large... the changes proposed at thattime were expected to worsen the funding level of typical schemes against the MFR by up to5%. This was not a big increase, and, bearing in mind that changing the MFR would notautomatically make schemes better funded, and that longer term changes to the MFR were thenbeing discussed, it was entirely reasonable for DWP to decide not to make any short-termchange at that time and their decision-making process to arrive at this conclusion could not beconsidered to have been in any sense maladministrative.

106. [A]s the impact of the changes to the economic and investment factors in the MFR formulagrew, they began to overwhelm the effect of the mortality changes needed. So, what was nowneeded was an aggregate weakening of the basis, if the original strength of the MFR was to bemaintained in absolute terms relative to the position when the MFR was first put in place in1997. As we understand the position, it was not the intention, either of DWP or of the actuarialprofession, to seek to maintain the strength of the MFR relative to an insurance companybuy-out basis.

107. The profession then combined their advice into a lesser reduction in the equity MVA factor(3.25% down to 3.0%, instead of the 2.75% that they considered justifiable, had an appropriatechange been made to the mortality assumption at the same time). The September 2001recommendation from the profession brought together mortality and economic developmentsinto one adjustment to the equity MV A, so the necessary strengthening as a result of mortalitywas included, even though the aggregate change was to reduce MFR liabilities.

108. The statement made [in paragraph 5.129] fails to recognise that GAD had been aware of, andclosely involved in, the development of the profession’s thinking on the MFR over many monthsand so GAD was fully aware of the context and scope of the profession’s work when theDepartment’s request for advice was put to us in September 2001. Furthermore our e-mail of25 September 2001 was in confirmation of earlier discussions with DWP and so not the onlycomponent of our advice. Nor was our advice limited in any way, and particularly not in theway suggested [in paragraph 5.130]. The context of that advice was the overall question of howthe strength of the MFR basis might have changed since it was last reviewed.

109. We do not agree that our advice was limited in the way suggested [in your report]. Neither dowe agree that we failed to answer the question that DWP had put to us. This is a completelydistorted interpretation of the GAD advice, exemplified by the unacceptable description of oneparagraph of that advice as being the “full advice”.


110. The statement made [in paragraph 5.138] does not recognise that, through its involvement inprofessional affairs, GAD had had access to the detailed work carried out by the TechnicalSupport and Research Committee of the Pensions Board of the actuarial profession, thecommittee that undertook the analysis leading to the profession’s 5 September 2001recommendation.

111. Once again, [paragraph 5.142] does not recognise the context of continuing discussions on thereplacement of the MFR, involving GAD, the Department and the actuarial profession, over theperiod between September 2001 and January 2002.

112. [Your] report asserts that DWP was aware that the change would have the effect ofsignificantly weakening the protection being offered. However, we understand that the DWP(and the actuarial profession) did not believe at the time that it was weakening the protectioncompared to that which the Pensions Act 1995 had intended to provide, merely restoring it tothe original, 1997, level.

113. Furthermore, it was not a “significant” change; as the parliamentary question [you havereferred to...] notes, the immediate effect of the change was to increase aggregate fundingwhen measured on the MFR basis by around 3 per cent.

114. As explained... above, changes to the MFR did not have an immediate effect on levels of fundingexcept in the limited circumstances where a scheme wound up and the employer was in aposition to make up any funding shortfall to the level of the MFR.

115. Moreover... the evidence base [for DWP’s decision] was not insufficient since it was based onstrong advice from the actuarial profession, which had been developed by a committeecontaining leading technical experts from most of the major firms of actuaries, andsupplemented by GAD as a further independent source of advice. The evidence base for thisdecision was in fact extremely strong and much stronger than for many (probably most) of thedecisions that have to be taken by Government.


Introduction1. This annex sets out the response to my report provided by Dr Ros Altmann, on behalf of

complainants.

2. She told me that:

On behalf of complainants, I welcome this report, but with great sadness that many ofthose affected did not live to read it. It has been several years since the victims of this hugesocial injustice first discovered that they had lost most or all of the company pension theyhad contributed to and which they had been led to believe was safe and protected by law.The experience of losing one’s entire retirement income and the uncertainty hanging overthese individuals and their families is impossible to over-estimate. Their sense of betrayalis acute.

