Annex A: FAS Review terms of reference
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| |Financial Assistance Scheme (FAS) Review of Assets |
| |Final Report |
| |December 2007 |
FAS Review of Scheme Assets – Final Report, December 2007
Index
Foreword 8
The role of the review 8
Our interim report and subsequent developments 8
Our final report 9
Acknowledgements and thanks 11
Summary 12
The scope of this final report 12
Summary of final report conclusions and recommendations 13
Chapter 2: Scheme assets 13
Chapter 3: Use of assets 14
Chapter 4: Future design issues 16
Chapter 5: Costs of FAS 17
Chapter 6: Alternative funding sources 17
Chapter 7: Solvent employers 18
Chapter 1: Introduction 21
Background to the Review 21
Legislative changes since the interim report 21
The areas covered in this final report 23
Chapter 2: Value of scheme assets 24
Our Terms of Reference and how we have interpreted them 24
The value of assets in FAS schemes 25
The distribution of assets in FAS schemes 26
Distribution of assets by scheme size 27
Asset allocation 29
Scheme funding levels 30
MFR funding basis 30
Full buy out funding basis 30
Pensioner and non-pensioner split 31
Conclusions and recommendations 33
Chapter 3: Use of scheme assets 34
Our Terms of Reference and how we have interpreted them 35
Options for the use of scheme assets 35
Options for liability management 37
A methodology for choosing between the options 38
Stage 1 Evaluation: Outline 39
Stage 1 Evaluation: Legal and accounting issues 39
Stage 1 Evaluation: Administrative/implementation issues 40
Ensuring timeliness of wind up 41
The scale of wind up 43
Delivering expertise in the wind up process 43
Stage 1 Evaluation: Set up costs 44
Stage 1 Evaluation: Use of existing institutions 45
Stage 1 Evaluation: Risks and moral hazard 46
Longevity risk 47
Investment risk 50
Inflation risk 51
Data or assumptions risk 52
Default or counterparty risk 53
Implementation risk 53
Moral hazard or incentive risk 54
Stage 1 Evaluation: Protection of members’ benefits 56
Stage 1 Evaluation: Summary 57
Stage 2 Evaluation: Outline 58
Stage 2 Evaluation: Additional value 58
Bulk annuitisation across FAS 60
Bulk annuitisation across FAS with longevity risk sharing 62
A fund based option 64
Government takes in the assets 65
Stage 2 Evaluation: Other issues 66
Guaranteeing the gains 67
Conclusions and recommendations 67
Chapter 4: FAS benefits and other design issues 69
Our Terms of Reference and how we have interpreted them 69
Payment from normal pension age 70
Deemed Buy Back 71
FAS non-qualifying members 72
Transfers out 72
Small payments 73
Treatment of Additional Voluntary Contributions 73
Current practice in FAS and PPF 74
Chapter 5: Costs of FAS 76
Our Terms of Reference and how we have interpreted them 76
Estimates of cost 76
Government share of the total cost of FAS 79
Methodology for estimating costs 80
Chapter 6: Other funding sources 82
Our Terms of Reference and how we have interpreted them 82
The scope of our investigations 83
Voluntary contributions 85
Unclaimed assets 86
Dormant accounts 87
Credit Unions 87
Unclaimed pension assets 88
Trust-based pension schemes 89
Non-trust-based pensions 90
Insurance and life assurance policies 90
Inherited estate 94
Mutual Insurers 95
Friendly Societies 96
Unclaimed shareholder assets 98
‘Lost’ shareholdings 98
Unclaimed dividends 102
Collective Investment Schemes 103
Open-Ended Funds 103
Close-Ended Funds 104
Cash balances of investment banks 105
Gambling winnings 106
Unclaimed winning bets 106
Customer Payments 107
Further unclaimed assets 108
Chapter 7: Pension schemes with solvent employers 109
Our Terms of Reference and how we have interpreted them 109
Current eligibility for FAS and recent changes 110
The role of the Review team 111
Information gathering 112
Data collection exercise 113
Response rate 113
Scheme funding and membership information 114
Additional schemes with compromise agreements 115
Other schemes 115
Employers’ responsibility for supporting underfunded schemes 116
Key issues for investigation 116
Schemes with compromise agreements 117
Members’ Voluntary Liquidation 118
Insolvency event outside the current cut off date 119
Schemes outside the scope of the FAS 119
Negotiations with employers 120
Improving scheme funding levels 121
Employers’ moral obligations to support their pension schemes 122
Conclusions and recommendations 124
Annex A: FAS Review terms of reference 126
Review of the use of assets in FAS pension schemes 126
Scope 126
Objectives 126
Timing 127
Annex B: The Review team 128
Review team lead 128
Review team – external experts 128
Annex C: Interim report findings 129
Funding and assets 129
Use of assets 129
Other sources of funding 130
Solvent employers 130
Annex D: The priority order 131
Effect on FAS 131
Priority order pre 6 April 1997 131
Priority order from 6 April 1997 but before 10 May 2004 132
Priority order from 10 May 2004 but before 6 April 2005 132
Priority order from 6 April 2005 133
Annex E: Scheme funding regimes 134
Funding regime before 6 April 1997 134
The Minimum Funding Requirement - 6 April 1997 to 30 December 2005 135
Scheme specific funding - from 30 December 2005 136
Annex F: The scheme wind up process 137
The basics of scheme wind up 137
The winding up process 138
Information provided during wind up 139
Legislation and winding up 139
Annex G: Scheme deficits and employer debt 141
Solvent employers 141
Insolvent employers 143
Compromise agreements 143
Annex H: Differences between FAS and PPF 144
Worked example to illustrate FAS revaluation 149
Circumstances 149
First revaluation period 149
GMP 149
Revaluing pension above the GMP 150
Second revaluation period 150
FAS assistance at the certification date 150
Revaluation of the FAS payment 151
Annex I: Schemes providing information as part of the Review team’s data collection exercise on solvent employers 152
Annex J: Republic of Ireland unclaimed assets scheme 158
The Irish scheme 158
Reclaim risk 159
Application to the UK 159
Annex K: Comparison of unclaimed assets collected outside the UK 161
Australia 161
New Zealand 161
Spain 162
United States of America 162
New York, USA 163
Vermont, USA 164
Annex L: Other sources of funding that are outside the scope of this Review 166
‘Windfall’ tax / Levy on industry 166
Dormant accounts 166
Banks and building societies 166
‘Unclaimed assets’ within Government 166
National Insurance Fund ‘surplus’ and state benefits 167
Tax overpayment refunds 168
National Savings and Investments 168
Court Funds Office 168
Bona vacantia 170
Unclaimed pension assets 171
Public Sector pensions 171
Gambling winnings 172
National Lottery 172
Annex M: Summary of written representations made to the Review team 173
List of abbreviations used 175
Figures
Figure 1: Cumulative percentage of assets held by ranked scheme size 27
Figure 2: Proportion of scheme assets by scheme size (number of members) 28
Figure 3: Proportion of scheme assets by scheme size (value of assets) 28
Figure 4: Number of scheme members 32
Figure 5: Cash costs of past and current FAS 78
Figure 6: NPV costs of past and current FAS 79
Figure 7: Total cash costs of FAS split by scheme assets and Government top up 80
Tables
Table 1: Asset holdings by asset class 29
Table 2: Results of stage 1 evaluation 58
Table 3: Risk vs. reward under different FAS options 60
Table 4: Information on Normal Pension Ages within FAS 71
Table 5: Current practice – FAS and PPF 74
Table 6: The changing costs of FAS (2007/08 terms) 78
Table 7: Scheme funding level bases for group and scheme member numbers 115
Table 8 : PPF versus FAS, key differences at a glance 144
Table 9: The Republic of Ireland unclaimed assets scheme 159
Boxes
Box 1: Solvency and capital adequacy requirements 48
Box 2: Net Present Value 77
Box 3: Solvent scheme case study 1 122
Box 4: Solvent scheme case study 2 123
Box 5: Solvent scheme case study 3 123
Foreword
The role of the review
In April this year I accepted an invitation by John Hutton, the then Secretary of State for Work and Pensions, to lead a review considering some aspects of whether the current Financial Assistance Scheme (FAS) arrangements remain fit for purpose.
At that time each scheme used its assets to purchase annuities in order to secure as much of the scheme pension as possible and Government then top this up to a pre-specified level. Our Review was asked to consider whether it might be possible to make better use of the residual assets in FAS eligible schemes to supplement the committed Government funding and increase assistance for members.
The Review was also asked to look into whether it was possible to find credible non-tax sources of funding to supplement agreed assistance levels and to look into the circumstances of those defined benefit pension schemes that wound up underfunded with a solvent employer.
Our interim report and subsequent developments
In our interim report, delivered in July of this year, we considered four main areas:
• the value of assets in FAS schemes, their ownership and stewardship;
• potential alternative ways of using these assets and whether there are options to increase value;
• other non-tax sources of funding; and
• the key issues related to pension schemes with solvent employers.
We found that the current FAS arrangements are unlikely to be the most effective way of using the estimated £1.7 billion in residual scheme assets.
We stated that we believed additional value could be generated by increased scale in the annuitisation process, with scope to make further additions from risk sharing and alternative management of assets and liabilities, for example, in a fund based option or Government taking in the scheme assets and providing assistance on a pay as you go basis, and we committed to investigate these areas further.
On other non-tax sources of funding, our initial view was that most of the options identified were not suitable or outside the scope of the Review. In particular we stated that we did not believe voluntary contributions, ‘windfall’ taxes, an extension of the Pension Protection Fund or Pensions Regulator levies, the National Insurance Fund ‘surplus’, defined benefit pensions, ‘orphan assets’ or NS&I ‘unclaimed assets’ were credible alternative funding sources. We did not consider bank and building society unclaimed assets as these are the subject of a separate HM Treasury exercise.
We concluded that unclaimed personal pensions and life assurance policies might provide a new source of funding. However, we had reservations about the legislative and administrative barriers to establishing such a scheme and we promised to conduct further investigation to determine the viability of these options and to investigate further possible sources of funding.
We also concluded that there was insufficient information on schemes that wound up underfunded but where the sponsoring employer remains solvent. To fill this, and other, information gaps we identified, we have undertaken further data collection and consultation.
We recommended that Government did not act on the current and proposed cut-off dates for scheme insolvencies to avoid the potential exclusion of some schemes from FAS whilst our investigations were ongoing. Government accepted our recommendations on the insolvency cut-off date and has also legislated to bring about a temporary nine month halt in schemes using their assets to purchase annuities, unless they have permission from the FAS scheme manager or a pre-existing commitment to purchase.
Since our interim report was published there have been further extensions to FAS arising from the Pensions Act 2007. Following new regulations FAS has been extended to cover around 130,000 people in 700 schemes and will pay 80 per cent of expected core pension. The de minimis of £10 per week will be removed, the cap raised from £12,000 to £26,000 and schemes with a compromise agreement in place will be eligible for assistance.
Our final report
In this final report we return to the issues previously identified and provide our conclusions, which are:
The optimal use of scheme assets, where we find:
• that the most appropriate use of assets depends on the appropriate level of guarantee for assistance levels:
o if guaranteed assistance levels are appropriate then we recommend that Government takes in the assets and pays the amounts to all FAS beneficiaries as they fall due. Government has indicated that they do not feel taking on investment risk represents value for money for the public sector;
o however, if some element of risk sharing is appropriate then managed use of the assets in a fund based option, with appropriate investment risk, is the best way forward.
• any risk sharing should be structured in order to guarantee assistance levels to those closest to retirement and provide those further from retirement with a reasonable expectation (subject to fund performance) of assistance at similar levels;
• both options generate broadly equivalent ‘economic value’ since any additional financial value involved where investment risk is taken just represents a risk return trade off, where either members or the taxpayer hold the uncertainty of investment performance;
• while risk sharing potentially reduces costs, it does so at the expense of certainty to the members.
The costs of FAS, where the Review team finds that, under the Budget 2007 extension (80 per cent expected core pension for all, removal of the de minimis, increasing the cap to £26,000 and including schemes with a compromise agreement), Government faces a cost of around £2 billion NPV[1] (or a cash cost of around £8.6 billion) over the next 70 years or so.
Potential alternative sources of funding, where we note Government may want to undertake further investigation with regard to:
• unclaimed personal pensions and insurance policies;
• lost shareholdings;
• customer payments;
• unclaimed assets within collective investment companies; and
• unclaimed winnings from gambling.
Out of the many other alternative sources of funding that we have identified most are either outside the scope of the Review (for a variety of reasons such as they would necessitate raising taxation e.g. the NIF ‘surplus’, or are already utilised e.g. unclaimed National Lottery prizes) or are not credible (for example voluntary contributions).
We wish to make clear that it is not the role of the Review to recommend whether Government should choose to legislate to access these funds or whether, if they do, such monies raised should go to support FAS; rather it is our role to identify the existence of these alterative sources of funds. We also note that there are complicated legislative and operational issues that would need to be resolved before Government could access these funds and the amounts that could be raised are uncertain.
Solvent employers, where our views are:
• that there is, in general, no material distinction between:
o those schemes which have wound up underfunded with a solvent employer where a compromise agreement is in place, without which the employer would have gone insolvent; and
o those schemes where no compromise agreement has been reached.
• scheme members are likely to have lost pensions in both cases and whilst it is clearly regrettable that some employers have not fulfilled their moral responsibility to their employees, they have fulfilled their legal duty;
• employees have no legal recourse to recover their lost pensions; and
• employers are unlikely, even when they are able to, to provide any further voluntary support for these schemes.
