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Occupational Pensions

With permission, I should like to make a statement on the ombudsman’s report on the security of final salary occupational pensions published yesterday. The Parliamentary Commissioner’s report is a detailed piece of work and, of course, deserves a proper, full and formal response. It is my intention to publish such a response in the next few weeks. However, I would like today to set out the reasons why, after very careful consideration, we have reached the view that we cannot accept any of the findings of maladministration and why we have therefore decided to reject all but one of her recommendations. The ombudsman’s report concludes that over the period between 1996 and 2002, both this Government and the Conservative Government were guilty of maladministration in three principal areas. I would like to take each of those findings in turn. I make no apology for the detailed response that I am about to give. To offer anything less comprehensive would not properly reflect the importance of the report and the seriousness with which we treat the findings that the ombudsman has made against this Government and the Conservative Government. I should stress, in that context, my Department has co-operated fully with the ombudsman and her office during the preparation of the report. It has provided detailed information and documentation on request and it has commented extensively on the specific findings that the ombudsman had indicated that she intended to make. Those responses are set out in the report, included in a lengthy annexe to it. Turning to the individual findings: first, the ombudsman found that official information about the security that members of final salary occupational pension schemes could expect from the minimum funding requirement, introduced in the Pensions Act 1995, was sometimes inaccurate, incomplete, inconsistent and therefore potentially misleading, and that that constituted maladministration. We do not accept that the Department’s leaflets were inaccurate, incomplete, inconsistent or misleading. It is true that some were more detailed than others, but that was because they were designed for different audiences. All the leaflets covered by the report carried very specific statements that they were not a full explanation of the law and were for general guidance only. The leaflets themselves make that clear. Perhaps I could illustrate those points by taking some of the key documents referred to in the report, in order. In 1996, the then Government published a guide to the 1995 Pensions Act—leaflet PEC3—which described the intention of the various measures in the Act, including the minimum funding requirement, or MFR, and how they were expected to operate. The leaflet also said:"““This leaflet is a brief summary of the changes. If you need advice about your occupational pension, speak to the trustees or managers of the scheme . . . This leaflet gives general guidance only and should not be treated as a complete and authoritative statement of the law.””" That was very much the pattern. In July 1997, the Occupational Pensions Regulatory Authority—OPRA—guide for pension scheme trustees summarised what the minimum funding requirement was. The guide also said:"““You””—" that is, trustees—"““will need to take advice from professional advisers so that you can use your powers and fulfil your duties properly. Please note that this guide should not be taken as a definitive statement of the law.””" In May 2002, the Department issued leaflet PM3: ““Occupational Pensions—your guide””. Although the guide did not discuss the risk of schemes winding up underfunded, it did say:"““this guide . . . looks at some of the questions you may need to think about and it tells you where you can find more information . . . Read any pension information your employer gives you . . . This leaflet is for guidance only. It is not a complete statement of the law.””" The Government do not consider that any of the leaflets or quoted statements relied on by the ombudsman could have formed a proper basis for scheme members, still less trustees who were professionally advised, to assess the security of their individual pension schemes. But, even more importantly, the Government also believe that the report fails to demonstrate that decisions taken by individual scheme members were influenced by the information that the Government did, or did not, make available. In other words, the report simply does not establish that the wording of the leaflets led to the losses suffered by individuals. I now turn to the second finding of maladministration. The ombudsman says that the failure by the Department for Work and Pensions to review its existing information leaflets, when informed that scheme members and member trustees did not know the risks to their accrued pension rights, constituted maladministration. The Government do not believe that the information given to the Department by the actuarial profession during this time should have instigated a review of its publications. Those recommendations concerned how trustees—not the Government—should communicate with their members about the funding of their schemes. The Department invited views on that issue in the consultation document that it issued in September 2000 on the future of the minimum funding requirement. The response to that consultation led ultimately to proposals, which were then implemented, for the replacement of the minimum funding requirement. I want to say more about that replacement later. But so far as we are aware, no respondents suggested that departmental publications were causing confusion. They were not advising that the content of these leaflets concerning the purpose or intent of