3. Dr Altmann continued:

At last, an independent investigation has highlighted clearly, for all to see, the gravity ofthe injustice that they have suffered. Having been brushed aside and fobbed off byGovernment for so long, the complainants had almost lost faith in justice and the rule oflaw. It is comforting, therefore, to see that our Parliamentary democracy does have amechanism for forcing Governments to face the consequences of their actions, whereMinisters and officials are unable themselves to appreciate the injustices they areresponsible for.

4. She told me that:

... it is an important principle that, if Government makes mistakes that lead to graveinjustice, it should rectify those mistakes rapidly, rather than trying to force the victimsinto accepting their losses. Surely, when officials claim that they want to make sure peoplecan save in a safe environment, the public is entitled to look to the Government to protecttheir interests, rather than giving higher priority to the interests of powerful lobby groupssuch as employers?

5. Dr Altmann continued:

This has been an exhausting, frustrating and deeply depressing fight – and many lives havebeen destroyed. I have watched people die, desperate because they had tried to provide fortheir families; they had believed and trusted in the system and then found that their trustwas misplaced. Having saved all their lives to look after themselves, they could not bearthe thought that they had unwittingly “let their loved ones down”. These stories are adreadful indictment of our pension system and I hope the fight for justice in this instancemay ensure that others, in future, will not suffer in the same way. If something is not safe,the Government should not tell us that it is. If Government assurances of safety turn out tobe false – due to unforeseen circumstances – then it must quickly compensate those whohave been damaged.

Annex E The response to my report from the advocate for complainants | 247

Annex EThe response to my report from the advocatefor complainants

6. She concluded by saying:

It is heartening that the Parliamentary Ombudsman has uncovered the full extent of thisinjustice, and I hope that all Members of Parliament will recognise immediately that theyhave a duty to ensure that full restoration of pensions is forthcoming straight away. Thesepeople have suffered more than enough – it is time they received a full apology and fullrestoration of what has been lawfully taken away from them and what they were alwaystold was actually “protected” by the law.

7. In addition to these general comments, Dr Altmann made specific comments about fouraspects of my report: on my findings on maladministration; on my findings on injustice; on myrecommendations and the Financial Assistance Scheme; and on the Government’s response tomy report.

Findings – maladministration8. Dr Altmann told me that the evidence set out in my report demonstrated clearly that the

complaints made by scheme members and trustees had been justified. Government had beenresponsible for the establishment and design of the MFR and for the legal framework withinwhich occupational pensions were provided but Government bodies had not properlyinformed citizens of the level of security that was provided by that framework.

9. She said that my report made clear that the then Government had decided in November 1995that non-pensioner scheme members would only have an even chance of receiving theirpensions. And yet the Government had for many years told everyone that their pensions weresafe, guaranteed and protected by laws.

10. She said that it was astonishing that official publications had only dealt with scheme wind-upfor the first time in April 2004 – this constituted ‘a huge betrayal of trust’. Many schememembers had told her that they had been shocked to discover that the Government had failedto tell them the truth about the security of their pensions. One had asked her ‘if you can’ttrust the Government, who can you trust?’ She said that the evidence set out in my reportconfirmed this ‘betrayal’.

11. Furthermore, Dr Altmann told me that she did not understand how Government could havefelt it was acceptable to design and operate a system that would only provide a 50% chanceof protection to non-pensioner scheme members. She asked whether it would be consideredacceptable if the Government ‘had encouraged people to put their money into a bank and toldthem it was safe, without warning them that they had only a 50% chance of getting it back’. Or,indeed, ‘whether MPs and civil servants would consider it acceptable if they were not told thatthey had only a 50% chance of getting their pensions?’

12. Dr Altmann told me that it was clear from the evidence that Government had deliberatelydecided to encourage pension scheme membership – and that such a policy had driven theiragenda of informing the public of the benefits of joining.

13. However, at the same time, she said that my report showed that that policy also determinedthe omission of any warnings about the risks to pension rights. It appeared that Government


had decided that it would damage their aim of increased private pension provision if officialpublications aimed at the public were to deal with risk at all. In her view that was ‘dishonestand irresponsible’ – and did not accord with any reasonable standard for the proper dischargeof public functions.

