Response to the Consultation on the Pension Green Paper - 25.03.2003

Simplicity, security and choice: Working and saving for retirement.

Synopsis:

Views on occupational pensions form a range between certainty that pensions are corporate charity and certainty that pensions result from a bargain developed during employment and finalised at retirement. Providers of pensions tend to the former view (" Your pension is only as good as your employer ") while the consumers of pensions, and the European Court of Justice, tend to the latter view. (" Pensions are deferred pay ")

This Green Paper, by following the agenda of the Pickering Report, which was in turn the agenda of the National Association of Pension Funds, puts the Department of Work and Pensions firmly in the corporate privilege camp.

Members of schemes believe that pensions funds should contain enough assets to meet the scheme's obligations. The Green Paper does not provide for this. Members of schemes believe that a trust should act in the members' interests and not as a subsidiary of the company. The Green Paper does not propose the level of member involvement that would remove the danger at its source. Members believe that regulators should be able to defend members' interests. The Green Paper does not even address making the Pensions Ombudsman effective.

A pensions policy is workable if it enforces the necessary contributions from employers and employed. Alternatively, a pensions policy is workable if it gives long-term confidence and incentives. This Green Paper offers neither, only a continuation of the corporate privileges and disdain for the members which together have brought us to this crisis.

The Full Response:

COPAS is a confederation, established in 1993, of approaching fifty scheme members' associations. A list of associations is given at the end of this document and further information can be found on our website www.copas.org.uk.

The Green Paper, on page 2, says " Most people are being paid the pension they were promised ". What sort of defence of the status quo is this? Should we be satisfied if the majority of people are not murdered? Should we be satisfied if the majority of people in jail are guilty?

The Green Paper, on page 5, says " many employers contribute generously ". This illustrates the Department of Work and Pensions' (DWP) misunderstanding of how today's employers behave. Employer contributions are neither " generous " nor " miserly "; they are a debt payable for services received.

The Green Paper, on page 6, refers to the employees " right to be consulted ". Of course employees should have this right (and so should retirees although the DWP does not mention them). But the right is worthless without consideration of the context of the consultation.

COPAS has pointed out before, in its submission to the Commons Select Committee on the Future of Pensions, that " consultation " often means that members receive a letter saying that some action will happen unless sufficient of them object. The letter will be slanted to favour the action, and members will not have access to any balancing viewpoint. Even if the members had more information they would probably not be organised to protest offending actions.

A consultation can be more genuine, where the members have organised a Members' Association independent of the company. Yet the Green paper makes no proposals to promote Member Associations or even to have existing associations recognised by the trust/company.

The Green Paper, on page 8, notes that " compulsory retirement ages are likely to be unlawful ". COPAS welcomes this and notes that it is especially applicable to Member Trustees who are retired. The age of such trustees, particularly for schemes closed to new members, will inevitably tend to be high. By setting age limits similar to those for company directors generally, the pool of retirees who are available as Member Trustees can be made very small. This effective disenfranchising of retirees is age discrimination. But the Green Paper does not address this aspect.

The Green Paper on page 30 talks of an " independent pensions commission ". We note that the Independent Pensions Research Group has reservations about whether the present composition of that commission will allow it to be genuinely independent. On this point and many others we recommend the IPRG comments on the Green Paper for careful consideration. (In particular on the affordability of a State Pension that would need less means-tested augmentation.) IPRG are very experienced in the feelings, facts, technology and logic of pensions.

The Green Paper chapter 3 is about informed choice and one might have expected proposals to give members the information they want.

Members want to know how well placed the pension fund is to fulfil the pension promises. Currently the actuarial report is only provided every three years and can then be delayed a year from the time it relates to - what use is that to members? Many of the figures in an actuarial report are just a reflection of choices of parameters made by the actuary and those who pay him. Sensitivity of the numbers to these choices is a reminder of the computer programmers' adage " garbage in - garbage out ".

Yet there are numbers that are meaningful to the members. The asset value, approximately what would be realised by selling, is meaningful. The cost of the pensions as annuities totalled with the transfer values is a good measure of the scheme's obligations. If the Green paper had proposed showing this number to members, annually, that would have been giving members the information they want and need to make informed choices.

The Green Paper on page 54 maintains that " Much of the current legislation was introduced in response to the Maxwell affair a decade ago. The pendulum must not swing back to far ". Again the DWP promotes the NAPF agenda. The current crisis reflects too little done in response to Maxwell, not too much. Intentions at immediate post-Maxwell time were good but they were not implemented. The Goode report called for funds to contain enough to protect members from company failures but the MFR was never set high enough to achieve this. The Minister said Member Trustees would "give members more influence in the running of their schemes" but the regulations were so feeble that (even where there was no opt-out) trustees appointed by rogue companies could perpetually outvote and disregard the Member Trustees. The Green Paper's intention to swing away from, rather than towards, adequate consumer protection should be unacceptable.