However, we wish to make clear that it is not the role of the Review to recommend whether these schemes should be included in FAS; that remains a matter for Government.
Acknowledgements and thanks
Finally, I would like to personally thank all the members of the expert advisory panel (Professor David Blake, Martin Clarke, Ashok Gupta, Alan Higham, Angela Hills, Chris Martin and Jane Samsworth). Their advice and opinions were invaluable, although I should stress that the conclusions are the responsibility of the Review team.
My thanks also go to all those scheme trustees and actuaries who have provided us with data (a full list is provided in the Annexes to this and our interim report). I would also like to thank and all those organisations and pensions and investment experts who have provided us so generously with their time, thoughts, ideas and expertise.
My thanks finally go to various members of the Department for Work and Pensions - particularly all the FAS Policy Team and analysts, the FAS Operational Unit and Government Actuary’s Department for analysis and other input and very especially to the hard-working secretariat (Brendan McMullan, Toby Nutley and Nina Young) who have so ably supported the Review and prepared both our interim and final reports.
Andrew Young
December 2007
Contact us
adelphi.fas-review@dwp..uk
Summary
The scope of this final report
1. This is the final report of the Financial Assistance Scheme (FAS) Review of Scheme Assets. The Review was announced by John Hutton, the then Secretary of State for Work and Pensions, on 28 March 2007 and launched on 23 April 2007 when James Purnell, the then Minister of State for Pensions Reform, published its Terms of Reference (see Annex A).
2. The Review has been led by Andrew Young of the Government Actuary’s Department, advised by a panel of leading external experts (see Annex B) and supported by a small Civil Service secretariat, provided by the Department for Work and Pensions (DWP).
3. It was set up to consider whether an alternative treatment of the residual funds in affected pension schemes could supplement the committed Government funding of the Financial Assistance Scheme and “…increase assistance for affected scheme members”.[2]
4. The Review was also asked to look into whether it was possible to find credible non-tax sources of funding to supplement agreed assistance levels and to look into the circumstances of those defined benefit pension schemes that wound up underfunded with a solvent employer.
5. This final report provides the Review team’s conclusions and recommendations on the following areas:
• the value of assets in FAS schemes, their ownership and stewardship - Chapter 2;
• the options for using the assets in the relevant pension schemes to increase the assistance levels to members - Chapter 3;
• simplification of the benefit structure in FAS - Chapter 4;
• the costs of FAS and how these have changed under alternate forms of assistance - Chapter 5;
• the other non-tax sources of funding and whether these might supplement the committed Government funding - Chapter 6; and
• the pension schemes that have wound up underfunded with solvent employers - Chapter 7.
Summary of final report conclusions and recommendations
Chapter 2: Scheme assets
6. In our interim report[3] we established that there are around £1.7 billion of assets remaining uncommitted in those FAS schemes yet to complete wind up. Of these, around £1.3 billion are in schemes that have yet to start annuitisation, and around £0.4 billion in schemes that have started to purchase annuities for some members.
7. Overall, the vast majority of these assets, around 80 per cent, are held in ‘gilts and fixed interest’ assets. However, there is some variation in aggregate asset holdings between schemes that have started to annuitise (where a greater proportion of assets are held as cash) and schemes yet to commit assets to annuity purchase (where a greater proportion of assets are in forms such as gilts or similar assets), probably reflecting their relative progress in the winding up process.
8. The distribution of scheme assets is uneven; a relatively small number of large schemes hold a significant proportion of the remaining assets. For example, out of the around 525 schemes yet to complete wind up:
• the 10 largest[4] schemes hold around £560 million in assets, which is almost one third of the total;
• the 20 largest schemes hold around £830 million in assets, which is almost half the total; and
• the 50 largest schemes hold around £1.2 billion in assets, which is nearly three quarters of the total.
9. If these larger schemes were to annuitise then there would be few assets left. The Government has implemented regulations[5] to bring about a temporary nine month halt to annuity purchase (unless the FAS scheme manager provides approval or there is a contractually binding pre-existing commitment to purchase); this should help safeguard the value of the assets we have identified.
10. There is widespread variation in funding levels between FAS schemes. Due to the statutory priority order (see Annex D), most should be able to secure some, or the vast majority, of pensioner benefits. However, there will often be little left for securing deferred members benefits.[6]
11. This statutory use of assets, combined with a relatively high proportion of pensioner members in schemes yet to commit any assets to annuitisation, suggests that much of the residual assets would be used to secure pensioner benefits if the current regime of scheme by scheme annuitisation were to continue. We estimate that, broadly, around two thirds of the scheme assets in those schemes yet to start annuitisation, or around half of all assets (some £870 million), may be attributable to pensioners.
12. Given this, in order to maximise the quantum of assets available to generate additional value, we recommend that:
• Government continues to protect the value of scheme assets by limiting scheme annuity purchase to those schemes that either have a contractually binding commitment already in place, or where such annuity purchase is demonstrably in members best interests; and
• all scheme assets, including those held in respect of pensioners and other non-eligible members, are treated in the same way, i.e. these non-eligible members do not have their benefits secured by annuity purchase, since to do so would not deliver them any additional value but would jeopardise the value that could be generated for others.
Chapter 3: Use of assets
13. In our interim report we identified three options for using the scheme assets to provide assistance to members. These were: the current FAS arrangements; bulk annuitisation; or managed use of scheme assets (including Government taking in scheme assets and liabilities).
14. We noted “…that the current arrangements (where each scheme uses their assets to purchase annuities in order to secure as much of the scheme pension as possible and Government then tops this up to a pre-specified level) are unlikely to be the most effective way of using the estimated £1.7 billion in residual scheme assets.”[7]
15. We also identified that altering the treatment of liabilities (in particular managing longevity risk, simplifying the benefit structure, pooling scheme assets and being able to offer clean data) could help to make it simpler and more effective to deal with FAS cases, and that this should help to drive value.
16. We set out a two stage evaluation procedure to examine the alternative options, where:
• in stage 1 options would have to pass a series of absolute hurdles with respect to the options being able to function legally, administratively, operationally, within acceptable risk parameters etc; and if these were passed then
• in stage 2 the relative merits of the remaining options would be assessed, particularly in relation to the extra cash flow they could generate.
17. The Review team believes that, after stage 1, none of the options are decisively ruled out; although there remain important detailed issues to be resolved in relation to:
• whether any degree of Government control would lead the assets, and their associated liabilities, to be classed as being within the public sector; and
• how any investment risk might be shared with members, such that the taxpayer does not underwrite investment performance.
18. Subject to the satisfactory resolution of these issues each option proposed should pass the stage 1 evaluation criteria. In particular the options should be:
• legally feasible to implement;
• administratively feasible;
• have affordable set up costs;
• use existing institutions;
• have acceptable risk to taxpayers; and
• ensure members are not unreasonably disadvantaged.
19. However, we believe that the key determinant of “The optimal economic use of these [scheme] assets for meeting the liabilities” of FAS depends on the appropriate level of guarantee for assistance levels.
20. If guaranteed assistance levels are appropriate then we recommend that Government takes in the assets and pays the amounts to all FAS beneficiaries as they fall due. Government has indicated that they do not feel taking on investment risk represents value for money for the public sector.
21. If some element of risk sharing with members is appropriate then we recommend the managed fund option with Government guaranteeing to pensioners and those closest to retirement the full level of assistance, with people at younger ages having a lower level of guarantee but with the aim that the investment strategy will enable the higher level to be paid to them by the time they become eligible.
22. Both options generate broadly equivalent ‘economic value’ since any additional financial value involved where investment risk is taken represents a risk return trade off, where either members or the taxpayer hold the uncertainty of investment performance. Whilst risk sharing potentially reduces costs, it does so at the expense of certainty to the members.
23. Whilst both these options involve Government underwriting longevity risk, this represents a relatively limited additional commitment over and above the current, top up based, arrangements and better financial value than bulk annuitisation.
24. We recommend Government should continue to limit scheme by scheme annuitisation in order to protect scheme asset value in advance of new arrangements, and that Government should implement legislation to minimise potential moral hazards that might arise from trustees or fund managers acting against the taxpayers’ best interests.
Chapter 4: Future design issues
25. In our interim report we noted that there are some simplifications that could potentially be made to the FAS benefit structure. We have identified a number of areas that will require further consideration from DWP when taking forward future work on the design of any new scheme. These issues relate to:
• payment from normal pension age (NPA);
• Deemed Buy Back;
• FAS non-qualifying members;
• transfers out;
• small payments; and
• treatment of Additional Voluntary Contributions.
26. Payment from scheme NPA would add some administrative and programme expense; however, it would make any system where annuities are not purchased relatively easier to operate, since it would avoid the need to earmark scheme assets to make payments between NPA and 65. We note from a sample of around 12,000 FAS members that 80 per cent have an NPA of 65.
27. We note that whilst FAS offers Deemed Buy Back,[8] take up has been low and its interaction with FAS is potentially anomalous (since DBB does not count against FAS entitlement meaning in some cases people could receive more than 100 per cent of scheme benefits). Its removal would be consistent with PPF policy and should also lead to a simpler wind up process.
28. The Review team believe new FAS arrangements should, in order to maximise the quantum of assets available to generate additional value, take in all available scheme funds, including those held in respect of non-eligible members. This will also necessitate paying these members the pensions they would have received from their schemes – something that happens in the PPF.
29. There is some merit in considering transfers out of FAS for younger members, though the cash flow impacts of doing this need further consideration. This option might also be extended to other people with small payments, though rationalising the scheme pension and assistance payment into a single flow would also help reduce the number of small payments.
Chapter 5: Costs of FAS
30. Government initially committed £400 million in cash to fund a relatively limited Financial Assistance Scheme that covered those people closest to (within three years of) retirement. This has subsequently been significantly extended such that under the Budget 2007 extension (80 per cent expected core pension for all, removal of the de minimis, inclusion of schemes with a compromise agreement and increasing the cap to £26,000) Government has currently committed to pay around £8.6 billion in cash costs or £2.0 billion in Net Present Value (NPV).
31. The profile of these cash costs is broadly bell shaped and driven by the number of scheme members over 65.[9] Therefore, they start at a relatively low level but increase rapidly to a maximum of around £240 million per year cash by the mid 2030’s, with a subsequent decline as eligible members die.
32. All cost estimates have been provided to the Review by DWP and are published alongside the Review in “Financial Assistance Scheme Review of cost estimates”.[10]
Chapter 6: Alternative funding sources
33. In our interim report we identified a number of areas as potential sources of alternative funding that might be able to be used to supplement the committed Government assistance, particularly unclaimed assets. However, we believed there was a need to conduct further investigation regarding the viability of some of these options.
34. Our Terms of Reference have meant that we have not considered a number of areas to provide potential sources of funding. Those areas which we have considered to be out of scope include: dormant accounts in banks and building societies; ‘windfall’ taxes or additional levies on business; unclaimed assets within Government (including the National Insurance Fund ‘surplus’ and National Savings & Investments); public sector pensions; and unclaimed prizes in the National Lottery.
35. We do not believe that, despite the current legislative powers that allow the FAS scheme to accept voluntary contributions from business or individuals, these voluntary contributions are likely to be forthcoming. Therefore, they do not represent a “credible” source of additional funding.
36. We have noted a number of potential areas that Government could consider conducting further investigation into, though we have not been able to fully consider the complicated legislative and operational difficulties associated with these areas, or the likelihood of their providing “credible” amounts of funds.
37. These areas include unclaimed insurance policies and unclaimed pensions in private non-trust-based pension schemes. Lost shareholdings, unclaimed assets within collective investment companies, and unclaimed winnings from gambling are also potential sources.
38. Any compulsory scheme aiming to gather unclaimed assets could lead to behavioural changes by the organisations holding the assets so that there is also considerable uncertainty about the amounts that may be raised.
39. We do not believe that other organisations, beyond banks and building societies, are likely to participate in a voluntary arrangement similar to that currently planned, though we recognise that some of these bodies are already actively attempting to reunite customers with their lost entitlements, and we welcome these actions.
Chapter 7: Solvent employers
40. In our interim report we agreed that, in our view, Government was right to extend FAS to those schemes where a compromise agreement[11] is in place. We also recommended that “…Government does not act on the current and proposed scheme cut-off dates for scheme insolvencies to avoid the potential exclusion of some schemes from FAS whilst our investigations are ongoing.”[12] Subsequently, Government accepted our recommendation on the insolvency cut-off date and introduced the necessary regulatory changes to include schemes with a compromise agreement in FAS.[13]
41. We also noted that the role of the Review team is to “…determine whether there are other pension schemes (in addition to those with compromise agreements) where although the sponsoring employer did not undergo an insolvency event, it would not be reasonable to expect the employer to have a continuing responsibility for supporting an underfunded scheme.”[14]
42. However, we cautioned that “…at present, there is insufficient information … on …schemes that wound up underfunded but where the sponsoring employer remains solvent” and stated “To fill this, and other, information gaps … we intend to undertake further data collection and consultation over the summer”.[15]
43. Having undertaken our data collection and consultation exercise, together with an examination of the legislation that governed FAS scheme wind up and getting legal opinion on the position of scheme members, the Review team believes that any case for further extension of scheme eligibility rests on whether it is feasible to draw a distinction between:
• those schemes which have wound up underfunded with a solvent employer where a compromise agreement is in place, without which the employer would have gone insolvent; and
• those schemes where no compromise agreement has been reached but any debt paid by the employer was insufficient to enable full benefits to be provided to the members.
