e-mail Paul Lewis on paul@deadline.demon.co.uk
The trustees of some company and public service pension schemes are cutting the pensions paid to millions of people - sometimes by more than £3000 a year. It is perfectly legal but there is growing pressure building up to stop it as pensioners realise that the benefits they paid for are not being given to them in full. It is called pensions clawback (the official name is pension integration) and it works like this.
While you are in work you pay contributions into the pension scheme your company operates. You also pay National Insurance contributions which pay for your state retirement pension and one or two other things such as jobseeker's allowance and widow's benefit. When you retire, you would expect to get your company pension and your state retirement pension - after all you have paid for them both. But some schemes make a deduction from your company pension to take account of the fact that you also have a state pension. These deductions do not normally start until you reach state pension age (65 for a man, 60 for a woman). So if you retire early, your company pension may actually goes down when you reach that age.
A recent survey by the National Association of Pension Funds found that 44% of company schemes clawed back some or all of the state pension. The record was much better among schemes in the public sector - civil service, fire, National Health Service, local council workers and so on. Only about one in twelve - such as the Post Office - make a deduction. Altogether, taking private and public schemes together, more than two and a half million people - about one in three with an occupational pension - currently have their pension reduced at state pension age.
History
Clawback has been in operation since the start of the National Insurance scheme in 1948. Before National Insurance began, people in a good superannuation scheme did not pay into the state pension scheme. But under National Insurance employers had to pay into the National Insurance scheme for all staff, even those in the company scheme. So they thought it reasonable to take back some of the pension they paid out to compensate for the cost of paying into the National Insurance scheme. Hence the official term for clawback - integration. The company scheme is said to be 'integrated' with the National Insurance scheme.
Although clawback has been around for fifty years, most people who get company pensions remain blissfully unaware of it. If you retire at pension age or later then you probably will not notice if there is a deduction from your pension. But if you retire early - before state pension age - then clawback becomes much more noticeable. Most schemes pay out the full benefit without clawback to people who retire before state pension age. The clawback deduction is only made when the pensioner reaches state pension age. This reduction in the company pension makes it very obvious what is going on and at that stage many people write to the scheme - or to their union - to find out what is going on. As early retirement has become more common so has the awareness of clawback.
Campaign
A major campaign is now under way to try to end clawback. It is being led by the banking union Unifi which represents staff at Barclays bank. The union wants the Government to make clawback illegal. The Barclays scheme is one claws back some of the company pension. And they are beginning to object. Saga reader David Brown worked as a manager of Barclays branch in Eastbourne, having started with the bank at the age of 16 in the war.
"I was a pen-pusher, doing statements, making the tea, even cleaning the windows of the manager's car. I worked my way up and in 1975 I went to a branch in Bournemouth as manager and retired early at 55. My pension is reduced by £515 a year. I’m not hard up but it's £10 a week, that would pay for some petrol wouldn't it? It's a matter of principle I suppose. We were still paying National Insurance for the basic state pension. So we should get it in full."
Mechanism
The way clawback actually works is complicated. It is not as simple as a company deducting the whole of the state retirement pension from the company pension. Clawback only applies to occupational pension schemes that pay a pension related to your final salary. It does not apply to personal pensions or to the newer sort of company scheme called a money purchase scheme where money is simply saved up for you and used to buy an annuity when you retire.
A final salary scheme pays a pension which is a proportion of your final pay - normally the pay averaged out over the last three years of your working life. For each year of service you get a fraction of that final pay. The normal fraction is 1/80th so that after 40 years with the same company you would get a pension worth half your final pay. Some schemes are more generous paying 1/60th or even 1/45th. Others pay less - 1/100th or 1/120th. When a scheme is integrated with the National Insurance scheme (ie operates clawback) an amount is deducted from your final pay before the pension is worked out. The amount deducted varies from scheme to scheme, but is usually related to the amount of the 'lower earnings limit' at which national insurance contributions start to be paid. This year that is £3328. If you get a pension of half your final pay, the deduction will cut it by half the lower earnings limit - £1664 a year or £32 a week. Some schemes deduct less, others more. In some exceptional cases it could be twice as much.
You can tell if your scheme makes a deduction by reading carefully the booklet which sets out the rules of the scheme. If the booklet says your is an 'integrated scheme' or is 'integrated with the National Insurance scheme' then a deduction will be made and details of how the deduction is worked out should be there. If you want to get an actual figure for how much the deduction is - or will be - in your case, then the person responsible for the scheme should tell you. Like all such enquiries it is better made in writing to avoid misunderstandings.
Discrimination
Because the deduction is a fixed amount, it affects low paid people more than those with higher earnings. If your pension is £7000 a year, a cut of nearly £1700 is a much bigger cut than if it is £40,000. A lot of low paid people only work part-time. And both low paid and part-timers tend to be women rather than men. This means that clawback affects women more than men and it may be illegal discrimination under the tough sex equality rules of the European Union. So far this question of legality has not been tested. But it is likely to go to court at some stage in the future and any women who are affected by it should write to their schemes now to say that they consider the clawback to be illegal discrimination under European law. That may help them get the money back if the European courts eventually rule against it.
Surpluses
If a scheme abolishes clawback then obviously the pensions it pays out will increase. So where will the money come from? Schemes which are integrated with the state pension scheme calculate the contributions that are needed on the assumption that the benefits will be reduced, so the contributions are lower. If the scheme suddenly has to pay out more money, then the actuaries will get out their slide rules and say contributions have to rise. But Unifi National Organiser Patrick Erault says most schemes have surpluses and can afford to pay up.
"Barclays scheme has a surplus, around £1.4 billion when it was valued in 1996 and we estimated it could be around £2 billion last year. Of course, some schemes do not have surpluses and there is no magic solution but it could be phased in or they could adjust the benefits in another way that was fairer to lower paid people. But a lot do have surpluses or the company itself is profitable enough to pay more in."
But the National Association of Pension Funds says that the campaign runs the risk of causing some schemes to be abolished. Sheila Longley is their spokeswoman.
"Surpluses have been cut a lot recently due to changes in the law. The danger is that occupational schemes that pay pensions related to final salary are under threat. Any complaints or campaigns against them could result in the scheme being closed down, maybe even nothing at all for new members of staff."
So far Unifi has had a good response to its campaign which is supported by other unions and by organisations like Help the Aged. It is encouraging individual pensioners who may be affected to write to their scheme - and their MP - to protest. More than 140 MPs have signed a parliamentary motion calling for a change in the law to make clawback illegal. And hundreds of individuals have phoned the Clawback Campaign hotline to get more information. The number is 01444 419728.
February 1999
e-mail Paul Lewis on paul@deadline.demon.co.uk