The Green Paper proposals on MFR give the impression of the DWP living in a different world from consumers. Page 56 recommends reducing the number of actuarial valuations. Is the DWP unaware of the rapid fluctuations in value that have occurred? The MFR has proved inadequate to keep funds up to strength but rather than strengthen it the DWP proposes more freedoms for companies and trusts. What world does the DWP inhabit, where it expects companies to put more into funds than the actuary&trustee suggest? Of course, if the actuary was accountable to make proposals that ensured the fund was robust then inadequate payments might not occur, but the Green Paper does not suggest such a level of accountability to the consumers.

The Green Paper on page 59 talks of " requiring all earnings to be included in pensionable salary ". This would be an excellent proposal if it stopped the policy of companies continually cheapening their established schemes by making bonuses and special payments a non-pensionable part of pay. But it seems from page 25 of the Technical paper that it does not mean that.

COPAS is concerned about what the DWP means on page 61 of the Green Paper when it says " the level of prescription should be based on the degree of risk to scheme members ". The first concern is the implication that consumer protection is not needed in some areas. COPAS believes that the company motivation to cheapen schemes at the expense of the members extends to all areas, and they all need protection. The second concern is the implication that the extent of protection is correlated with the level of prescription. This is not necessarily so. Some simple nonprescriptive legislation that specifies purpose (eg " These regulations are intended to ensure pension promises are kept ", " The purpose of Member Trustees is to ensure members' influence in the running of their schemes ") can adequately protect members if backed by empowered and motivated regulators. Page 61 exhibits another place where purpose is confused with mechanism. The purpose of Member Trustees is member influence. The mechanism proposed is 1/3 trustees nominated. That the DWP should even consider only head-counting (Option 1 of the Technical Paper, page 33) is unacceptable. The purpose of Member Trustees requires that regulators have some recourse if the company selects members on the basis of whom it knows from the golf course or who are major shareholders.

Again on page 61, the Green Paper suggests "giving scheme trustees more flexibility to adopt a procedure that best suits the scheme and it members". Internal disputes are disputes between the member and the trust. What level of knowledge of the real world does the DWP have, if it thinks the trust will use extra powers to aid members in these circumstances? The purpose of the dispute resolution procedures is to give the member some small chance of pushing through a valid complaint when faced with deterrence from the trust and its lawyers. Extra powers to the trust are the opposite of what is needed.

On page 62 the DWP again shows its colours by stating that "Employers provide schemes voluntarily" and implying that they must be pandered to, to encourage them to volunteer more charity. This simply fails to understand how companies operate.

Pension schemes are voluntary in the sense that paying staff is voluntary - a company could suggest to its staff that they work for nothing, but that would not be a good business model. Companies do not introduce schemes for altruistic reasons, they introduce them because they are a necessary part of a good business model for recruiting and retaining the best staff.

Once a scheme is in operation there is nothing voluntary about the scheme meeting its obligations - these obligations are debts, not opportunities for charity.

Page 67 has a classic example of facing both ways at once. The Green paper says " The Government will be guided by the aim of not increasing the overall burden on employers providing pensions ". It is cheaper for companies to walk away from their full pension obligations than to honour them. The legislation now allows them to do this. How can there possibly be better protection for the members that does not make matters more expensive for the rogue companies? No doubt it is just a clerical error, but Mrs A Sample, on page 72, seems to be in a " wife " relationship with herself.

COPAS finds the DWP's attitude to the Pensions Ombudsman deeply troubling. When the DWP summarised consumer protection in its written input to the Commons Select Committee it failed to mention the Office of the Pensions Ombudsman at all. Again in the Green paper Annex 6 it fails to mention the Office of the Pensions Ombudsman (OPO), even though the OPO has its own website. In the technical paper page 42 OPRA is mentioned but not the Ombudsman (even though the Ombudsman could find that failure to communicate was maladministration). Is there an agenda to de-emphasise the OPO, except as a sort of complaints department operating for the pension provision industry, a department making life as slow and difficult as possible for complainants and recommending minimum compensations?

Humans run the OPO so there will be mistakes. Currently when these mistakes favour the consumer they are corrected in the courts by trusts (using trust funds) and companies (using corporate budgets). When the mistakes are against the consumer they are not in practice challenged. This asymmetry makes it vitally important that mistakes are minimised. But the Green Paper simply ignores the issue.

The OPO needs many more, and more qualified, legal staff. It requires ample funds to defend its decisions in court. It needs to be made accountable. Currently the Parliamentary Ombudsman for Administration has "no power to investigate the actions of the administrative staff taken under the authority (explicit or implied) of the Pensions Ombudsman". In other words, however rude, tardy, illogical or negligent the administration may be, there is no accountability to consumers via the Parliamentary Ombudsman since the OPO works for, and under the authority of, the Ombudsman.