44. There is no simple answer. Ultimately any decision on extending FAS beyond those schemes where a compromise agreement is in place is for the Government to make. Nevertheless the Review team has a very distinct role in trying to establish whether or not it would be “reasonable” in certain circumstances to expect the employer to “have a continuing responsibility for supporting an underfunded scheme”. This is likely to depend on how “reasonable” is defined and what other factors are taken into account.
45. The first test of whether it is “reasonable” is to look at the legal obligations in place at the time the scheme started to wind up and how far the employer has met their obligations.
46. The second test might be how far the employer is able or, importantly, willing to meet their moral obligation to support the pension scheme. The fact remains, however, that unless there is a legal obligation on employers to “have a continuing responsibility for supporting an underfunded scheme” it is unlikely that many will provide additional financial support.
47. Discussions with a number of trustees, administrators and other commentators suggest that most employers are reluctant to pay over and above the statutory level of debt owed to the pension scheme. For a number of reasons very few consider that they have any ‘moral obligation’ to do so.
48. The evidence which we have reviewed indicates that there is in general no material distinction between:
• those schemes which have wound up underfunded with a solvent employer where a compromise agreement is in place, without which the employer would have gone insolvent; and
• those schemes where no compromise agreement has been reached but any debt paid by the employer was insufficient to enable full benefits to be provided to the members.
Chapter 1: Introduction
Background to the Review
1. On 28 March 2007, John Hutton, the then Secretary of State for Work and Pensions, announced a review to examine whether an alternative use of the residual funds in affected pension schemes could supplement the committed Government funding of the Financial Assistance Scheme (FAS) and “…increase assistance for affected scheme members”. [16]
2. The Review was also asked to look into whether it was possible to find credible non-tax sources of funding to supplement agreed assistance levels and to look into the circumstances of those defined benefit pension schemes that wound up underfunded with a solvent employer.
3. The Review was launched on 23 April 2007 when James Purnell, the then Minister of State for Pensions Reform, published its Terms of Reference (shown in full at Annex A) in a letter to Members of Parliament,[17] noting that “The review will provide an initial view in the summer, consult formally in the autumn and then report by the end of the year.”
4. The Review, led by Andrew Young of the Government Actuary’s Department and advised by a panel of leading external experts (further details are provided in Annex B), provided its interim report[18] on 16 July 2007 (a summary of findings are provided as Annex C). This concentrated on the following key areas:
• the value of assets in FAS pension schemes, their ownership and stewardship;
• potential uses of these assets and whether there are options to increase value;
• other non-tax sources of funding and whether these might be used to supplement the committed Government funding; and
• the key issues related to pension schemes that wound up underfunded with a solvent employer.
Legislative changes since the interim report
5. Subsequent to the publication of the Review’s interim report, on 16 July 2007, the Pensions Act 2007 gained Royal Assent. This, and two subsequent packages of regulations,[19] have led to a number of changes for FAS, most notably:
• prohibiting, for a period of nine months following the regulations coming into force on 26 September, the trustees of relevant pension schemes from purchasing, or agreeing to purchase, annuities on behalf of qualifying members, without the FAS scheme manager’s approval (unless they had already entered into a binding commitment to do so);[20]
• the normal pension age related tapered assistance levels[21] that applied will be removed so that all eligible qualifying members get topped up to 80 per cent of expected core pension - subject to the cap - (for both initial[22] and annual payments) at age 65;[23]
• the de minimis rule that excluded those whose FAS payment would be £10 or less a week will be removed;
• the cap on maximum assistance will be increased from £12,000 to £26,000 per year;
• the extension of FAS to cover members of schemes that began winding up between 1 January 1997 and 5 April 2005 where a compromise agreement is in place and enforcing the debt against the employer would have forced the employer into insolvency;
• the removal of the current insolvency cut-off date and allowing the scheme manager to exercise discretion in deciding whether there is a link between employer insolvency and scheme wind up where the insolvency occurs after 1 January 2009; and
• the extension of FAS to cover some small self-administered schemes.[24]
The areas covered in this final report
6. This final report provides the Review team’s conclusions and recommendations on the following areas:
• the value of assets in FAS schemes, their ownership and stewardship - Chapter 2;
• the options for using the assets in the relevant pension schemes to increase the assistance levels to members - Chapter 3;
• simplification of the benefit structure in FAS - Chapter 4;
• the costs of FAS and how these have changed under alternate forms of assistance - Chapter 5;
• the other non-tax sources of funding and whether these might supplement the committed Government funding - Chapter 6; and
• the pension schemes that have wound up underfunded with solvent employers - Chapter 7.
Chapter 2: Value of scheme assets
Main findings and recommendations
• There are around £1.7 billion in uncommitted assets in FAS schemes; £1.3 billion of this in schemes that have not started to annuitise and £0.4 billion in schemes that have annuitised some members.
• The vast majority of the remaining assets (around 80 per cent) are held in ‘gilts and fixed interest’, though there is some aggregate variation between schemes that have and have not started to annuitise. In schemes that have started to annuitise a greater proportion of assets are held as cash, perhaps reflecting these schemes relative progress towards completing wind up.
• The distribution of scheme assets is uneven; a small number of relatively large schemes hold significant proportions of the remaining assets. For example, the 10 largest schemes, out of around 525 still to wind up, have just over £560 million in assets, about one third of the total.
• If these schemes were to annuitise there would be a significant reduction in the quantity of assets available to be utilised more effectively. However, the value of the remaining assets is currently protected by legislation temporarily halting annuity purchase in FAS schemes.
• Scheme funding levels vary widely between schemes, but some FAS schemes are relatively well funded. Due to the statutory priority order that operated throughout the majority of the period schemes qualify for FAS, most should have been able to secure at least part, and in some cases the majority, of the promised scheme benefits for pensioners with cut backs mainly affecting deferred members.
• Pensioners represent around 30 per cent of the 150,000 members of FAS schemes yet to complete wind up, but many of them will not be entitled to assistance as they would get the majority of their scheme benefits on wind up. The remaining ones will, however, have a greater claim on the residual scheme assets than the deferred members. We estimate around two thirds of the scheme assets in those schemes yet to start annuitisation, or around half of all assets, may be attributable to pensioners.
• We recommend Government continues to limit scheme by scheme annuity purchase in order to protect the value of available scheme assets.
• We also recommend that, in order to maximise the quantum of assets available to generate additional value, all available scheme assets, including those held in respect of non-eligible members, be treated in the same way.
Our Terms of Reference and how we have interpreted them
1. Our Terms of Reference set the objectives for the Review in relation to scheme assets as being “To determine the potential value, current stewardship and current allocation to different asset classes of the assets that were the property of the relevant pensions schemes on their commencement of wind up, in order to assess what assets might be available.”
2. We have interpreted this as requiring us to:
• undertake investigation into the quantum of residual assets within FAS eligible schemes;
• consider the distribution of assets between schemes and types of member;
• examine scheme funding levels; and
• determine which asset classes the remaining assets are held in.
The value of assets in FAS schemes
3. For our interim report[25] the Review team, in conjunction with DWP and the FAS Operational Unit, conducted a data collection exercise contacting all the 525 schemes eligible for FAS assistance that were in the process of winding up and asking them to provide information on scheme assets.[26] Just over 400 schemes responded, and of these, 387 returns were used,[27] resulting in a proportion of 74 per cent of all schemes initially contacted and representing approximately 85 per cent of the total membership[28] of FAS eligible schemes.[29]
4. Analysis of the data, presented in our interim report, showed the following key results:
• for the 200 schemes which have not, as yet, either committed or entered into any agreement to commit assets to provide an annuity for current or future pensioners, there is approximately £1.3 billion[30] of uncommitted assets;
• for the 187 schemes who have taken some steps towards annuitisation, there is approximately £0.4 billion of uncommitted assets; and
• therefore, there is a total of approximately £1.7 billion of uncommitted assets, an average of around £3.25 million per scheme, in the 525 schemes eligible for FAS assistance that are currently in the process of winding up.
5. Whilst there may have been minor changes in these amounts since our data collection concluded, arising from pension payments and annuitisation which would have reduced the total and investment performance that might have increased or decreased it, we have no reason to believe there will have been significant variation.
6. In order to confirm this, the Review team has, with the assistance of DWP and the FASOU, been monitoring totals annuitised since our interim report. This monitoring suggests only those schemes that previously notified us of a binding commitment (and hence whose assets were not included in our original £1.7 billion estimate) have progressed towards annuity purchase during the current nine month moratorium.
7. Information collected by the FASOU since the start of the restriction on annuity purchase suggests that, by 3 December 2007, around 140 schemes with £120 million in assets had notified FASOU that they considered themselves to have a binding commitment to annuitise.
8. Most of the remaining scheme assets are also held in relatively less volatile asset classes, so the effects of investment performance on the remaining values should generally have been limited (see Table 1 and paragraph 15 for more detail on asset allocation).
The distribution of assets in FAS schemes
9. We also examined the distribution of scheme assets; this shows that:
• in schemes that have yet to commit assets to annuitisation, the 10 largest[31] schemes account for 40 per cent of the assets, the 20 largest account for 57 per cent of the assets and the 50 largest for 81 per cent of the assets; and
• in schemes that have taken some steps towards annuitisation the 10 largest account for 63 per cent of the assets, the 20 largest account for 79 per cent of the assets and the 50 largest for 95 per cent of the assets.
10. Figure 1 presents more detail on this distribution of assets. It shows the percentage of assets by ranked scheme size[32] and clearly demonstrates that a small number of relatively large schemes account for a large proportion of the total remaining scheme assets.
Figure 1: Cumulative percentage of assets held by ranked scheme size
[pic]
11. Given this distribution, as we noted in our interim report, if relatively few schemes were to annuitise the total assets figures could change rapidly. For example, the 10 largest[33] schemes, out of the around 525 still to complete wind up, have around £560 million of assets, the 20 largest around £830 million and the 50 largest around £1.2 billion, or nearly three quarters of the total remaining assets.
12. The legislation temporarily halting annuity purchase in FAS schemes, unless trustees seek the permission of the FAS scheme manager or have a contractually binding pre-existing commitment, should protect scheme assets from being used in a way that the Review team believe is unlikely to provide best value for scheme members.[34]
Distribution of assets by scheme size
13. Figure 2 shows the proportion of scheme assets by banded number of scheme members.[35] Unsurprisingly the majority of scheme assets, 73 per cent where some assets have been committed and 58 per cent where no assets have been committed, are in larger schemes, i.e. those with over 500 members.
Figure 2: Proportion of scheme assets by scheme size (number of members)
[pic]
Figure 3: Proportion of scheme assets by scheme size (value of assets)
[pic]
14. Figure 3 shows the same information, but defines scheme size by the value of scheme assets.[36] Again, unsurprisingly, the vast majority of scheme assets, 63 per cent where some assets have been committed and 69 per cent where no assets have been committed, are in larger schemes, i.e. those with at least £10 million in assets. However, as our interim report showed (in its Figure 1 1) many schemes winding up have little or no assets remaining.
Asset allocation
15. Table 1 shows the asset allocation of the uncommitted assets.[37] Based on the returns provided, the analysis suggests that, overall, the vast majority of uncommitted assets are in ‘gilts and fixed interest’ with the only other significant amounts remaining in ‘insurance policies’ and ‘cash’.
|Table 1: Asset holdings by asset class |
|Asset type |All schemes |No assets committed |Some assets committed |
| |(per cent) |(per cent) |(per cent) |
|Gilts and fixed interest |78 |82 |65 |
|Insurance policies |8 |8 |7 |
|Cash |6 |3 |12 |
|Equities |4 |5 |1 |
|Other investments[38] |4 |1 |15 |
|Total |100 |100 |100 |
Note: Numbers are rounded to the nearest 1 per cent and may not sum due to this rounding
16. These asset classes are frequently considered to be relatively ‘safe’ assets i.e. they are generally thought to be less likely to experience large fluctuations in value than, for example, equities and hence are suitable investments for schemes in wind up.
17. However, there are some differences in types of asset holding if we consider the aggregate distribution of assets for schemes that have started to commit assets to annuitisation. These schemes hold relatively higher proportions of their assets in ‘cash’ and ‘other’ investments; this may reflect their relative progress in the winding up process, such that they have started to liquidate their longer term assets in preparation for completion of annuity purchase and a final securing of scheme liabilities.
Scheme funding levels
18. Schemes were also asked about their funding levels and our interim report provides more details.[39] Of the 334 schemes that gave useable data on funding levels we found that there is little difference in quoted funding levels between schemes which have committed funds to insurers[40] and those which have not.
19. Schemes provided funding information on two main bases: MFR; and full buy out. These cannot readily be combined in order to give an overall average funding level as the ratio of MFR to full buy out depends on the characteristics of the scheme; for example, the relative numbers and ages of deferred members and pensioners and scheme NPA.
MFR funding basis
20. 219 schemes reported results on the MFR[41] basis, 94 saying that the figure was an estimate and 125 saying that it was accurate, of these:
• 24 schemes were less than 50 per cent funded;
• 53 were between 50 per cent and 75 per cent funded;
• 83 were between 75 per cent and 100 per cent funded; and
• 59 were more than 100 per cent funded.
21. Being more than 100 per cent funded on the MFR basis does not mean that it is possible to secure full benefits for scheme members by buying out with an insurance company, and therefore having an MFR funding level of above 100 per cent is not inconsistent with a scheme having members who are eligible for FAS assistance.