14. Dr Altmann told me that the evidence in my report also clearly showed that the Governmenthad been consistently more concerned for the interests of employers than ensuring anadequate degree of member security. This was evident from the decisions taken on the MFRbasis and on the other decisions taken by Government on related matters, including in relationto the extension of deficit correction periods.

15. Dr Altmann pointed out that the law had allowed solvent employers, who could well affordmore, to ‘walk away from their pension liabilities’ without having to ensure that the pensionsof their scheme members were paid in full.

16. She told me that the evidence disclosed by my investigation suggested that the decisionsrelating to changing the MFR basis had been taken by Government without due regard to thepossibility of solvent employers choosing to wind up their scheme and without payingattention to the decreasing number of suppliers and increasing costs of bulk annuities.

17. Dr Altmann said that there was no evidence that the Government had considered the risks tomembers of solvent employer scheme wind ups – their discussions on the MFR had clearlyfocused on the risks of employer insolvency.

18. Nor had any evidence been found to suggest that, when changing the MFR, the Governmenthad considered the fact that security for non-pensioner benefits and Guaranteed MinimumPensions would be dramatically reduced – as the rising costs of annuities necessarily meantthat far more of the fund assets would be needed to secure pensioner benefits, leaving muchless for non-pensioners.

19. She told me that all of the above pointed to a comprehensive failure by Government toensure that its policies were properly explained, that its actions were taken in a transparentmanner, and that the reality of the ‘pensions promise’ and associated risks were disclosedclearly to people to enable them to make informed choices and to protect their financialfuture and that of their families.

20. Dr Altmann said that all of the above demonstrably constituted maladministration of a mostsignificant and far-reaching kind and that my report set this out clearly.

Findings – injustice21. Dr Altmann told me that my report had identified a number of contextual factors that helped

to explain the circumstances in which schemes had wound up without sufficient assets tomeet their liabilities to all members.

22. She said, however, that it should also be properly recognised that this injustice was furthercompounded by the legal requirement that schemes in such a position have to discharge their


liabilities through the purchase of annuities. Only Government could remove this requirement,thereby enabling schemes to use the assets of the scheme for the benefit of all its members.

23. In addition, Dr Altmann said that one other aspect of the legal framework had further addedto the injustice suffered by scheme members – the requirement that individuals who weremembers of a final salary scheme could only contribute to one pension at a time. In such acontext, she told me that the Government had restricted the freedom to diversify investmentthat might have enabled scheme members to protect their position. This meant that theprotection provided by the framework devised by Government was all the more importantto individuals and that it should both have been robust and properly explained to schememembers. Where, as here, such protection failed, the Government had a responsibility toremedy the injustice caused by such failures.

24. Furthermore, she told me that it was incorrect for Government to state that it had not givenindividual financial advice through its official publications. By endorsing membership of anoccupational pension scheme, particularly in a situation in which the law for which it wasresponsible did not allow individuals to join more than one pension scheme, the Governmentwas effectively giving citizens advice as to the benefits of joining one particular scheme. Ifthey had only one employer, that constituted advice to join that one scheme. Had officialinformation dealt with both benefits and risk in a proper and balanced manner, individualswould have been better able to assess their options and to make informed decisions aboutjoining, about remaining in, about transferring money in from another scheme, and about whento take their pension. She said that my report made this extremely clear.

25. Dr Altmann also told me that it should be recognised that the legislation governing the MFRmeant that it was perfectly legal for schemes to be funded well below the MFR level so longas a plan for the restoration of the funding position – over many years – was in place.

26. She told me that, in the light of all of the above, the Government must recognise that it wasresponsible for the injustice suffered by complainants that my report had identified. Not onlydid its failure to provide clear, accurate, complete and consistent information to schememembers constitute maladministration causing injustice to them, but Government could notevade responsibility for the other factors set out in my report.