The output of the OPO needs to be monitored by independent legal minds. If nobody does this, how can we know whether/when the OPO expeditiously chooses to produce determinations which are paraphrases of the submissions it gets from respondents' lawyers, rather than choosing the harder task of a full and balanced appraisal of the legal aspects of the case?

Turning to the technical paper we find more details of the DWP disdain for members. It is worth repeating an early list (page 12) showing those responsible for removing the MFR requirement:

Association of British Insurers, Association of Consulting Actuaries, Association of Pension Lawyers, British Chamber of Commerce, Confederation of British Industry, Faculty and Institute of Actuaries, Investment Management Association, National Association of Pension Funds, National Consumer Council, Pensions Management Institute, Society of Pension Consultants, and Trades Union Congress.

Of these the National Consumer represents scheme members in an indirect way, although it is not primarily concerned with scheme members and it is funded by government and " friends " from industry. The TUC does have an interest in pensions but that is just one of its interests and a minor one until recently. Many scheme members do not have union representation.

The list does not have any organisation with scheme members as its prime concern and does not have any academic input or input from bodies like the Independent Pensions Research Group. Is it a surprise that the outcome follows the providers' agenda at the expense of the consumers?

Page 13 refers to a " full actuarial valuation ". COPAS believes that should make available to members sufficient data for the members to reproduce the results for themselves, sufficiently to detect any factors they have not been told about. We doubt that the DWP means " full " in that sense.

We note from the detail that the DWP does not propose telling members what they want to know. It does not propose they be told both the values of the assets and the obligations in marketplace terms. It does not propose they be told what they would receive if the scheme was wound-up. This contrasts with the purported aim that " Improved awareness and understanding among scheme members and their representatives about how their pension scheme is funded is intended to act as a check and balance under the new arrangements ".

On page 33, option 1 for member trustees is totally unacceptable. Examination of the detail shows that it would allow any members to be appointed by the trust in any way and the regulator could do nothing about it. Such trustees would not be Member Trustees in any sense related to the purpose of member trustees. If the regulator does not insist on the power to ensure openness and fairness it will not be a regulator worthy of the name.

Page 34 items 16 and 17 are worthy of comment. There is talk of exemptions from the requirement to have MNTs. Such exemptions require justification that the technical paper does not give. All members are entitled to the protection that MNTs provide. Regulators can benefit from the watchfulness of MNTs in all schemes. Trust schemes can communicate with their members, so they can communicate for the purpose of trustee elections.

COPAS agrees that there has to be legislation for the situation where no members want to stand. We do not agree that this is likely to be " through no fault of their own ". Trustees who keep their members well informed, and promote a Pensioners Association independent of the company, are unlikely to find a shortage of candidates.

The potential of Member Trustees to snuff out at source problems that would otherwise eventually reach the regulator should not be discounted. The gain to the regulator from Member Trustees far exceeds the cost of regulating their appointment.

COPAS believes the list of considerations for guidance given on page 34 is a good one. Guidance will need to contain a clear statement of one additional requirement for fairness - members must select the trustees, not merely offer choices for company appointments. (We are reminded of the case of somebody the company deemed unsuitable as a trustee because he was chairman of the pensioners' association!) Whether all the guidance will meet its objectives depends on the regulator.

This raises a general concern about the domination of the OPRA board by pension providers. Those who come to the board with the mindset of providers are likely to have come from good providers. They will be reluctant to recognise wrong behaviour by other providers. Extra powers for OPRA could work against members' interests if the balance of the OPRA board is not improved.

Page 39 addresses some requirements of IDRP. There are others that are important:

- Where the respondent states what the law is, it must give the complainant a reference to the particular law. (This is already OPRA guidance.)

- Where there are significant facts that the respondent will rely on if the case reaches the Ombudsman then the complainant should be told those facts. If this is not done, the Ombudsman should be entitled to infer that there was an attempt to mislead the complainant.

On the question of timing, six months is far too long. A logical time would be one week after the next trust board meeting, with the complainant being advised immediately when that meeting will be.

Page 42 is correct to emphasise that members need information to make decisions and defend their rights. The important point which the paper omits is that it is not open to the scheme to decide that members should not be interested in something - if the members would reasonably regard the information as relevant if they were to receive it then they should receive it. This is probably already the law.

With respect to page 43 item 7 we comment:

It should be acceptable for the trust to supply a reference to information on a public website, together with an offer to supply paper if the website is not convenient for the requestor. This is efficient, and will encourage trusts to make information readily available.