Full buy out funding basis
22. 115 schemes reported results on a full buy out basis,[42] 89 saying that the figure was an estimate, and 26 saying that is was accurate, of these:
• 6 schemes reported being less than 25 per cent funded;
• 57 were between 25 per cent and 50 per cent funded;
• 40 were between 50 per cent and 75 per cent funded; and
• 12 were more than 75 per cent funded.
23. A scheme that is more than 75 per cent funded on a full buy out basis might appear unlikely to have many members eligible for FAS assistance. However, once 100 per cent of liabilities for pensioners[43] are met on a full buy out basis, the remaining assets divided by the full buy out liabilities for non-pensioners may well be sufficiently low that non-pensioner members are eligible for FAS assistance.
Pensioner and non-pensioner split
24. As well as providing data on scheme assets, schemes provided information on the number of pensioner and non-pensioner members they have.[44],[45] This does not allow a fully accurate attribution of assets, but at least gives a broad idea of the relative weight of numbers in schemes.
25. Due to the priority order[46] (See Annex D) applied on wind up, pensioner members have a prior claim on residual assets and are more likely to receive their full benefits than non-pensioner members. Therefore, under the current FAS arrangements of scheme by scheme annuitisation, a large proportion of the residual assets will be used to secure pensioner liabilities. A broad estimate is that around two thirds[47] of the assets in schemes yet to start annuitisation belong to pensioners and therefore around 50 per cent[48] of the total assets may be attributable to pensioners.
26. Pensioners having their scheme benefits secured through annuitisation have immediate annuities purchased for them. These are generally felt to offer less scope for gains from economies of scale than deferred annuities and therefore may reduce the relative gain that might be available from modified annuitisation arrangements (see Chapter 3 for more details).
27. In fund based options (including Government taking in scheme assets) the assets of these pensioner members, including those not eligible for FAS assistance, could also be taken in and managed. Government would need to ensure pensioners received their legal entitlements, but could utilise their assets to generate additional value to increase assistance levels for deferred members.
28. Figure 4 shows that about 90,000 of the around 150,000 members of FAS schemes yet to complete wind up,[49] i.e. some 60 per cent,[50] are in schemes that have started to commit assets to annuity purchase. Around 30 per cent of scheme members are pensioners, but many of this group will not be eligible for FAS assistance as they will be receiving full scheme benefits.
Figure 4: Number of scheme members[51]
[pic]
Conclusions and recommendations
29. A significant amount of assets yet to be committed to annuity purchase on a scheme by scheme basis remains in FAS schemes. Given there are currently legislative constraints on what these assets can be utilised for we believe the additional value that could be generated through alternate use of these assets (e.g. bulk annuitisation or fund management) is currently safeguarded.
30. We recommend that:
• Government continues to protect the value of scheme assets by limiting scheme annuity purchase to those schemes that either have a contractually binding commitment already in place or where such annuity purchase is demonstrably in members best interests; and
• all scheme assets, including those held in respect of pensioners and other non-eligible members, are treated in the same way in order to maximise the quantum of assets available to generate additional value. Allowing these assets to be used to secure scheme benefits via annuity purchase would not deliver any additional gain to non-eligible members but would jeopardise the value that could be generated for others.
Chapter 3: Use of scheme assets
Main findings and recommendations
• In our interim report we identified three approaches to using scheme assets: the current FAS arrangements; modified annuitisation; or ‘managed’ use of scheme assets.
• We stated that “…the current arrangements …are unlikely to be the most effective way of using the…residual scheme assets.” Further analysis undertaken for this report has done nothing to change our initial view.
• We believe that the most appropriate use of assets depends on the appropriate level of guarantee for assistance levels.
• If guaranteed assistance levels are appropriate then we recommend that Government takes in the assets and pays the amounts to all FAS beneficiaries as they fall due. Government has indicated that they do not feel taking on investment risk represents value for money for the public sector.
• However, if some element of risk sharing is appropriate then managed use of the assets in a fund based option, with appropriate investment risk, is the best way forward. This risk should be structured in order to guarantee assistance levels to those closest to retirement and provide those further from retirement with a reasonable expectation (subject to fund performance) of assistance at similar levels.
• The additional financial value from these options is estimated to be between 20 per cent and 33 per cent (or around £340 million to £560 million) over and above the current arrangements (of scheme by scheme annuity purchase).
• The true ‘economic value’ of the options will be lower since some of the financial value comes solely from transferring risks to the taxpayer; this does not generate value, just change ownership of these risks.
• Whilst both these options involve Government underwriting longevity risk, this represents a relatively limited additional commitment over and above the current, top up based, arrangements and better financial value than bulk annuitisation.
• We make recommendations on the winding up process (in so far as it affects FAS schemes), where we believe that Government should investigate how best to achieve a speedy consolidation of scheme assets and data in order to deliver timely assistance to members, including payments during wind up.
• We make recommendations on simplification and member protection, where we believe Government should carefully consider any changes it makes to benefit structures in order to deliver best value whilst protecting members’ entitlements.
• We also make recommendations on scheme by scheme annuitisation, which we feel should remain strictly limited to protect scheme asset value in advance of new arrangements, and that Government should implement legislation to minimise potential moral hazards that might arise from trustees acting against the taxpayers’ best interests.
Our Terms of Reference and how we have interpreted them
1. There are several elements of our Terms of Reference that are relevant to the use of scheme assets; in particular:
• “To make recommendations on the optimal use of these assets, bearing in mind:
o The optimal economic use of these assets for meeting the liabilities
o The implementation issues – ensuring any proposals for asset reallocation or change of stewardship are feasible
o The ongoing administrative issues and costs involved in any proposals
o The transfer of risk, including to the Government.”
• “The Review will present appropriate risk management structures for any proposals, to ensure the pension scheme member benefits are no less protected than currently and that any risks to the wider taxpayer are minimized.”
• “The Review should not propose solutions that would subject Government on behalf of the taxpayer to the management of significant incremental risk.”
• “The Review must ensure the speed of payment of assistance to scheme members is not unduly impeded.”
2. We have interpreted these Terms of Reference as requiring us to determine which of a range of alternative options for utilising the residual scheme assets is optimal. This has been done via a set of evaluation criteria which include additional value generated, administrative, legal, operational and implementation feasibility.
3. We have looked at the range of risks and moral hazards associated with various options and engaged HMT and DWP in order to determine how much risk Government is willing and able to take, particularly with respect to longevity and investment. We have also considered how scheme wind up could be improved to ensure payments to members are made in a timely manner.
Options for the use of scheme assets
4. In our interim report[52] the Review team identified three options for the use of scheme assets to provide assistance to FAS members:
• Option 1 - the current FAS approach;
• Option 2 - modified annuitisation; or
• Option 3 - ‘managed’ use of scheme assets.
5. In the current FAS approach, scheme assets are used by trustees, on a scheme by scheme basis, to purchase annuities at wind up in order to secure as much of the promised pension benefits as possible. These annuities provide a guaranteed lifetime income which is then topped up, on a pay as you go (PAYG)[53] basis, to the appropriate level of expected core pension[54] by FAS assistance payments.
6. In a system of modified annuitisation, scheme assets would still be used to purchase annuities, with a top up coming from Government,[55],[56] but rather than each scheme’s trustees negotiating contracts with insurers the annuitisation process would be altered to deliver greater economies of scale. The change could be either:
• large scale bulk annuitisation, where the scheme assets of the entire FAS population not already annuitised would be aggregated and a large scale purchase of annuities (both immediate and deferred) undertaken; or
• annuitisation in tranches, where rather than securing some pension for each member (both pensioner and deferred) when the wind up process is completed, annuitisation would be done on a group by group basis, for example, fully buying out the people closest to retirement, thereby reducing the likely term of each annuity purchased and the risks associated with longer term products.
7. The scheme assets could be ‘managed’ rather than used to purchase annuities. The approaches that could be taken are:
• a fund based model, similar to that operated by the PPF,[57] where the assets in the fund are invested and then used together with the committed Government funding to make payments throughout the lifetime of FAS or on an alternative timescale; or
• Government taking the residual scheme assets and then paying the entire payments due to those eligible for FAS at a predetermined level (Government does not only takes on the assets but also the associated liabilities from this option i.e. the promises to pay FAS and any other payments due to the members from the residual scheme assets).
Options for liability management
8. As well as using the residual scheme assets in a different way our interim report suggested there may also be scope to alter the treatment of liabilities to help drive additional overall assistance to members. The three options we identified were:
• managing longevity risk;
• simplification of the benefit structure; and
• other ways of improving value.
9. Annuitisation of younger deferred members generally tends to be viewed as ‘expensive’,[58] though higher costs are inherent in the longer term nature of such annuities and their associated risks. If these people were treated in a different way, either through transfers[59] to remove them from the group being annuitised or Government underwriting either anticipated[60] or unanticipated[61] increases in their longevity then insurance would become relatively less costly.[62]
10. There is also the option to potentially link some elements of scheme assistance for younger members to investment performance in the event of a fund; this would help share risks and ensure fund managers (and trustees if the fund were held in trust) had appropriate incentives to act in members’ best interests. Linking the assistance of some members to investment performance could also overcome the problem of Government, in effect, guaranteeing the performance of the fund, which we have been advised would not be appropriate within the system of Government financial controls.
11. A rationalisation of the two FAS payment streams (the insurer or fund based scheme pension derived from the scheme assets and the Government top up) into a single stream could help save administrative costs. A simpler, more standardised, benefit structure[63] could also make administration less costly and allow more efficient use of assets; in particular it would also make buy outs easier since rather than replicating around 700 scheme benefit structures a more universal product could be purchased.
12. Pooling scheme assets,[64] being able to offer high quality clean data (or Government agreeing to take the risk that the final actual scheme membership differs from the assumptions made) and the removal from the FAS population of members entitled to very small pensions[65] are also believed to help drive value since they make insurance relatively cheaper and may also help to reduce administrative costs.
13. The management of liabilities and potential benefit simplifications is dealt with in various places in this chapter and some specific aspects are covered more fully in Chapter 4.
A methodology for choosing between the options
14. In our interim report (paragraphs 4.47 to 4.54) we set out how we proposed to choose between the options for use of assets identified above. Broadly, the framework we proposed was a two stage process where:
• all options first need to pass some fundamental hurdles; and assuming these are passed then
• they are assessed for their relative performance in key areas.
15. The fundamental hurdles related to the option being able to function:
• legally and in accounting terms;
• administratively;
• at reasonable cost;
• through existing institutions (including outsourcing);
• at an acceptable level of risk; and
• not unreasonably disadvantaging members compared to current arrangements.
16. Assuming more than one of the options pass these fundamental hurdles then their relative merits would be considered with relation to:
• expected extra value;
• whether the extra value can be guaranteed, or whether it is dependent on, for example, investment performance (where investment risk is taken) or longevity risk;
• moral hazard issues and how Government might proportionately manage these;
• timing and size of cash payments from Government;
• the level of guarantee required from Government; and
• cost and complexity of the new arrangements.
Stage 1 Evaluation: Outline
17. As we noted in paragraph 14, our evaluation is in two stages; the first of these is a series of absolute hurdles to be cleared and only if an option passes these can it proceed to a relative assessment.
Stage 1 Evaluation: Legal and accounting issues
18. The Review team has been advised that the existing powers in section 286(3) of the Pensions Act 2004,[66] which give the SoS the ability to make regulations that, amongst other things, allow “…for the property, rights and liabilities of qualifying pension schemes to be transferred to the scheme manager in prescribed circumstances and for the trustees or managers of a qualifying pension scheme in respect of which such a transfer has occurred to be discharged from prescribed liabilities”, provide an appropriate legal framework for assets to be brought together for either bulk annuity purchase or ‘managed’ use of scheme assets (either creation of a fund[67] or through Government taking in the scheme assets and providing assistance on a PAYG basis).
19. There may be a need for some minor changes to either primary or secondary legislation to fully enable any new scheme but the Review team do not believe that there are significant legal barriers which would decisively rule out the implementation of any of the identified options.
20. Clearly, the precise way that the options are set up, for example which groups are included, might raise subsequent issues which Government will need to consider further in making any necessary legislation if it implements the findings of this Review. However, for our purposes we do not believe that legal issues are an insurmountable barrier or indeed one that can be used to meaningfully differentiate between the identified options.
21. The Review team has been advised that there are also issues in relation to Government financial rules and controls which could affect how a fund based model could be implemented. Government would not set up a fund which would take investment risk within the public sector, whilst a fund which invested solely in gilts would be less optimal than Government taking in the assets. It would be less optimal since both approaches would achieve the same underlying gilts return, but a fund would have the associated frictional costs of transactions between Government and the fund manager which would not be present if Government were to take control of the assets.
22. Moreover, even if the fund were in the private sector, if it were deemed that Government had underlying control of the fund, it could be classified as within the public sector. It would, therefore, be necessary for the fund to exist in the private sector and for the objectives and control of the fund to operate in such a way as to avoid a public sector classification. The Review team believes that there are solutions available in the investment markets to achieve these objectives, although further work would have to be done on the precise requirements and constraints.
Stage 1 Evaluation: Administrative/implementation issues
23. The Review’s Terms of Reference (see Annex A for further details) state, with relation to implementation issues, that the role of the Review is to make recommendations “...ensuring any proposals for asset reallocation or change of stewardship are feasible”.