27. In particular, Dr Altmann said:

(i) that, ‘whatever some sponsoring employers had done, it was the law created and operatedby Government which both had allowed solvent employers to fund only to levels thatwould not secure the pensions of non-pensioner members and had also meant that debtsowed to pension schemes by insolvent employers were not accorded priority when theirassets were distributed’;

(ii) that other aspects of the legal, regulatory and administrative frameworks that my reportset out were the direct responsibility of Government;


(iii) that ‘Government policy was directly relevant to the injustice suffered by scheme members– it may have been entitled to take those policy decisions but Government still had to faceup to their consequences’; and

(iv) that the deficiencies in the system of winding-up schemes, which exacerbated injustice,took place within a system that had been designed by Government and for which it alsohad to take some responsibility.

28. Thus, she said, the Government’s actions and inaction were the direct cause of the injusticecaused to scheme members and trustees.

Recommendations29. Dr Altmann told me that she welcomed my recommendations. She said that primarily it

should be recognised by Government – and by Parliament – that a sense of urgency wasrequired in ensuring that Government responded positively to my recommendations and thatthey put right the injustice my report had identified.

30. She also said that it would be wholly unacceptable for there to be further procrastination anddelay on the part of Government, as many individuals were in desperate financial straits andneeded money now.

31. In addition, Dr Altmann told me that, while only Government could co-ordinate and organisethis, there were ways in which the cost to the taxpayer of pension replacement could bemitigated. She said:

In November 2003, I recommended that the assets of these schemes should not be used topurchase annuities, but that the schemes could be run on, allowing trustees to pay outpensions as they became due and then Government could set aside funding to top up thescheme assets in a pooled vehicle, which would be able to pay the pensions over the long-term. I proposed this again when the Financial Assistance Scheme details were announcedand I have consistently asked the DWP to tell trustees to put the annuity purchases onhold, rather than allowing the scheme assets to disappear and making the organisation ofcompensation far more difficult.

32. She continued:

The assets of all schemes in wind-up should not have been used for buying annuities.They should be pooled, with scheme pension records transferred by the independenttrustees to a Government-funded body which could handle all scheme liabilities as if theschemes were still ongoing. The requirement is for pensions to be paid and these are long-term annual commitments. The only capital sums needed would be tax free lump sums foreach member reaching retirement age immediately, and life assurance or ill-health benefitsmay need to be paid from time to time, but the rest of the liabilities can be paid overmany years and would not require payments to be capitalised up front.


33. Dr Altmann told me:

I fear that many schemes are very close to buying annuities, or have recently done so, andthis will ultimately mean that the bill for taxpayers to fund compensation will be muchlarger than would otherwise have been the case. I suggest that the Government in responseto this report should do the following:

l stop schemes from buying annuities – as is seen in the report, Government recognised aslong ago as its Regulatory Impact Assessment of the 2002 MFR changes that buyingannuities is not necessarily the most appropriate way for younger members’ pensions tobe secured;

l pool all scheme assets that have not already been used for annuities into a fund to run asa satellite of the Pension Protection Fund, utilising the systems and infrastructure which isalready being put in place to pay out pensions for schemes in wind-up. This could befunded with top-ups from Government funds as required;

l permit scheme trustees to pay all pensions to those eligible now, including those who areterminally ill. These pensions could be paid in full to all those eligible, using the schemeassets which are available;

l use unallocated funds in the DWP budget, which could be dedicated to paying outcompensation; and

l use unclaimed assets to fund the compensation payments required. Since banks often hadpriority over pension funds when companies became insolvent, there could be said to be arationale for using these assets to fund compensation payments for scheme wind-ups.

34. Finally, Dr Altmann said that some scheme members had suffered financial injustice beyondthat directly related to the loss of their pension and associated benefits.

35. She told me:

... some members have had to sell their houses since they were relying on the pension lumpsum to pay off their mortgage, or some need to sell to replace their lost pension incomeand downsize their house. Others have suffered dreadful effects on their health. I hopethat these factors can be recognised within redress provided by Government.

Financial Assistance Scheme36. Dr Altmann said that her response to my recommendations had been informed by her strong

view that the Financial Assistance Scheme was a wholly inappropriate remedy for the injusticesuffered by complainants.

37. She told me that there was a good case for arguing that the way in which the FinancialAssistance Scheme had been established and its eligibility criteria had been developed andannounced in itself constituted maladministration.


