Did the Maxwell affair change nothing?

Robert Maxwell: Raided the company pension fund

Analysis
By Andrew Verity BBC personal finance reporter

In the early 1990s, it emerged that Mirror proprietor Robert Maxwell had used the company pension fund to finance his business interests. Ten years on, the government is facing increasingly angry complaints about the failure of legal protection introduced in the wake of the Maxwell affair.

A string of recent cases involving employers who have wound up their pension schemes has highlighted the risks to occupational pension schemes.

While employees are protected against fraud, they may still lose most of their pension if their scheme is legally wound up - even when they have been contributing for 30 or 40 years.

What we have at the moment is the worst of all possible worlds

Malcolm McLean, Opas

Staff at Sea-Land, a division of the Danish shipping group Maersk, are mounting a formal complaint to the Pensions Ombudsman over the decision to wind up their pension scheme.

Before their company was taken over, staff had been given a typical "final salary" pension promise. If they contributed for long enough, they could build up benefits worth up to two thirds of their final salary at retirement.

However, they have learned that now the scheme is being wound up, they may get as little as 40% of the benefits they thought they had earned.

In another case, staff at Irish Fertiliser Industries, a joint venture between the chemicals group ICI and the Irish government, are learning they are likely to get pensions worth 38% of the benefits they had been promised.

Starting from scratch

The cases echo the plight of workers at ASW, the Cardiff-based steel company which was forced to wind up its pension scheme earlier this year when the firm went bust.

We're devastated: we don't know which way to turn next

Former ASW worker Bernard Dite

Staff there have been told they may get as little as 10% of the value of their pension scheme rights - even those who have been saving for nearly 40 years.

Former ASW worker Bernard Dite still does not know what his pension entitlement will be, five months after it was announced that his scheme was being wound up. But he has been warned not to expect much.

He told the BBC: "We've got a board of trustees there who seem to be doing everything they can, then they turn around and say: 'There's nothing left.'

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"We're devastated: we don't know which way to turn next. We've got no life assurance, we've got no pension, so if I get a job I'm going to have to start from day one again."

His wife Shirley added: "We thought the future was secure. When Bernard retired, we thought we'd have a comfortable life with a private pension from the company. And as it turns out, we've got nothing."

The case of Maersk has caused even greater outrage. The pension deficit in the Sea-Land pension scheme is £3.5m ($5.6m) for a scheme worth £6.4m.

Maersk made profits in the UK of £32.1m in 2000, rising to £61.5m in 2001. Its Danish parent company AP Moller made profits of £780m in 2001 and £1.1bn in 2002.

But Maersk refuses to make up the deficit, pointing out that its pension scheme has enough money in it to meet legal requirements and wind it up - even though scheme members will get much less than they were expecting.

Funding requirements

After the Maxwell affair, a new law was proposed to ensure pension schemes had enough funds to meet their commitments if the sponsoring employer went bust.

But after opposition from some companies this "minimum solvency requirement" was watered down, so much so that its name was changed to the "minimum funding requirement".

Now when an employer goes bust, the scheme first has to pay for pensioners. Staff who have not yet retired get the remainder.

In many cases the amounts required to buy pensioners out of a scheme when it winds up are much higher than anticipated.

The minimum funding requirement doesn't do its job but we have not been told what would replace it

Malcolm McLean

To buy those pensioners out, the scheme winding up will typically buy annuities on their behalf from a life insurance company.

But longer life expectancy and lower interest rates have made annuities - which are payable for the rest of a pensioner's life - much more expensive. And that leaves much less for the workers who have yet to retire.

Nick Edmans, spokesman for the Occupational Pensions Regulatory Authority, said: "When a pension is 100% funded for the minimum funding requirement there may only be enough money in there for 40% of the benefits."

Added to that, the slumping stock market has had a massive impact on employers' pension schemes, which invest most of their money in shares.

According to estimates for the BBC by the actuaries Hewitt Bacon & Woodrow, the level of funding in those schemes has shrunk by an average of 15 to 20% since the start of the year. And three-quarters of Britain's pension schemes are in deficit, compared to less than half in January.

There is compensation for pension scheme members if they lose their benefits through a fraud such as that committed by Robert Maxwell.

But there is no compensation if members lose their benefits simply because their employer chooses to wind up the scheme. As long as they meet the minimum funding requirement, employers are free to wind up their pension schemes.

'Slow to act'

The government said 18 months ago that it would scrap the minimum funding requirement in favour of a "scheme specific standard" of funding. However details are not yet forthcoming.

Many in the pensions industry are sceptical about what it would mean for the government to set a "standard" that is also "specific" to each scheme.

Malcolm McLean, of the Occupational Pensions Advisory Service, which offers advice and help for members of occupational pension schemes, says:

"It matters not to the members whether the missing pension money has been caused by fraud or because a scheme is being voluntarily wound up.

"The minimum funding requirement doesn't do its job but we have not been told what would replace it. What we have at the moment is the worst of all possible worlds."

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