24. As we outlined above, the key issue in implementing any scheme is not the legality, but instead the practicality. Each option, regardless of its precise nature, has the same basic underlying principles:
• determining who is eligible for payment;
• at what level, in respect of both payments derived from the scheme assets and the FAS; and
• making payments.
25. Eligibility for assistance is set out in legislation and is a matter for Government rather than the Review team. However, the level[68] of payments and the ability to make payments are, in no small part, likely to depend on the ability to manage the transfer of the individual scheme assets and member details to any fund manager (including Government in a PAYG arrangement) or bulk annuity provider.
26. It is worth noting that this is not a unique, or even an unusual, task; more than 150 FAS schemes have already completed wind up. Trustees currently have to transfer scheme data and assets to annuity providers on wind up. Schemes entering the PPF undergo an ‘assessment period’ such that, if they cannot be rescued or secure benefits at least equal to the compensation PPF would provide, their assets and data are transferred before the PPF takes responsibility for the scheme (the assets becoming part of the central fund). Hence, in both existing annuity based (FAS) and fund based (PPF) models similar events are required to be completed.
27. Therefore, the Review team believe the key issues around implementation of any new arrangements are ones of:
• timeliness;
• scale; and
• expertise.
28. We note that those arrangements that require a larger departure from the current scheme by scheme annuitisation arrangements, i.e. fund based options (including Government taking the scheme assets and providing assistance on a PAYG basis), are likely to require relatively more effort to implement, particularly if Government takes responsibility for paying those people in FAS schemes that would not currently be eligible for FAS[69]or not eligible to FAS at that time. However, the Review team note that similar fund based arrangements already successfully operate on a smaller scale within Government in the form of the PPF, and therefore we believe, in line with our Terms of Reference, that the approaches we have identified are all “…feasible”.
Ensuring timeliness of wind up
29. We do not believe that there are likely to be significant differences between our options in their effects on the speed of schemes’ wind up. Broadly, each option requires the same range of tasks to be completed in order for them to be feasible, and these tasks are the same as those currently required.
30. However, the current pension scheme wind up process is frequently slow (Annex F provides more details about scheme wind up) and many of the schemes eligible for FAS have already spent several years in wind up without completing the process.[70] Delays are frequently exacerbated for schemes with insolvent employers as little may have been spent on adequate record keeping in the years immediately prior to employer failure making the necessary tasks harder.
31. Therefore, the time spent in consolidation of assets could potentially delay the implementation of new arrangements. We note that our Terms of Reference state “The Review must ensure the speed of payment of assistance to scheme members is not unduly impeded”. We also acknowledge that Government has already done much to speed up wind up, through legislation, Government and industry working groups, the DWP’s November 2006 Report[71] and tPR initiatives,[72] but we feel that there may be some scope for further improvements in respect of FAS eligible schemes from:
• More active project management of each scheme – currently PPF schemes undergoing an ‘assessment period’[73] are subject to relatively more active monitoring and progress chasing than FAS schemes, though in both cases the trustee retains the ultimate responsibility;
• Legislative changes – for example, giving FAS the ability to demand data from trustees in a prescribed format and timescale. There are also likely to be some gains if there is no annuitisation as this takes away some of the immediate data cleansing burden, the adjustment of interim benefits, transfer values etc.; or
• Simplifying the process – for example, removing the right to deemed buy back of rights to the additional pension or simplifying GMP reconciliation. The PPF operates a relatively simpler and more standardised benefit model covering all its eligible schemes and this makes some of the wind up related tasks easier to complete.
32. The Review team acknowledge the DWP Secretary of State's report of November 2006 “Speeding up Winding Up Of Occupational Pension Schemes” and the subsequent informal consultation that followed its publication and do not want Government to undertake nugatory work. However, the Review team recommend that Government should consider whether there is a need for additional investigation into what steps could be taken to further improve the speed of wind up for FAS eligible schemes. Faster winding up will help to realise the asset value and potential improvements in assistance levels more quickly and ensure our recommended solution complies with our Terms of Reference.
33. The PPF requires trustees to pay PPF level benefits during the assessment period, whereas FAS depends on trustees paying scheme pensions voluntarily or making applications to the FASOU to make initial payments to the member. Given that the circumstances of FAS schemes will be different from those of PPF schemes (for example, in some cases, perhaps where pensioners have been annuitised, scheme assets may be very low), it may not be appropriate to simply require trustees to pay FAS benefits. However, we believe that it is vital to ensure that beneficiaries receive payments as soon as they are eligible and urge Government to consider placing a requirement on trustees to either pay at FAS levels or to provide relevant information so that FAS can pay them.
The scale of wind up
34. There are currently around 525 FAS schemes that have not completed wind up.[74] In comparison it should be noted that PPF currently has around 190 schemes going though an assessment period.[75]
35. Recognising the scale, and potential complexity, of combining the FAS pension schemes the Review team recommend that whatever arrangements Government decides to operate they should look at maximising capacity through appropriate use of both public and private sector resources.
Delivering expertise in the wind up process
36. The FAS Operational Unit currently plays a relatively limited role in wind up and few current staff have the necessary skills and experience to undertake such a role. However, the staff in the FASOU have built good relationships with trustees and scheme members and developed a firm understanding of what is necessary in order for assistance to be paid.
37. Many commentators have suggested that application of the PPF processes and systems to FAS would offer a ready made solution to the current under availability of expertise in wind up. The Review team believes there are three significant counter arguments to this point of view:
• FAS schemes operate under a different, generally more lightly regulated, legislative framework[76] and less standardised benefit model than PPF schemes, so this is not something the current PPF teams have direct experience of;
• PPF is involved with scheme wind up from the start whereas many of the FAS schemes were at least part way through wind up, and therefore some of the reasons for delay already deep rooted, when they entered FAS; and
• much of the PPF assessment process is, like FAS, still undertaken by trustees and administrators with PPF largely fulfilling an oversight role.[77]
38. Therefore, whilst we can see the benefits of some wider use of PPF style procedures, we believe that many of the vital skills, particularly with relation to pre-PPF wind up, are not currently available within Government.
39. Hence, the Review team recommend that Government give consideration as to how best to leverage the good practice in the PPF, the knowledge of the FASOU and the skills of the private sector to provide the necessary expertise in scheme wind up. This may potentially come through a partnership model or some other arrangement.
Stage 1 Evaluation: Set up costs
40. The Review team has not, principally because of time constraints, been able to conduct a thorough assessment of the set up costs for various options, but all our estimates of gain include allowance for expenses.
41. We note that the activities required are broadly similar in all models i.e. to determine eligibility for, and level of, payments and then make those payments. In order to achieve this, regardless of the chosen approach, scheme data and assets will need to be consolidated.
42. Despite the underlying similarity of tasks required in each option there are likely, at least in theory, to be some differences in where the costs appear between different models. However, in practice, Government will ultimately pay the costs whatever model is used. For example, in a fund based option, Government would bear the costs of assessing and making payment more explicitly than in a model of bulk annuitisation with top up. But in bulk annuity arrangements insurers’ costs would, whilst appearing to be borne from pension scheme funds, in practice, be paid by Government in so far as these costs would reduce the amounts that are paid via the scheme pension and therefore increase the required Government top up.
43. There is an apparent difference in those fund based options where non-eligible individuals in FAS schemes are brought into FAS so that the assets that would have been used to purchase annuities for them can be used to generate value for eligible members. Bringing these people into FAS would mean Government paying assistance which, in theory, would not be incurred if these individuals had annuities purchased for them. However, it should be borne in mind that these annuities would be purchased with scheme funds and their costs would therefore reduce the quantum of residual assets in schemes; this would mean Government paying a higher top up to the remaining eligible members thereby, indirectly, bearing the insurers costs.
44. We note that all of the required activities in each option are fairly standard for pension schemes that are winding up, and scalable systems already exist. There may also, in certain circumstances, be synergies with providers’ existing operations such that there may be potential efficiencies from economies of scale; for example, anyone running a fund might be able, due to larger fund management mandates, to reduce the costs of asset management for both new and existing funds. We have not attempted to quantify the benefits that may arise from these scale gains; however, over the 80 plus year lifespan of FAS they could be substantial.
45. Therefore, we have no reason to believe that the total additional costs of implementing any new arrangements will vary widely between models albeit that they are more, or less, explicit in some options. However, there may be associated risks to delivery from differing levels of complexity between the models which are discussed more fully below.
Stage 1 Evaluation: Use of existing institutions
46. Current FAS arrangements rely on a combination of private sector (annuity providers) and public sector (in the form of the FASOU) institutions. The Review team do not believe that any of the options that we have examined would necessitate setting up significant new institutional arrangements.
47. In a modified system of bulk annuitisation, annuity providers would continue to pay scheme pensions. This could then be topped up to the required level in a number of alternatives ways; for example, in principle Government could choose to pre-fund pensions by making an upfront payment to fully annuitise FAS members, although in practice the high upfront costs of this approach make it unlikely. Alternatively, the existing FASOU could pay top ups or there are two options to rationalise the two payment streams into one, either:
• the whole payments could be made by FASOU with scheme pensions being transferred by insurers to FASOU on an ongoing basis; or
• the whole payments could be made by insurers with Government transferring the necessary funds that would have been paid as a top up on an ongoing basis.
48. In a fund based system there would need to be a way of determining peoples’ overall entitlement, a fund manager and payment systems supported by basic administrative functions. All these facilities already exist in the private sector and the PPF undertakes similar functions in the public sector supported by appropriate use of outsourcing.
49. Government could decide to set up any FAS fund under trust, as allowed for in the current legislation (see paragraph 18). This would necessitate establishing a trust and appointing trustees; however, this is a fairly standard task that is unlikely to be difficult, costly or time consuming to achieve.
50. The Review team recommend that Government should give consideration as to how to simplify the current arrangements of two payment streams (the scheme pension and the FAS assistance payment) into a single payment stream if our findings are implemented. This should help cut out duplication and reduce the overall costs of FAS.
Stage 1 Evaluation: Risks and moral hazard
51. The Review’s Terms of Reference (see Annex A) state that we must bear in mind “The transfer of risk, including to the Government” and we “…should not propose solutions that would subject Government on behalf of the taxpayer to the management of significant incremental risk.” Therefore “The Review will present appropriate risk management structures for any proposals, to ensure the pension scheme member benefits are no less protected than currently and that any risks to the wider taxpayer are minimized.”
52. With this in mind we have identified potential risks in the following areas:
• longevity;
• investment;
• inflation;
• data/assumptions;
• default/counterparty;
• implementation; and
• moral hazard/incentive risk.
53. The Review team has also engaged HMT and DWP in order to determine how much risk Government is willing and able to take, particularly with respect to longevity and investment, to ensure that our recommendations are compatible with our Terms of Reference. Government does not believe it is appropriate for taxpayers to be asked to guarantee investment performance. From our discussions with officials, we believe that Government could be willing to accept some mortality risk although careful consideration would need to be given to the value for money case. We have investigated this further in the following section.
Longevity risk
54. If FAS members, or their survivors, live longer than expected then the costs of paying them assistance will increase.[78] Clearly models where Government is responsible for a greater proportion of the assistance, or the private sector provision is not guaranteed, leave the taxpayer with relatively more longevity related risk. For example:
• a model where all the FAS payments were secured by annuitisation[79] would transfer the entire risk associated with the annuitised funds to annuity providers;
• a model where Government took in all the assets to be ‘managed’ in a fund[80] would leave Government with all the risk associated with the managed funds;[81] or
• a model with partial annuitisation, like the current FAS arrangements, shares the risks between Government (on the top up payments) and annuity providers. About one third of FAS members’ total assistance currently comes from their schemes with Government financing the other two thirds (see Figure 7 in Chapter 5 for more details).
55. Insurers and other informed experts we consulted have told us that if Government does not require the certainty of insurance then, from a purely financial point of view, it would be best advised to manage the assets and liabilities without incurring the costs of insurers’ profits, margins for prudence and regulatory capital (see Box 1 for more details on regulatory capital).
56. The only natural mortality hedge for insurers is their own portfolio of life insurance products (which are more profitable when longevity increases), and this is unlikely to adequately allow offsetting of the risk from pensions, hence insurers have to charge a premium to take on more longevity risk.
Box 1: Solvency and capital adequacy requirements
Insurers are obliged, by legislation, to hold capital reserves to ensure that they are able to meet their liabilities. There are currently two levels of capital assessments. Firstly what is termed Pillar 1, driven by the EU Directives, and secondly Pillar 2, which is a more risk sensitive internal assessment by the firm (its individual capital assessment or ICA) and subject to underpinning guidance from the FSA.
Firms have different solvency margins to support different parts of their business, reflecting the nature of liabilities. For annuity business the type of annuity will make some difference to the capital requirements for an insurer. Generally, the more uncertain the liability (for example because of inflation linking) the higher the capital requirement will be under Pillar 2, but not Pillar 1.
A block of annuities in deferment or payment would see a minimum capital requirement of four per cent of technical provisions[82] (which themselves are prudent) under Pillar 1 and around 10 per cent for Pillar 2 as a minimum (post diversification capital on top of realistic provisions).The revision to Pillar 1 now underway in the EU (the Solvency 2 Directive) will impose a higher, more risk sensitive, Pillar 1 requirement.
The Pillar 2 requirements reflect the long term nature of annuity business and the associated risks relating to uncertain investment returns and improvements in longevity. Deferred annuity policies can run for periods in excess of 60 years and are subject to more extreme possibilities of longevity but are heavily open to the uncertainty of investment returns prior to vesting.
