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Last Updated: Wednesday, 15 March 2006, 15:06 GMT
What the government leaflets said
By Ian Pollock
BBC News personal finance reporter

The government and the Parliamentary Ombudsman are at loggerheads.

Ann Abraham
Parliamentary Ombudsman, Ann Abraham

The ombudsman, Ann Abraham, has accused the government of "maladministration and injustice", because it gave inaccurate advice about the security of final salary pension schemes.

Tens of thousands of people have lost part or even all their pensions as a result of schemes going bust in the past decade or so.

Speaking on BBC Radio this morning, the Ombudsman, Ann Abraham, set out her view unequivocally.

"We are talking about people who relied on government information, government leaflets, which turned out to be inaccurate, incomplete and misleading," she said.

"As a result people lost the opportunity to make informed pension provision, and they suffered serious financial loss."

But the government flatly denies that its advice - given to the public in pension leaflets issued by the then Department for Social Security (DSS), now part of the Department for Work & Pensions (DWP) - was faulty.

"I don't think there was any evidence that the leaflets were inaccurate or incomplete or misleading in the way the Parliamentary Ombudsman has indicated," Work & Pensions Secretary John Hutton told the BBC's Today programme.

"I believe the leaflets were accurate - yes, absolutely."

Reassuring leaflets

At the centre of the row is a leaflet published by the DSS in January 1996, to explain the impact of the changes that had been brought about by the 1995 Pensions Act.

John Hutton
John Hutton, DWP secretary

Among other things, the new law - designed to tighten up pension regulation after the Maxwell scandal - introduced the concept of the Minimum Fund Requirement (MFR) for pension schemes.

"The minimum funding requirement is intended to make sure that pensions are protected whatever happens to the employer," the leaflet told its readers.

"If the pension scheme has to wind up, there should be enough assets for pensions in payment to continue, and to provide all younger members with a cash value of their pension rights which can be transferred to another occupational pension scheme or to a personal pension."

During Parliamentary debates on the new Act, government ministers had also described the MFR in similar terms - in other words, a guarantee of accumulated pension rights if an employer went bust.

Even chance

Despite what they - and the leaflet - said, they were wrong.

Two months before the new leaflet was published, the actuarial profession wrote to the DSS asking for clarification.

What, they asked, was the underlying purpose of the MFR?

A DSS official replied that it was "to require schemes to have a level of assets which should as a minimum be sufficient, if the scheme were to wind up, to enable it to pay in respect of each non-pensioner member a sum which if invested in an appropriate alternative pension vehicle could reasonably be expected to generate a pension benefit at least equivalent to that which the scheme would otherwise have paid in respect of rights accrued up to that point in time.

The final sentence of the reply was highlighted in bold in the ombudsman's report.

"By reasonable expectation we mean that there should be at least an even chance," the official wrote.

In other words, the MFR was not a guarantee at all. Instead, according to the official's response, it offered something more akin to a 50-50 chance that people would get their money back.

In the event, the sad experience of thousands of scheme members has shown that even this was far too optimistic.

False notion

Yet the idea of a cast-iron guarantee was soon in circulation - partly thanks to the DSS's own leaflets.

The aim of the minimum funding requirement is to ensure that a scheme that is funded to at least the level of that requirement will, in the event of the employer becoming insolvent, be able to provide pensions
Work and Pensions minister, Maria Eagle, 2001
The requirement for pension schemes to adopt the MFR did not come into force until April 1997.

That year a second leaflet - this time from the newly established Occupational Pensions Regulatory Authority (Opra) - reinforced the message.

"The MFR refers to the minimum amount of funds that should be in the scheme at any one time in order to meet the scheme's liabilities if it were to be discontinued," it said.

But it was not long before the official publications started to tone down this blanket reassurance.

Before the MFR rule started, a DSS press release described it as offering only fair value.

"Schemes funded to this minimum level will be able, in the event of an employer going out of business, to continue paying existing pensions and provide younger members with a fair value of their accrued rights which they can transfer to another scheme or to a personal pension," it said.

And partly thanks to suggestions from the actuarial profession, the MFR "promise" was watered down even further.

A leaflet published by Opra in May 1999 pointed out that the MFR "will not necessarily ensure that all of a scheme's liabilities can be met fully if the scheme were to be wound up".

Lingering expectations

But the impression given early on that the MFR was watertight did not go away entirely - even in official pronouncements.

During a Parliamentary debate in July 2001 on employee pension schemes, the then parliamentary under-secretary of state for Work and Pensions, Maria Eagle, stuck to the old line.

"The aim of the minimum funding requirement is to ensure that a scheme that is funded to at least the level of that requirement will, in the event of the employer becoming insolvent, be able to provide pensions," she told the House of Commons.

"It is also intended to provide younger members with a fair value of their accrued rights, which they can then transfer to another occupational pension scheme, or to a personal pension."

The 254 pages of the Ombudsman's report trace in detail what the government, ministers, actuaries and various official bodies said over the years about their expectations of the MFR and what it really provided.

But there is no doubt that - initially at least - the government was exaggerating the protection it might offer.

Pensions reprimand for government
15 Mar 06 |  Business
Q&A: Ombudsman's pension report
15 Mar 06 |  Business


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