This piece first appeared in Saga Magazine in November 2003
The text here may not be identical to the published text

 

Campaign on pensions

Thousands face poverty when company goes bust

There is a growing campaign to get justice for thousands of people who have paid into their company pension for decades but are now told they may get little or nothing when they reach pension age. They are people who paid into a company pension scheme that promised them a pension that was linked to their pay. These so-called ‘final salary schemes’ used to be considered the Rolls Royce of pensions - well designed, guaranteed, and never went wrong. Not any more.

The terrible twins of falling interest rates and growing life expectancy have left most of these pension schemes with too little money to meet their pension promises. That does not matter while the company itself remains in business and solvent – it has to stand behind its promises and many large firms have pumped hundreds of millions into their ailing pension schemes (see Saga Magazine Money News October 2003).

But if the company goes bust then things are very different. With no extra money available, the pensions promises are at risk. Under a law introduced in 1997, pensions already in payment have to be guaranteed first. Once that has been done – and the lawyers have been paid – the remainder is used to buy pensions for the future for the people who have not yet retired. Often there is so little money left that people who have paid into their scheme for decades can be left with virtually nothing.

Andrew Parr worked for more than 20 years as an engineer for Allied Steel and Wire in Sheerness in Kent. It was compulsory to pay into the company pension scheme which he was glad to do so. But in July 2002 ASW went bust and just before Christmas the receivers who were running the company made him redundant aged 59. "I had planned to retire at 60. I had enough years in the scheme that I could manage on my pension. But now I have got nothing. What angers me is that I’ve done exactly what the government and its advisors said I ought to - saved for a pension. I’ve kept my side of the bargain and now the government should keep its side. No-one ever told us of the risk. If someone had said ‘if the company goes bust you could lose your pension’ I would have worked somewhere else. But no-one did."

Until 1988 there was no alternative way for Andrew and millions of others to save up for a pension. They were trapped – obliged to pay into a company scheme if one existed, and prohibited from paying into any other pension.

Now nearly 60 Andrew is working as a trainer on lower pay and with a long journey to work. He has no prospect of retiring before 65. At the best he will eventually get about a quarter of the £15,000 pension he thought he had paid for.

"Losing a pension isn’t giving up holidays or a second home. It is asking ‘can I afford to get the fridge repaired?’ That’s what is facing me and my colleagues."

The government collects no figures on how many people are in Andrew’s position. But researchers have calculated there could be up to 42,000. What we do know is that their numbers are growing almost every month. In July and August two more companies went bust leaving another 200 people facing the prospect of poverty in retirement.

What went wrong?
From the mid 1950s pension funds invested their money mainly in shares. And during the last half of the 20th century, especially the last 25 years, shares only went one way – up. The result was that pension funds seemed to have plenty of money. Actuaries confidently said that they had more money than they needed to meet their pension promises.

Then the Government stepped in and told pension funds that if they had more than 110% of what the Inland Revenue thought they needed, then they had to reduce the fund. Companies normally did this by cutting their own contributions rather than those of their employees. Over the years from 1987–2001 companies withheld £19 billion, effectively on government orders. Then Gordon Brown decided to take his share. In his first Budget in 1997 he said "Many pension funds are in substantial surplus…so this is the right time to…abolish tax credits paid to pension funds". Losing this tax relief cost pension funds an estimated £5 billion a year.

But the actuaries – and Gordon Brown – had got it wrong. The value of stockmarket investments is a gamble. But pensions are guaranteed amounts. So liabilities which were certain had to be paid from funds that were anything but. After 1999, three years of falling stock markets slashed the value of pension funds. At the same time longer life expectancy and falling interest rates put up the cost of providing pensions. As a result, the Confederation of British Industry estimates that pension funds of UK companies are £160 billion short of what they need to meet their pension promises.

Minimum Funding
It was not supposed to be like this. By law, every pension fund has to have enough money to meet what is called the Minimum Funding Requirement (MFR). But it is becoming clear that the MFR does not mean they have enough to pay the pensions their members expect. The main reason is that the MFR is designed to assess what a pension scheme needs if it continues in business, not when it is wound up. Recent experience shows a scheme which come to an end, even it meets the MFR, only has enough resources to buy pensions of around a third of what was promised to workers who have not yet retired.

Many schemes do not even meet the MFR. They are assessed only every three years and funds which met the MFR three years ago when share prices were higher may not meet it now. If a fund is found to be short of its MFR the company has up to ten years to top it up. And companies in financial difficulties seldom give priority to paying contributions into the pension fund. The result is that when a company goes bust the fund may be well below even the MFR and there may be nothing left to pay pensions for people who have not yet retired.

Solutions
The Government has said it will introduce an insurance scheme called the Pensions Protection Fund. Every pension scheme will have to pay an annual premium into the Fund and when a company goes out of business, the Fund will take over the pension assets and meet the pension promises. But the scheme will not start until April 2005 at the earliest and the Government has said it will not be backdated. So people like Andrew whose employer has already gone bust – or which goes bust before that date – will not be helped.

Now there are moves to set up a separate scheme to help them. The plans have been drawn up by Dr Ros Altmann, a pensions consultant who has advised the Government in the past. She proposes that the remaining assets of schemes that have been wound up before April 2005, should be held in trust by the Government and used to pay out the promised pensions to the scheme members as they retire. Eventually, probably in about ten years’ time, the money would start to run out and the Government would have to pick up the bill. Her calculations show it would cost about £90 million a year to pay in full the pensions promised to anyone whose scheme was wound up between April 1997 – when the rules about dividing up pension assets in these cases began – and April 2005 when the compensation scheme will be in place. Ros Altmann is determined to succeed in persuading the government to adopt her scheme.

"These problems are the result of flawed legislation in the 1990s. The government is putting it right for the future. So it has a duty to compensate people who have been affected in the past before they have corrected things."

Court threat
If the Government rejects these proposals campaigners say they will go to court to force it to take action. They claim the Government is breaking a 23 year old EU law (Article 8 of the 1980 Employment Insolvency Directive) which requires governments to protect employees’ pension rights when companies go bust. They also say it is breaking the Human Rights Act by taking away their right to the ‘property’ of a pension. Ros Altmann believes there is a lot at stake. "If the campaigners go to court I believe they will win. But the publicity around the case would cause a catastrophic loss of confidence in pensions. So I hope the Government will do the sensible thing."

What to do?
Already, the problems facing pension schemes is discouraging people from joining them. But that could be an expensive mistake. It used to be the one piece of financial advice that was always right – if your company operates a pension scheme join it. Now that advice has to be tempered with a warning – if your employer goes bust, then the money you have paid in over the years may be lost. But it is still good advice for the vast majority of people, especially now that the Government is committed to introduce the Pensions Protection Fund in 2005.

So anyone who works for a company that offers a final salary pension scheme should join it. But they must remember that if the company goes bust before April 2005, and they have not retired their pension could be at risk. Of course, the worry of insolvency does not exist for public sector workers so they should always join. Nor do these problems affect the other sort of company pension – usually called ‘money purchase’ or ‘defined contribution’ schemes. If your company has one of those and puts in money on your behalf it would be foolish not to join.

More information
Campaign for people whose pensions have been hit www.pensionstheft.org

National Association of Pension Funds www.napf.co.uk

November 2003


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