57. Government already carries a substantial longevity risk from unfunded state pension benefits, the unfunded public sector pension[83] and the National Health Service. For example, DWP have told us that, on a central projection of mortality the NPV of pensioner benefits[84] over the next 40 years is around £2.9 trillion, but on a high longevity basis this increases by around £100 billion.[85] Government may, therefore, value additional certainty around that part of its future expenditure which is generated by FAS; otherwise, whilst the amount involved is very small, relative to these other sources of mortality risk, without additional certainty it will be highly correlated with already significant risks to Government.
58. Analysis undertaken by DWP for the FAS Review team suggests that if the residual assets were used in a fund based model rather than annuitised the potential additional cost to Government of the risk from increased longevity could be around £100 million[86] NPV.[87] There could also be a corresponding saving if longevity was to be lower than expected.[88]
59. Therefore, in theory, Government could make a reasonable provision for the longevity risk from a fund based model by setting aside around £100 million NPV i.e. holding back some of the assets, and their associated investment income, and not distributing them to scheme members in the form of increased assistance. This ‘capital’ would be returned to Government in the event that it were not needed, but would be available to pay assistance in the event of increased longevity.[89]
60. In a model where scheme assets were annuitised but Government underwrote longevity risk for the over 90’s there would be an estimated £45 million additional NPV of Government spending required in the central scenario in order to pay the total benefit and FAS payments. For the over 90’s. There would also be an additional risk related cost of around £20 million NPV if longevity were at the upper end of predictions. There is however some potential upside for Government in this case through the assets available realising a better price for the annuities pre age 90. Insurers would stand to gain most from any slower than anticipated growth in longevity, though there would be some gain to Government through small reductions in the £45 million cost.
61. The Review team believe that longevity risk is manageable in all of the options identified and that Government could deal with this either by passing it to insurers (through annuitisation) or reserving against it. However, Government may decide that, in the context of overall longevity risk already borne and its usual approach to expenditure where mortality risk exists, it is not significant and therefore requires no special treatment. In this event a fund based solution is likely to be optimal.
Investment risk
62. Under the current FAS arrangements Government faces no direct investment risk on the FAS top up; insurers face investment risks on the assets they use to back annuities.[90] However, Government still faces some investment, or market, related elements of risk, principally:
• if the investment performance of the recovered assets is poor prior to annuitisation, Government has to top up by whatever amount is necessary to meet the FAS payments; and
• poor economic performance, resulting in general economic stagnation, can affect Government since it is effectively using future growth in GDP to help underwrite the PAYG amounts.
63. In a bulk annuitisation arrangement, risks would not change from the current FAS unless Government opted for annuitisation in tranches through the purchase of immediate annuities as and when payments became due. This would leave Government to carry ongoing investment risk during the period of deferment in the expectation of better value from the deferral.
64. In arrangements where Government took in the assets of the schemes, the only significant investment risk would be that assets perform poorly before they are brought together and that this poor performance increases the scale of the necessary top up. This asset value risk is present in an analogous form in the current FAS arrangements in so far as if the assets perform poorly before they are annuitised the annuity purchased is relatively lower and therefore the top up required is larger. The subsequent conversion of scheme assets into either NILOs, or cash to hold in an OPG account, both have minimal associated investment risk.
65. If the assets were ‘managed’ in a fund, Government could face additional investment risk as a larger top up could be required if the fund performed poorly.
66. Some of this risk could be shared with scheme members (most probably those furthest from retirement) by linking certain elements of overall assistance levels to fund performance. This could help to provide appropriate incentives for trustees or fund managers to ensure any fund is prudently managed.
67. Whether to take investment risk is a decision for Government rather than the Review; however, Government have indicated to us that they do not feel taking investment risk in the public sector represents good value for money, hence any option where the fund was in the public sector would not take such risk.
68. Much of the investment risk in any private sector fund based option could be mitigated by an appropriate prudent investment strategy such that some risks were hedged (although of course relatively lower return is normally associated with relatively lower risk).
69. The PPF currently adopts a “…conservative investment approach”[91] (with over 70 per cent of its assets held in bonds or cash) where modest out performance (1.4 per cent) is sought over and above its liability benchmarks, but with a low risk tolerance (only four per cent[92] instead of the normal 10-12 per cent adopted by most UK defined benefit pension schemes).
70. It should be possible to set up a private sector FAS fund such that less investment risk was taken than in the current PPF strategy. The estimates of a 20 to 25 per cent gain from a fund based option assume a level of investment risk below the PPF’s already conservative current strategy.[93]
71. If there were a move towards an investment strategy more similar to that currently pursued by the PPF then the gain could be between 25 and 33 per cent. However, this would require some investment risk to be taken, partly from credit risk associated with corporate bonds and possibly some equity risk. This as not representing a true gain in economic value, as increased risk is being traded off against increased reward.
72. The Review team believe that investment risk can, where agreed, be managed through an appropriate choice of investment strategy. However, we recognise that any option where funds are in the public sector would not take such risk and any private sector fund where such risks were taken would need to share these risks with members in order to avoid the taxpayer underwriting market performance.
Inflation risk
73. FAS assistance is not currently indexed once in payment and therefore once an individual has started to be paid there is no inflation related risk. However, there is some risk during the period of revaluation before payments start. Insurers face some inflation risks if they are providing indexed linked annuities.[94]
74. Inflation risk to the taxpayer is the same under each of the variant options identified and we therefore do not believe it is an important factor within our evaluation.
Data or assumptions risk
75. In the current FAS system risks associated with scheme data and assumptions are shared between insurers and Government.
76. In order to estimate the public expenditure commitments from the top up arrangements, Government has made a set of assumptions[95] about FAS (see Chapter 5 for more details). If these turn out to be incorrect then Government may face higher, or lower, expenditure to deliver the assistance levels it has committed to.
77. Equally, under the current arrangements, insurers make assumptions when setting annuity rates[96] and if these are not borne out by actual events then providers face potential losses on contracts. In the case of many FAS schemes where record keeping is relatively limited, insurers may also tend to build in additional margins to cover the uncertainty this generates.
78. Bulk annuitisation does not significantly change the risks associated with data and assumptions (since the risks are still shared between insurers and Government), other, perhaps, than if:
• Government agrees to write bulk annuity contracts on a ‘stated lives’ basis. This would arise in a situation where, without being able to provide fully ‘cleaned’ data, Government would, for example, only purchase survivors’ entitlements for those people stated to be married and agree to cover any additional costs arising from actual experience differing from this. The Review team has been told by insurers that they would prefer a stated lives basis, i.e. the risks passed to Government if data on new FAS cases arise after the bulk purchase, and that this would makes annuity purchase relatively ‘cheaper’; or
• Government agrees to take the tail of longevity risk. This would mean Government underwriting pension payments from, say, age 90; therefore, insurers’ margins reflecting uncertain future longevity, particularly for deferred annuitants, would be significantly reduced, making annuity purchase relatively ‘cheaper’.
79. In options where scheme assets are taken in or managed within a fund, Government would face risks arising from the uncertain asset value before the assets could be consolidated. However, this is little different from the current risk that if asset values are different from assumptions the amount of annuity purchased may be lower than expected and therefore top up costs higher.
80. Therefore, the Review team believe that there is little difference in the relative risks faced from incorrect assumptions in any of the options and that this risk, whilst being potentially material, is not a differentiating factor that should be used to decide between approaches.
Default or counterparty risk
81. In any case where Government does not assume full responsibility for provision of assistance payments there is always a chance that any private sector provider or partner may experience an insolvency event and be unable to complete their obligations.[97]
82. However, the Review team believes that the Financial Services Authority (FSA) regulatory regime, combined with the Financial Services Compensation Scheme (FSCS),[98] should make this default unlikely and also ensures that an individual’s losses are compensated. We do not therefore believe default risk is a material, or a differentiating, factor between options.
Implementation risk
83. Implementation of any new scheme, and its associated risks, is discussed in more detail above. The key point is that any option which requires bringing assets together (fund, Government taking the assets or bulk annuity purchase) has a broadly similar process to be completed and therefore broadly similar risks.
84. However, the way in which the risks are spread between different elements under the different options may increase or decrease overall risk. For instance, operating a scheme in which provision needed to be made for the ongoing payment of several thousand additional people who are not currently eligible for assistance, but who were included within the new scheme so that all of the assets transferred from their scheme could be used to benefit others, would need a more complex administrative structure. This may potentially lead to some extra risk of delayed implementation and associated reputational risk for the delivery organisation; although experience at PPF suggests that arrangements to deliver scheme equivalent payments to pensioners can be made to work.
85. The Review team believe implementation risks could be significant if the process is managed poorly, but they are unlikely to be a key factor in differentiating between the options.
Moral hazard or incentive risk
86. Moral hazard is the risk that any party in a transaction that has more information about its intentions, or actions, than the other parties behaves in a way these other parties would consider inappropriate in the sense of being against the agreed purpose of the transaction. This gives rise to ‘perverse’ incentives where the party with the greater knowledge is given a reward (or not punished) for acting in ways that the other parties may not want.
87. FAS is currently characterised by a number of potential moral hazards or incentive problems between scheme trustees and Government. The Review team believe the overwhelming majority of trustees are extremely unlikely to seek to exploit these, but possible issues include:
• trustees having a limited incentive to obtain the best annuity rate, and insurers a limited incentive to offer it to them (apart from market competition, which has historically been limited in pension wind ups), since trustees know careful searching on their part will not increase the assistance their members receive;
• trustees having the potential incentive, mitigated by their fiduciary duty and the statutory priority order, to purchase benefits that are over and above those offered by FAS; [99]
• trustees having limited incentive to try and obtain additional assets from employers, via negotiation, since this won’t increase members’ assistance;[100] and
• trustees, and annuity providers, having a potential incentive to charge higher fees knowing that the depletion of scheme assets will not reduce assistance to members (though it will affect costs to Government).
88. Under a system of bulk annuity purchase across FAS some of these incentives would not change significantly. However, trustees would no longer be conducting the annuity purchase exercise and, therefore, their potential lack of incentive to get a good deal or incentives to selectively purchase non-FAS features would be removed; trustees would be replaced by a body whose task was to act in the taxpayers’ best interest.
89. In a system where assets are either managed or taken in by Government the potentially negative incentives related to annuity purchase are removed.[101] There may still, however, be limited incentives to maximise the value of available scheme assets that are handed over.
90. Government’s promise of matched funding[102] was designed to try and ensure appropriate incentives for trustees since if scheme assets are not safeguarded then there will be a limit to the additional value that can be generated through their better use and hence the increased assistance levels available to members. Therefore, trustees’ decisions could be said to directly influence their members’ outcomes which should provide the correct incentives.
91. However, some trustees may take the view that, in isolation, their annuitising is unlikely to have a significant effect on assistance levels, but that it might allow their members to have additional non-core FAS benefits such as a higher level of survivor protection. Clearly, if all trustees reached a similar view there would be no assets left, hence the importance of legislation preventing annuity purchase unless it is demonstrably in members’ best interests or a binding agreement is in place.
92. A managed fund could potentially introduce a new moral hazard, i.e. that the fund is not managed in an appropriate manner. This may be either excessive conservatism or taking too many risks i.e. if there was a guaranteed assistance rate the fund managers could take investment decisions that increased the costs for Government without risk to beneficiaries.
93. This moral hazard could be managed by Government being represented in the body that makes investment decisions or through a robust statement of investment principles or by the terms of any investment contract. However, if this were deemed insufficient then an investment linked element of benefit could be introduced such that managers’ decisions had an impact on members providing an appropriate incentive to manage optimally.
94. For example, this could be done by guaranteeing assistance to some of the younger deferred members eligible for FAS at a level that could be ensured through the investment strategy, but any higher assistance to be provided by investment performance, with the investment strategy structured with the aim of such out-performance enabling these members to receive higher levels of FAS assistance. This is similar in many ways to the way Dutch pension schemes are financially managed and the financial markets have experience of developing suitable products.
95. The Review team believes that options to use the assets for bulk annuity purchase, a Government funded PAYG scheme or a managed fund all have a similar level of moral hazard and incentive problems; therefore this is not a decisive factor in deciding between models.
96. We recommend Government continues to limit current scheme by scheme FAS annuitisation to those schemes that either have a contractually binding commitment already in place or where such annuity purchase is demonstrably in members’ best interests. We also recommend Government should implement legislation that reduces trustees’ opportunities to actively select against FAS and increase costs to the taxpayer.
Stage 1 Evaluation: Protection of members’ benefits
97. The Review team’s Terms of Reference give us the role of ensuring “…the pension scheme member benefits are no less protected than currently”; therefore, we have considered our options for use of scheme assets in the light of this. We believe that the current members of FAS should, as a minimum, get no less from any new arrangements than they get from the current arrangements.
98. If FAS scheme members who are not eligible for FAS[103] have their assets brought into a new scheme to generate additional value to pay increased assistance to others, as we are recommending, Government will need to ensure these people receive benefits in line with their legal entitlements.
99. Providing this protection for members has the potential to make implementation of models that bring in those people who are currently non-eligible in FAS schemes more complex and more immediate, as it will mainly relate to pensioners’ benefits; Government will need to ensure that the additional value generated is not eroded in providing this protection.
100. Whilst it is not the role of the Review team to make recommendations on potential changes to the benefit structure of FAS, we believe that if Government decides it is appropriate and consistent with the generation of additional value to simplify benefits (we provide some thoughts on areas Government may wish to consider further in Chapter 4) this should not be done in such a way as to significantly disadvantage any member or class of members.