38. Dr Altmann told me that:

The only payments being made are ‘interim’ payments of just 60% and these are still notpaid if this amounts to under £10 per week. The other exclusions and rules are grosslyunfair.

39. She continued:

In fact, the FAS itself is directly responsible for many members getting even lower pensions.This is because the costs of providing the FAS with data on scheme membership and detailsof those who may be eligible are paid out of scheme assets. This reduces assets for allmembers, but only a few actually qualify for the FAS. Thus, all those who do not qualifymust end up with lower pensions as a result of helping those within 3 years of pension age.This is a further injustice.

Government’s response40. Dr Altmann told me that she was extremely disappointed and distressed by the Government’s

initial response to my findings.

41. She said that it was disturbing that Government still did not realise or accept the degree towhich it had played such a central role in the events set out in my report.

42. Dr Altmann told me:

If the Government thinks that encouraging membership and failing to warn of risks is fine,and cannot see the error of its ways, then how can we hope for improvements in future?If any private sector firm or organisation behaved in this way, it would be forced tocompensate in full for any losses.

43. She also said:

The report makes clear that, after ‘Maxwell’ and the pensions mis-selling scandal, theGovernment said that people needed to know where to get advice they could trust. Theofficial leaflets were supposed to provide that. Given what had happened, if an individualat that time had been worried about their pension after ‘Maxwell’, people would not havenecessarily trusted their employer or the trustees. In addition, if they had been worriedabout pension mis-selling, they would not have trusted financial advisers.

It is in this context that it was even more likely that they would rely on the Government’sinformation. It is also all the more disappointing that DWP is trying to suggest that peopleshould not have expected to be able to rely on these leaflets! Why was taxpayers’ moneyspent on them if they were not reliable?

44. She told me that the Government’s further response to the report was totally unsatisfactory.She described it as ‘outrageous’:

Every right-thinking person with a sense of fairness and natural justice, when reading theevidence uncovered by this investigation, cannot fail to appreciate that what theGovernment has done to these individuals is wrong.


The real worry is that Government itself, in its response to the report, seems to be tryingto deny the evidence clearly put before it.

It is Government that seems not to have told the truth, but it is also apparently nowattempting to question what scheme members have said about having read and relied onthe official leaflets.

This behaviour is adding insult to injury. These individuals have done nothing wrong.

Their lives have been devastated by the carelessness of Government. Their mistake wasthat they genuinely believed that Government would tell them the truth and it beggarsbelief that Government appears to be now saying that the scheme members either havelied about relying on the official materials that they read or that, if they did read them,“of course they should never have believed it”!

Since I first met the members of ASW Cardiff, in 2002, and subsequently having met somany other individuals who have suffered so much these past years, I have been struckby how decent and honest they are.

They believed and trusted in official assurances of safety and are the kind of people whoare the bedrock of our British nation. Hard-working people who always wanted to lookafter themselves, worked and saved hard, tried to check out what they should do, and didwhat they thought was the right thing to do because Government told them so. We as anation should be ashamed of how our Government is behaving on this issue.

Government seems to be trying to say that this situation is the fault of everyone else,but not itself. This is a mess that the Government itself has created and which it hasconsistently refused to acknowledge.

These are people who believe it is wrong to lie and have lived their lives by the principlesof personal responsibility and honesty. Many of them still find it almost impossible tobelieve that Government could really behave dishonestly.

My assessment of Dr Altmann’s response45. I will comment only on one aspect of the response of Dr Altmann to my report on behalf of

complainants – that related to additional financial or other losses that would not be remediedby pension replacement.

46. DWP operates a scheme to provide redress for financial loss and other injustice caused bymaladministration for which it or its agencies are responsible. Where an individual claims tohave suffered particular financial loss because of maladministration by DWP, it is open to thatindividual to seek redress through that scheme. Evidence that certain actions were taken willneed to be provided – as will evidence of the loss claimed.

47. If an individual is dissatisfied by the outcome of their claim to DWP in such circumstances,it is open to them to ask their Member of Parliament to refer their complaint to me. Such acomplaint would then be assessed in the normal way by my Office and treated on its merits.


trusting in the pensions promise - home - bbc...

Documents