This one will run and run

The government has been trying to make its peace with MPs over its dismissal of the parliamentary ombudsman’s findings over past pension losses.

In doing so, it has revealed that the “speeding up” regime introduced four years ago has been largely ineffective, but promised to do better in future. However, there are still two court cases hanging over the government about this issue.

Complete loss of defined benefit pension rights when an employer becomes insolvent should now be a thing of the past, thanks to the creation of the Pension Protection Fund in April 2005. It was revealed in the PPF’s first annual report that it is allowing for up to £1bn of potential “probable” and “possible” claims upon it.

One of the largest may be Bermuda-registered Sea Containers which announced in October that it had received warning notices from The Pensions Regulator on the issue of a financial support direction, but “does not accept that it is reasonable or appropriate for the regulator to issue FSDs”.

There have always been doubts about how enforceable such directions would be in jurisdictions such as Bermuda.

Those whose pensions were lost before the creation of the PPF are also continuing to create difficulties for the government. Since the summer, there has been a stand-off with the parliamentary ombudsman and the public administration select committee (PASC) in the House of Commons.

The ombudsman produced a report finding maladministration, but the government rejected this. In time to catch the end of the parliamentary session, pensions reform minister James Purnell has now issued a formal response to the PASC’s strong criticism of the government’s stance.

In tones more reminiscent of senior civil servant Sir Humphrey Appleby in TV’s Yes Minister, Purnell told the PASC that of course the government “has, and will continue to have, absolute respect for both the office of the ombudsman and its office holder.

“Although the government does not accept liability for these losses, it agrees that there should be a significant package of support, which is why we have committed an additional £2bn to the Financial Assistance Scheme.”

Purnell continued: “We believe we have designed a scheme which strikes the right balance between our duty to the taxpayer and support for people with the least ability to build up pension savings because of their age.”

But the government’s position remains that it “does not believe that the taxpayer should be expected to underwrite what were private company pension schemes”.

However, the government did accept that there should be a review of the time taken to wind-up defined benefit occupational pension schemes, and this has also been published. There should be a target, it says, for completion within two years – as opposed to the three currently allowed under the 2002 regulations on the topic, before a report must be made to TPR.

The regime introduced by these regulations seems to have been largely ineffective. All the regulator will claim is that there is “some evidence that where it has received reports under the 2002 regulations and has intervened... it has had some success in removing impasses to wind up and bringing them to swifter conclusions”.

This could be because it has been taking a risk-based passive attitude, relying solely on whistle-blowers and complainants to take action when there are problems, and assessing the risk of loss through mere dilatoriness as low.

TPR is now finally going to start targeting administrators and providers, and to ensure that the independent trustees it appoints are operating “effectively and in a timely fashion” – or remove them if not.

It also plans to provide more guidance and support to trustees and administrators, by publishing guidance and an e-learning module on wind-up. Higham Dunnett Shaw director and actuary Russell Agius was on the working party which carried out the review, and going forward will be helping the regulator to work on its new guidance.

“Speeding up the process has to be good news for members,” Agius says.

“They will either be getting payment from the FAS or having to rely on themselves, and this is going to give them more certainty and a better understanding of what they will get.

“We have seen massive improvements in the way scheme wind-ups are dealt with, but there is still a rump of schemes where trustees are dragging their feet. If a project management approach is used, as with preparing a scheme for the PPF, doing things in parallel rather than sequentially, one can get everything done much more quickly.”

HM Revenue and Customs is also being pushed into action. “Deemed buyback” of SERPS and S2P rights from insolvent schemes has always taken an age and been a nightmare, but after years of relying on clerical calculations, there are now plans for a new, automated calculation system.

The Government Actuary’s Department has estimated, on the basis of what limited information it has, that an extra 10,000 people could benefit from the process. Not everyone benefits from deemed buyback, however, because of the interactions with other slices of deferred pensions with contracted-out elements.

The department for work and pensions has promised to examine whether it can produce a “tailored forecast, for each person who qualifies for deemed buyback, of the additional pension they could receive”.

Waiting in the wings, however, are two court cases.

One is in the European Court, in a case brought against the UK government by the unions Amicus and Community on behalf of around a thousand of their members employed at Allied Steel and Wire who lost their expected pensions when the company went into insolvency in 2002. The advocate-general gave his opinion in mid-July, so that a final verdict is due in the near future.

The case relates to the question of whether the UK properly implemented European Directive 80/987, the “insolvency” directive. Article 8 of this refers to the interests of employees in regard to their pensions as being something which needs protection.

“It is precisely not in the interest of an employee to receive payment of only a fraction of his contractually agreed pension entitlements,” the advocate-general’s opinion says.

“Contrary to the view expressed by the United Kingdom government, it thus cannot be inferred from the use of the notion of ‘interests’ that article 8 does not offer full protection.”

This seems clear enough, but then the advocate-general expresses his doubts about whether the omission was sufficiently serious for the UK to have to pay compensation if people have suffered by it – not least because the European Commission reported in 1995 that the implementing rules of the UK appeared to satisfy the requirements of article 8, and so gave them comfort they were doing the right thing.

Potentially more explosive is a UK case for judicial review of the government’s handling of the parliamentary ombudsman’s report, taken by the Pensions Action Group and to be heard in February 2007.

Giving his ruling, Mr Justice Collins said that he recognised the claimants were suffering financially and so as speedy a decision as possible was needed in the legal proceedings.

Lawyers representing the pensioners suggested that the case raised some fundamental legal principles of government accountability.