101. The Review team recognises that this could mean creating a scheme with three main categories of members:
• those with an existing annuity for part of their scheme benefits and a FAS top-up;
• those who would be paid assistance combining what they would have got from their scheme with their FAS top-up; and
• those who would be due their full scheme entitlements.
102. The benefits due to members in each of these categories would need to be carefully considered and any proposals to change benefit structures should be subject to examination of their impact on members’ outcomes as well as considering numbers affected.
103. Therefore, the Review team recommend Government gives careful consideration as to how it could simplify benefits or otherwise alter members’ entitlements for different categories of members.
104. Having noted this we do not believe that, in themselves, any of the new FAS arrangements we have examined intrinsically reduce member protection. Clearly the precise way that changes are implemented could have an adverse impact but we do not believe that member protection is an area that allows us to differentiate between alternatives.
Stage 1 Evaluation: Summary
105. As we noted in paragraph 14 our evaluation is in two stages; the first is a series of absolute hurdles to be cleared and only if an option passes all of these can it proceed to the second stage, a relative assessment.
106. Table 2 below summarises the results of the stage one evaluation of our alternative options for use of scheme assets and concludes that, at this point, none of the options are decisively ruled out. However, detailed issues remain to be finally resolved in relation to Government controlling the ‘managed’ use of assets and how any investment risk might be shared with members.
|Table 2: Results of stage 1 evaluation |
| |Bulk annuitisation across FAS |Bulk annuity across FAS with |‘Managed’ use of assets |
| | |risk sharing |(including Government taking |
| | | |assets in for PAYG) |
|Legally feasible to implement |( |( |( |
|Administratively feasible |( |( |( |
|Affordable set up costs |( |( |( |
|Uses existing institutions |( |( |( |
|Acceptable risk to taxpayers |( |( |( |
|Members are not unreasonably |( |( |( |
|disadvantaged | | | |
Stage 2 Evaluation: Outline
107. For those options that pass the stage one evaluation hurdles they then move onto stage two, which is a relative assessment of the merits of each option in relation to:
• expected extra value;
• whether the extra value can be guaranteed, or whether it is dependent on, for example, investment performance (where investment risk is taken) or longevity;
• moral hazard issues and how Government might proportionately manage these;
• timing and size of cash payments from Government;
• the level of guarantee required from Government; and
• cost and complexity of the new arrangements.
Stage 2 Evaluation: Additional value
108. One of the key determinants of the relative merits of the various identified options is the additional value that might be generated over and above the current FAS arrangements. In particular since Government announced, during the passage of the 2007 Pensions Bill, that they would “…match the extra funds that the review identifies with the goal of moving towards 90 per cent of expected core pension for all recipients”[104] being able to clearly identify gains will help determine the quantum of funding available to increase assistance levels.
109. Estimates of the gain from alternative options clearly varies by option; we have therefore worked with the PPF, insurers, investment banks, buy out specialists and actuaries to establish the additional value that might be generated from our identified alternative options. Further detail is provided in the following paragraphs.
110. It is important to note that this analysis is based on contemporary market conditions and could change in future. We believe that it would be impossible, at this stage, to guarantee these estimated increases and that any delays caused by the administrative complexity of bringing schemes together has the potential to change these estimates.
111. The key point to be borne in mind is that there is a risk and return trade off. The lowest market risk, i.e. a simple bulk annuitisation across FAS, yields the lowest additional return, and, as an increasing amount of longevity and investment risk is taken, the gross returns, without any reserving for these risks, increases.
112. Government have told us that they do not regard options where increases in financial value come solely from transferring risks to the Government as creating true ‘economic value’. Whilst Government may be willing to accept these risks, providing it is the best value for money solution, they do not regard them as being inherently different in their costs if they were borne by the taxpayer or if they were borne elsewhere i.e. transferring them cannot generate value, just alter who holds that value. Therefore, the true ‘economic value’ of the different options may be lower than the financial value we report. In particular riskier investments are unlikely to generate more ‘economic value’, rather they just ask either the taxpayer or scheme members to bear risk if performance is lower than expected.
|Table 3: Risk vs. reward[105] under different FAS options |
| |Bulk annuitisation across FAS |Bulk annuitisation across FAS |Fund with minimal investment |
| | |with simplification and |risk/Government takes |
| | |longevity cut-off |assets[106] |
|Percentage gain over current |5% to 8%[107] |12% to 15% |20% to 25% |
|arrangements | | | |
|Gross additional financial |£85 million to £135 million |£205 million to £255 million |£340 million to £425 million |
|value[108] | | | |
|Gross additional Government |£0 |Around £45 million[110] |£0[111] |
|spending[109] | | | |
|Risk of additional Government |£0 |Around £20 million |Around £100 million |
|spending due to uncertain | | | |
|longevity[112] | | | |
|Risk of additional Government |£0 |£0 |Depends on investment |
|spending due to uncertain | | |strategy[113] |
|investment return | | | |
Bulk annuitisation across FAS
113. Information provided to the Review team by leading insurers and buy out specialists suggests that bulk annuity purchase across the whole of FAS alone could offer a premium of between five and eight per cent (or £85 million to £135 million) over the current arrangements, with the largest gains focussed on deferred members.
114. If this were combined with a simplification of benefit structures and purchase of the most straightforward annuities[114] then this might, dependent on the type and degree of simplification, increase to between eight and 10 per cent (or around £135 million to £170 million) – this is not shown in Table 3 above.
115. The reasons why there may be gains from bulk annuitisation across FAS as a whole arise in part from the current FAS arrangements. At present each FAS scheme buys out as much of their scheme benefits as possible through the purchase of annuities from an insurer. This process is characterised by:
• Lack of scale - many FAS schemes are either small or have few residual assets due to their low funding levels. This makes them unattractive to some buy out companies as, whilst the buy out market has recently had a number of new entrants, some of these companies are only interested in larger scale business. Therefore, there may be limited competitive market forces to drive up value; [115]
• Complicated benefit structures - trustees frequently have to purchase semi bespoke annuity products to replicate scheme rules and mirror requirements set down in statutory priority orders.[116] This often means that insurers are faced with taking on risks that are ‘unattractive’ i.e. require relatively large amounts of regulatory capital due to a lack of suitable backing instruments or associated uncertainty; and
• Duplication - each scheme needs to get quotes from a number of insurers, this will create administrative expense.
116. Leading annuity providers and buy out specialists have indicated to us that:
• a single large deal (or even two to three smaller deals), of around £1.7 billion, should be considerably more attractive, from both the buyers’ and sellers’ viewpoints, than hundreds of smaller ones;
• the pooled mortality experience across around 700 schemes is likely to be more stable and easier to predict than taking on small schemes individually;[117] and
• there should be lower expenses and greater administrative efficiencies in getting one large quote than 700 small ones (especially if the benefit structure is simplified and data is cleaned).
117. However, we note that there is some potentially significant variation between different insurers’ estimates (indicated by the ranges shown). This, at least in part, may reflect their different business models, current appetite for risk and additional business and market conditions.
118. One leading buy out insurer the Review team have met questioned whether there would be any gain from bulk annuitisation believing that, at least in their case:
• there would not be any additional risk pooling effects since bulk purchase scheme members would simply go into a pool with all the existing annuity business, which is already sufficiently diversified;
• the gains from removing providers per scheme expenses would be limited given these represent a small fraction of the overall value of contracts, however, the relatively larger share of costs represented by the per member charge (for arranging payment) will still remain; and
• the funds used to secure the annuities would represent a small share of total existing business, therefore there would not be further economies of scale in their management.
Bulk annuitisation across FAS with longevity risk sharing
119. There is a further option, within a bulk annuity purchase across FAS, for risk sharing arrangements between insurers and Government. Several insurers have told us these would deliver an additional increase over any bulk purchase premium across FAS.
120. Risk sharing arrangements would principally be around Government underwriting some proportion of longevity risk, thereby reducing the amount of regulatory capital needed and allowing insurers’ margins reflecting uncertain future longevity, particularly for deferred annuitants where the timeframes are much longer, to be removed or significantly reduced. Arrangements could take a variety of forms; some suggestions made to us include:
• Government agreeing to take the tail of longevity risk through, for example, underwriting pension payments from, say, age 90;
• Government taking an increasing share of the risk on younger members, for example, insuring 100 per cent of risk on 80 year olds and over, with a sliding scale to zero for 45 year olds and below; or
• Government taking responsibility for the excess mortality improvements as measured by an index if, for example, these were to exceed, say, 2.5 per cent per annum compound.
121. We have not been provided with estimates on each of these separate bases but have been told that removing the tail risk of people aged over 95 could, if combined with bulk purchase across FAS and simplification, lead to around a 12 per cent premium, removing the over 90’s could lead to around a 15 per cent premium. This implies gross additional financial value of between £205 million and £255 million could be generated from these arrangements.
122. However, there would also be an associated increase in Government expenditure arising from the need to provide full pensions to people older than the age cut-off. Therefore, net benefits would be reduced by around £45 million reflecting this, with another risk related element of cost (reflecting the possibility that longevity is greater than central forecasts - paragraph 60 provides some more details) of around £20 million.
123. We have also been told, by insurers, that longevity risk sharing in annuitisation could produce the ‘worst of all worlds’ i.e. the impact of the constraints arising from an insurance framework without the corresponding offloading of risk from the Government. Such arrangements would, by nature, leave Government with the most severe and unpredictable elements of the longevity risk without any potential upside (paragraph 54 provides some more detail on longevity risks).[118]
124. However, it is worth bearing in mind that if insurers and Government have relatively different abilities to cope with the risks of, for example, uncertain future longevity amongst the over 90’s, then reallocating the risk from one party to the other could lead to an improvement in efficiency which might help drive positive outcomes.
A fund based option
125. Independent analysis commissioned through the PPF to assist the Review suggests that the best estimate of the gain arising from managing the assets alongside, but clearly segregated from, the PPF’s existing funds, with explicit attribution of costs between levy payers and FAS such that levy payers did not subsidise FAS, would be around 20 to 25 per cent (or around £340 to £425 million) without taking material investment risk. There are likely to be broadly similar gains from a minimal risk fund based option run by investment banks or others.
126. There is the potential option to increase this premium further by taking a greater, but still prudent, degree of investment risk (see above for further comments on investment risk); for example, around £560 million (33 per cent over current arrangements) could be obtained from an investment strategy that generated just over 60 per cent of the PPF’s target return. However, this would require Government to be prepared to act as guarantor unless the risk was passed to members with partially variable assistance rates that were, in some way, linked to investment performance.
127. The additional financial value generated by a fund based solution is larger than the equivalent increases available from insurers principally because the fund based options do not require statutory capital reserves (see Box 1), do not insure longevity risk and, in a PPF environment, do not incur marketing costs or seek to make profit.[119]
128. The fund premium relies on Government underwriting the risks of adverse outcomes (principally increased longevity), which in an insurance driven solution are accounted for by regulatory capital. There is, therefore, an explicit trade-off between assuming risk in a fund based environment compared to securing that risk in an insurance based environment.
129. DWP modelling undertaken for the Review suggests Government could face a longevity risk cost of around £100 million NPV in a fund based option, but also has the potential for a similar scale of gains if longevity was to be lower than expected (paragraph 58 provides more details). This could reduce final net financial gains to between £240 million to £325 million if Government ‘reserved’ for longevity risk and accounted for this as a cost.
130. The major increase in financial value that would come from a fund based strategy principally arises through the better value generated by the management of the residual assets in a non-insurance environment. However, the PPF have also indicated that there could be some further small savings if PPF administered the system (with a similar probable gain in other approaches) going forward arising from:
• a faster wind up process, which could save around £2 million per year administrative expenses from around year three;[120]
• economies of scale from use of existing payment systems; and
• improved terms from fund managers (which, in a PPF based option, would also benefit levy payers) and be worth up to £0.5 million per year.[121]
Government takes in the assets
131. Although, in general, the Government (like other bodies) cannot hold its own debt, there are a few exceptions (mainly relating to the Debt Management Office (DMO)). In addition, it is not Government policy to allow Government departments to hold marketable gilts. Should the Government wish to hold gilts to match the newly-acquired liabilities under the FAS, the gilts would need to be switched to a non-marketable equivalent and held in an account at the DMO (formally, an account managed by the Commissioners for the Reduction of the National Debt (CRND)). [122] Although requiring legislation, this is a straightforward and standard procedure.
132. To the extent that the option to establish a fund relies on that fund receiving a return equivalent to that on gilts, the benefits of running an actual fund (with its associated administration costs) would be achieved whichever way the transferred assets were used to reduce Government debt. There are three options:
• it could be utilised alongside existing receipts from general taxation to pay for FAS at a pre-determined level;
• it could be converted into non-marketable gilts or National Investment Loans Office (NILO) [123] stocks; or
• the cash could be deposited into an Office of HM Paymaster General (OPG) account.
133. In each option, the FAS assistance would be at the same pre-determined level and, under each option, Government debt and debt interest payments fall (assumed to flow from the lower issuance of gilts).
134. Government taking in the assets (and delivering FAS on a PAYG basis) generates a financial value of around £340 million over and above scheme by scheme annuitisation, which is equivalent to a fund with minimal investment risk i.e. wholly invested in gilts. Given the relative simplicity of this option compared to the others we have examined we have not felt it necessary to explore it in the same depth.