the minimum funding requirement was misleading or inaccurate. Ministers cannot fairly be criticised for failing to do something that was simply not proposed. Moreover, trustees had access to advice from their own scheme actuary, who would have been well aware of the operation of the minimum funding requirement. In addition each MFR certificate included a statement that meeting the minimum funding requirement did not equate to full buy-out. All of this information was available to scheme members. We do not believe that it would have been reasonable for trustees to have relied on publications issued by the DWP which were brief and general in nature, rather than the professional advice they had access to and were under an obligation to consult. Trustees were required to give all scheme members basic information about their scheme, and many trustees produced fairly detailed information booklets. We have seen no evidence from the report that the ombudsman has considered what information trustees supplied to their scheme members and what, if any, impact this information might have had. Thirdly, the ombudsman has said that the decision in 2002 by the Department for Work and Pensions to approve a change to the basis of the MFR was taken with maladministration. The Government believe that we acted wholly responsibly in implementing the recommendation of the actuarial profession which had received the backing of the independent Government Actuary’s Department. The ombudsman has not allowed us to see the full actuarial advice on which some of her comments were based. The Government Actuary advised the ombudsman that, if this advice was not disclosed, it made it impossible for anyone to understand the basis on which she reached her conclusion that the Government were guilty of maladministration. As a result, we have not been able to see or challenge how she arrived at some of her conclusions on the 2002 change. The change in 2002 was intended to bring the MFR back to its original strength. Adjustments to the MFR were always on the principle of maintaining its 1997 level. This was the principle on which the actuarial profession kept the basis of the MFR under review and made recommendations to the Department. It was also the basis on which the Government Actuary’s Department advised my Department. The report published yesterday contains a letter from the Government Actuary, referring to the decision criticised by the ombudsman, and I want to quote from it. It says that"““the evidence base””" for the DWP’s decision"““was not insufficient since it was based on strong advice from the actuarial profession, which had been developed by a committee containing leading technical experts from most of the major firms of actuaries, and supplemented by GAD as a further independent source of advice. The evidence base for this decision was in fact extremely strong and much stronger than for many (perhaps most) of the decisions that have to be taken by Government.””" The ombudsman acknowledges in her report that the 2002 change did not affect the degree of knowledge which scheme members had. Against this background, the Government have considered carefully the ombudsman’s first four recommendations, which involve considering whether to restore the lost pension rights of affected scheme members, making consolatory payments and apologising to scheme trustees. As I have already made clear, the Government are unable to accept the findings on which those recommendations are based. We do not believe that the findings of maladministration can be supported by the facts. It simply cannot be right that the losses from the schemes that have collapsed should be met by the taxpayer without establishing any causal connection between the actions criticised in the ombudsman’s report and the losses that people have incurred. The report fails to establish that connection. Indeed, in respect of the ombudsman’s fourth recommendation, relating to schemes that began to wind up between April 2004 and April 2005, the report itself acknowledges that the individuals concerned could be said to have had the opportunity to take whatever action they could to mitigate their potential loss. I do not consider that it would be in the wider public interest for Government to accept that very substantial liability on behalf of taxpayers. We calculate that liability as being in the range of £13 billion and £17 billion in cash terms over the next 60 years. We estimate that the administration costs would be in the region of a further £20 million each year. We do not therefore intend to take the actions recommended by the ombudsman. The taxpayer cannot be asked to accept the responsibility for effectively underwriting the value of private investments in the way the report suggests. The Government do, however, accept the ombudsman’s fifth recommendation with regard to reviewing the time that it takes to wind up a defined benefit pension scheme. Work is already under way in this area, and we will set out our proposals for how we intend to proceed when that work is completed. I would like to finish by making two things absolutely clear. First, this Government have been the first to accept the moral and social obligation to make sure that as many as possible of those who have suffered hardship and distress in these circumstances receive financial support. That is why this Government have set up the financial assistance scheme, with £400 million of public money. The scheme is designed to provide help to those who have lost the most and who are in the greatest need—those closest to retirement and who are therefore least able to make alternative provision. The scheme will currently help up to 15,000 people who have faced significant occupational pension losses. [Interruption.]