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The Actuary The magazine of the Institute & Faculty of Actuaries

Pensions compensation

t is now almost two years since my article entitled ‘Playing political football’ (The Actuary, May 2005) was published, but I could hardly have imagined that, three knock-out rounds later, the game would still be in progress with shocking disregard for the injured participants. In case anyone has forgotten, the earlier rounds were the parliamentary ombudsman’s report of March 2006, the Public Administration Select Committee’s report of July 2006, and the High Court judgment of 21 February 2007.

Inaccurate and misleading information
Broadly speaking, these various independent tribunals held that the government was guilty of maladministration through the issue of inaccurate and misleading information, that this had been a significant contributory factor in the creation of these members’ financial losses, and that the government should consider making arrangements for restoration of the lost benefits by whatever means is most appropriate, including from public funds.
Before I examine the recent High Court judgment more fully, political football spectators may be interested to note the scores in the latest round of early-day motions (EDMs), as shown in the table. As the intention of both EDMs is almost identical, I won’t repeat them here, but it is evident how strongly MPs of the two main parties support their own parties’ EDMs, despite grand offers in Parliament of cross-party co-operation on this issue. My key point, as shown in the table, is that eclectic cross-party support would result in a narrow majority of all MPs being in support of proper compensation, which increasingly means Pension Protection Fund (PPF)-scale benefits, which have been in place for future insolvencies since April 2005.

Establishing causation
To return to Mr Justice Bean’s High Court judgment, his most important ruling was to quash the secretary of state’s rejection of the ombudsman’s finding of maladministration, and likewise to quash his rejection of her first recommendation regarding compensation, which he directed now be reconsidered in the light of this judgment. Although Mr Justice Bean did not accept that direct causation of loss had so far been established in every single case that occurred from 1997 to 2005, it clearly remains open to individuals to establish causation in their own cases.
This then leads on to the point made in the parliamentary debate by the LibDem spokesman that it would be unsatisfactory to end up with 100,000 individuals each having to fight cases in the courts. Indeed, it is this point, combined with several others, that has led to calls from many quarters for compromise to be reached by the offer of PPF-scale benefits in all such cases.

The true cost?
Whenever the issue of an effective compensation package is raised, it is constantly met by government provisos about it having to be ‘affordable’ by taxpayers, even though ‘public funds’ was only one of the means suggested by the ombudsman. But perhaps the most telling point is the absence of any clear indication from the government of what the proper true cost is.
Indeed, the government continues to suggest exaggerated costs of some £15bn ‘in cash terms’, by which it means ‘funny-money’ future cashflows over the next 60 years or so. In point of fact, its own figures, as referred to in the High Court judgment, disclose a net present value (NPV) of only some £3.3bn. This figure reflects full compensation, not lesser PPF benefits, and does not allow for the offset of income tax and the considerable saving in means-tested benefits all of which would seem likely to reduce the NPV to nearer £2bn net.

Restoring public confidence
Although a not insignificant sum, this can be contrasted with the £5bn that chancellor Brown’s 1997 tax change has taken out of pension schemes each year since then. Moreover, it should not be overlooked that the government is anxious to restore public confidence in pensions ahead of its other pension reforms. In this context, realistic compensation, at say PPF-level, would seem to be a sine qua non, as well as righting a long-running injustice.