We have noticed that some trusts tend to use the current maximum delays for supplying documents or responding to IDRPs as minimums in practice. They may regard this as good practice, like not paying bills early. Merely supplying guidance rather than limits may lead to them experimenting with how long they can leave things before the member turns to the regulator.

Currently allowed delays are far too long. The trust knows which documents may be requested. Responding to a request should just be a matter of taking a copy from the shelf and mailing it.

With respect to page 49 we must first recognise the case for changing priorities. Because the MFR requirement has been so weak, schemes are being wound-up seriously underfunded and some members greatly disadvantaged. Changing priorities between employees and retirees offers one amelioration, changing the sharing of assets between larger and smaller pensions offers another.

COPAS prefers the second option. This is because it would undermine the whole security of pensioners if their pension could suddenly take a jolt downward late in life. Even if this rarely happened, the possibility of it would damage the quality of life of all retirees. The accumulated insecurity from the first option far outweighs the damage done by the second option, which might require some people (who expected large pensions but did not watch their pension fund carefully enough to ensure it) to find other jobs after wind-up, if they wanted to maintain their expected standard of living.

If offspring entering work find that their retired parents are insecure, in the knowledge that their pensions are insecure, then the offspring will not value highly the pension scheme offered to them. We cannot afford to undermine a basic tenet of pensions in this way - companies will only offer better pensions when prospective employees value those better pensions.

With respect to windups by solvent employers, page 53, we note that such windups are voluntary. While the company has the option of continuing the scheme there can be no ethical reason for making it cheaper for that company to dishonour its pension promises. Legislation should provide for "full buy-out" or something similar. The company always had an obligation to provide the pensions it promised. Failure by the government to provide a route by which the company could cheaply dishonour the promises is not " increasing the overall burden on employers providing pensions ".

Section 194 of the regulatory assessment fails to mention the risk of forcing employees into investments that are unwise, either because of undue corporate privilege in running the schemes, or because of means testing which effectively makes the investment highly taxed.

There are many aspects of the Green Paper not covered by these comments and COPAS welcomes the majority of them. We have deliberately restricted our comments to the worst examples of disregard for members' interests. We gave more detail in our contribution to the Work and Pensions committee, published in their Volume III, and we ask that the DWP should also give consideration to this. Specific examples are given of the " Pickering Predisposition " and there are 26 recommendations. The proposals there remain well founded even though the construction of the Green Paper provides no place for them to be discussed. Our website www.copas.org.uk has copies of the submission and other COPAS submissions.

As the Green Paper turns to White, we need to be vigilant of unexpected consequences. There are several unexpected consequences from the current regulations. The dividend " stealth " tax could be regarded as a minor trimming in the context of the markets when it was introduced. Now most people see it as slowly precipitating crisis. The breakpoint at 105% of actuarial surplus was intended to curb rogue companies - it did not do that but it did prevent funds acquiring the strength to weather economic storms.

One good test of a regulation is whether it makes sense to the members. All the money in all the pension funds is there due to the members providing it, either as contributions or as recompense for their work. If the DWP moves towards testing regulatory proposals for their benefit to members it will not go far off-course.

Here is a list of some of the member associations in the COPAS confederation :

Association of British Airways Pensioners
Association of Members of IBM UK Pension Plans (AMIPP)
BAe Retired Association - Kingston BAE Systems Pensions Group - Dunsfold BAE Systems Pensions Group - South East BAE Systems Pensions Group - Weybridge BAE Systems - Plymouth BBC Pensioners' Association Blue Circle Pensioners' Association
British Aerospace - Filton British Technology Group Pensioners' Association Civil Aviation Authority Retired Staff Association
CSE Pensioners' Association
Clydesdale Bank Pensioners' Association
Crown Agents Pensioners' Association
Digital Equipment Co Ltd. Pensioners' Association
English China Clays Pensioners' Association
Gillette Pensioners' Association
Gulf & Chevron Pensioners' Association
HTV Pensioners' Association
Harland & Wolff Pensioners' Action Group
Imperial Pensioners Action Call (IMPAC)
Independent Television Commission Retirement Association (ITCRA) Independent Television News Pensioners' Association
Industrial Training Board Pensioners' Association
Lawson Mardon Pensioners' Association
National Association of British Steel Pensioners
National Federation of Post Office & BT Pensioners
National Transcom Retirement Association (NTLRA)
PERA Pensioners' Association
Proctor & Gamble Pensioners' Association
Quaker Oats Retirement Fellowship
Reckitt & Colman Pensioners' Association
Royal Ordnance Pensioners' Association
SERCO / IAL Pensioners' Association
Tandem Group plc Pensioners' Association
Thames Television (AMTTPS)
Thorn - EMI Pensioners' Association
Wellcome Group Pension Fund Members Association
Wimpey Pensioners' Association (South East)