135. This option would provide certainty for beneficiaries, avoid the costs of operating in an insurance environment, be consistent with benefit simplification and provide a single payment stream.
Stage 2 Evaluation: Other issues
136. As well as the expected gain from an alternative treatment of assets our interim report stated there was a need to consider the relative merits of alternative options with respect to:
• whether the extra value can be guaranteed, or whether it is dependent on, for example, investment performance (where investment risk is taken) or longevity;
• moral hazard issues and how Government might proportionately manage these;
• timing and size of cash payments from Government;
• the level of guarantee required from Government; and
• cost and complexity of the new arrangements.
137. We have already outlined our views on many of these areas, for example, moral hazard (see paragraph 86) and costs and complexity (see paragraph 40).
138. We also believe that it is for Government to decide how to use the cash flows generated from any alternative treatment of assets and this will determine when and what size the necessary Government contribution is. Of course it must be borne in mind that using the cash flows from the assets in particular ways will alter the scale of returns that could be generated. For example, running a fund down quickly in order to minimise Government commitments in the early years of the FAS scheme is likely to limit the potential investment gains from a fund based option since it would reduce the potential for compounded investment growth that would result from a more even spreading of the fund across a number of years.
139. Therefore, the only residual issue to be covered is whether the gains generated by an alternative treatment of assets can be guaranteed and what Government might need to do in order for this to be possible.
Guaranteeing the gains
140. In options where the additional value over and above current arrangements is not linked to investment or market performance, for example, if the Government takes the assets, the gain is fixed at the outset and it should then be possible to guarantee the additional assistance for members based on that estimated gain (albeit that the exact level of any increase retains a degree of uncertainty at present).
141. As we outlined earlier, in options where the scheme assets are not used to purchase annuities, Government could opt to link assistance levels in some way to the actual future asset performance. This might imply that some part of the overall target level of FAS payments, for some people, would depend on investment performance.
142. Government have indicated that they do not feel it is appropriate for taxpayers’ to guarantee investment performance in those cases where investment risks might be taken. Therefore, in such instances assistance levels would need to include some element of risk sharing.
Conclusions and recommendations
143. “The optimal economic use of these [scheme] assets for meeting the liabilities” of FAS depends on the appropriate level of guarantee for assistance levels.
144. If guaranteed assistance levels are appropriate then we recommend that Government takes in the assets and pays the amounts to all FAS beneficiaries as they fall due. Government has indicated that they do not feel taking on investment risk represents value for money for the public sector.
145. If some element of risk sharing is appropriate then we recommend the managed fund option with Government guaranteeing to pensioners and those closest to retirement the full level of assistance, with people at younger ages having a lower level of guarantee but with the aim that the investment strategy will enable the higher level to be paid to them by the time they become eligible.
146. We recommend these options on the basis that they should be able to function legally, administratively, at reasonable cost, through existing institutions (including outsourcing), at an acceptable level of risk and do not unreasonably disadvantage members compared to current arrangements.
147. Both options generate broadly equivalent ‘economic value’ since any additional financial value involved where investment risk is taken just represents a risk return trade off, where either members or the taxpayer hold the uncertainty of investment performance. Whilst risk sharing potentially reduces costs, it does so at the expense of certainty to the members.
148. The following brings together the other recommendations made in this Chapter:
• Government should consider whether there is a need for additional investigation into what steps could be taken to further improve the speed of wind up for FAS eligible schemes;
• that whatever arrangements Government decides to operate they should look at maximising capacity through appropriate use of both public and private sector resources;
• that Government give consideration as to how best to leverage the good practice in the PPF, the knowledge of the FASOU and the skills of the private sector to provide the necessary expertise in scheme wind up;
• that Government should give consideration as to how to simplify the current arrangements of two payment streams (the scheme pension and the FAS assistance payment) into a single payment stream;
• Government gives careful consideration as to how it could simplify benefits or otherwise alter members’ entitlements for different categories of members;
• Government continues to limit scheme by scheme annuitisation to those schemes that either have a contractually binding commitment already in place or where such annuity purchase is demonstrably in members’ best interests; and
• Government should consider legislation that reduces trustees’ opportunities to actively select against FAS and increase costs to the taxpayer.
Chapter 4: FAS benefits and other design issues
Main findings and recommendations
• During the course of the Review a number of matters have been identified that will require further consideration when taking forward any future work on the design of any new scheme. These are discussed briefly in this chapter.
• Payment from scheme NPA will add some administrative and programme expense; however, it would make any system where annuities are not purchased relatively easier to operate, since it would avoid the need to earmark scheme assets to make payments between NPA and 65.
• We note that whilst FAS offers Deemed Buy Back take up has been low and removal would be consistent with the PPF policy.
• The Review team believe new FAS arrangements should, in order to maximise the quantum of assets available to generate additional value, take in all available scheme funds, including those held in respect of non-eligible members. This will also necessitate paying these members the pensions they would have received from their schemes.
• There is some merit in considering transfers out of FAS for younger members, though the cash flow impacts of doing this need further consideration. This option might also be extended to other people with small payments, though rationalising the scheme pension and assistance payment into a single flow would also help reduce the number of small payments.
• The Review team does not make recommendations since it is not within our remit to determine any modifications to the current FAS scheme or the future design of any new scheme that might replace the existing arrangements.
Our Terms of Reference and how we have interpreted them
1. Our work during the course of this Review, particularly when considering alternative approaches for the use of residual scheme assets and future delivery options, highlighted a number of detailed issues for dealing with the members' benefits under the wind up rules.
2. While clearly outside the remit of this Review to resolve these issues, some of these matters will require further consideration by the DWP in taking forward any detailed work following the publication of this report and the Government’s subsequent response to it.
3. The Review team has an interest in these areas due to the statement in our Terms of Reference that the objectives of the Review team are “To make recommendations on the optimal use of these assets, bearing in mind: The optimal economic use of these assets for meeting the liabilities”. Whilst much of the Review’s work has focussed on the optimal use of the scheme assets, this chapter considers the liabilities. The issues, discussed in more detail below, relate to:
• payment from normal pension age (NPA);
• Deemed Buy Back;
• FAS non-qualifying members;
• transfers out;
• small payments; and
• treatment of Additional Voluntary Contributions.
Payment from normal pension age
4. The Review team received nearly 40 representations calling for FAS to be paid from a scheme member’s normal pension age rather than from age 65 as now. Such a change would benefit all those with an NPA below age 65.
5. However, given the likely range of different pension ages within schemes it might prove complex to administer with a resultant increase in administration costs. It would also increase the overall costs of FAS payments. Consideration would need to be given to these factors.
6. Nevertheless, it seems clear that one of the advantages of paying from NPA, if annuitisation ceases, is that it would avoid having to devise an administratively complex system. Where a member had an NPA less than 65, it would be necessary to establish how much they could have received by way of an annuity from NPA to age 65 and then earmark an appropriate proportion of assets to cover payments from NPA to age 65. This process in itself could be complex, and particularly so depending on the level and extent of any scheme specific benefits.
7. Information on the average NPA within all FAS qualifying schemes is not readily available as individual member data is, in the main, only provided to the FASOU for those members who are nearing age 65. Early analysis of the data held on those members aged 65 or over in FAS qualifying schemes suggests that over 80 per cent have an NPA of 65.
8. Table 4 shows member's Normal Pension Ages within the data collected from actuaries and administrators to inform a separate DWP exercise to update estimated FAS costs. It should be noted that this is only a sample and does not relate to the entire number of people eligible to FAS. The data collected relates only to schemes currently in wind up.
|Table 4: Information on Normal Pension Ages within FAS |
|Scheme’s Normal Pension Age |Number of scheme members |Percentage of total |
|60 |2,107 |17 per cent |
|61 |7 |0 per cent |
|62 |337 |3 per cent |
|63 |10 |0 per cent |
|64 |3 |0 per cent |
|65 |9,898 |80 per cent |
|Total |12,362 |100 per cent |
Deemed Buy Back
9. Deemed Buy Back (DBB) allows eligible people who have incurred losses, where a scheme is unable to meet its liabilities in full, to be fully or partly reinstated into the State Second Pension scheme or SERPS for the period they were contracted out into an occupational pension scheme. The option allows people to ‘buy back’ into the state Additional Pension at less than the full cost of doing so. Any shortfall is ‘deemed’ to have been paid.
10. The interaction between Deemed Buy Back and FAS is complex and in some cases could result in a small number of scheme members receiving over 100 per cent of their scheme pension. DWP will need to consider the likely impact of this when developing any new scheme. However, simplifying the treatment of DBB payments in a re-designed Financial Assistance Scheme would undoubtedly be welcomed and could help speed up scheme wind up.
11. In practice, it is the scheme trustee who chooses whether or not to express an interest in taking up DBB for the scheme’s members. Once the trustee is made aware of the scheme members who are likely to qualify those members are then offered access to DBB payments. This arrangement is not replicated in the operation of the PPF as members are not offered the option of taking up DBB.
12. One potential simplification measure might, therefore, be to remove access to DBB altogether for FAS beneficiaries. However, further work would be required to explore the financial impact and the legal implications of making any changes against a background of low reinstatement rates back into S2P or SERPS.
13. To add some context, the numbers who both qualify and opt for DBB are low. Since April 1997, when the legislation to establish DBB was introduced, a total of 164 people have opted for DBB at a total cost of around £2.3 million.
FAS non-qualifying members
14. A crucial question for the design of any future FAS scheme is which scheme members should be brought within its scope? To some extent the answer must inevitably link to the future benefit structure and how maximum financial advantage might be secured for members of FAS qualifying schemes.
15. Around half the total assets available are attributable to pensioner members, most of whom do not currently qualify for FAS, so an early decision will be needed on whether to include them and other non-qualifying members in any new scheme. In funded and bulk annuitisation options including this group is likely to generate the best outcome for scheme members because it maximises the amount of assets available. If Government takes the assets they are included by definition.
16. In Chapter 2 we recommended that “All scheme assets, including those held in respect of pensioners and other non-eligible members, are treated in the same way in order to maximise the quantum of assets available to generate additional value. Allowing these assets to be used to secure scheme benefits via annuity purchase would not deliver any additional gain to non-eligible members but would jeopardise the value that could be generated for others.”
17. However, the level of risk to the Government and taxpayer of taking on the liabilities for this group of members will be a key consideration. An additional issue will be the impact on scheme members. Specifically, it will be important to ensure that any new arrangements put in place should seek to ensure that members are not disadvantaged in comparison with the existing arrangements.
Transfers out
18. There may be scheme members in FAS qualifying schemes, many in the younger age groups, with relatively short periods of pensionable service. Early leavers from occupational pension schemes benefit from the statutory entitlements available to them, which are set out in sections 93 to 101 of the Pension Schemes Act 1993 – namely a sum representing their rights accrued under the scheme being transferred to another scheme or being used to buy an annuity.
19. Whether eligible members of FAS qualifying schemes should be offered an option to transfer out of FAS would need further examination. This option would have to be assessed against the overall cost and impact on FAS cash flows.
Small payments
20. With the removal of the de minimis (minimum payment) rule there will be increasing numbers of small value FAS payments under the current scheme. By their very nature these payments are likely to be disproportionately costly to administer as the current scheme continues.
21. One positive effect of having a single payment stream under any new scheme (i.e. paying the pension scheme pension and FAS payment as one payment) is that it would reduce the instances of low value payments. Further work is needed to analyse the financial and legal implications of any alternatives, including offering relevant scheme members a transfer value or a lump sum payment. Offering a transfer value might, however, be seen as an administrative burden to pension providers given that the value of such transfers is likely to be low.
22. Based on current FAS scheme parameters, some early analysis from GAD suggests that a broad estimate of the cost of making such payments in the short term would be around £370 million[124] in cash terms. It is estimated that up to 45,000 scheme members, mainly in the younger age groups, might benefit from such a provision.
Treatment of Additional Voluntary Contributions
23. Some scheme members may have paid AVCs to obtain extra pension benefits. AVCs can be either defined contribution or defined benefit in nature. Defined contribution (or money purchase) AVCs are usually discharged separately from the scheme benefits at wind up. Defined benefit AVCs are less common (perhaps a maximum of 10 per cent of members of DB schemes have these) and the treatment of these varies from scheme to scheme - some are part of a member’s pension pot and others are outside it.
24. AVCs are usually protected at wind up because, for schemes winding up before 6 April 2005, they were at the top of the wind up priority order (i.e. the schemes have to meet these rights before any others). However, some types of DB AVCs (particularly ‘added years’) are not given priority because they are difficult to identify separately from the rest of the pension. These are therefore treated along with the rest of the pension.
25. The treatment of AVCs when assessing FAS eligibility differs depending on whether the scheme member’s defined benefit AVCs have been discharged separately. Whether the treatment of AVCs in any new scheme remains as now is an issue that Government might have to consider.
Current practice in FAS and PPF
26. For information, Table 5 below sets out how the areas discussed above, where appropriate, are treated for FAS and PPF assessment purposes.
|Table 5: Current practice – FAS and PPF |
|Area |FAS |PPF |
|Deemed Buy Back |The amount of SERPS or S2P which a member receives|The PPF, which takes in all the remaining assets |
| |if he or she opts for Deemed Buy Back is not |of schemes that transfer into the PPF after the |
| |considered in the FAS assessment. Instead, the |assessment period, effectively become trustees for|
| |amount of assets allocated to them at the end of |those schemes and do not offer members the option |
| |wind up is converted into a 'notional annuity |of taking up DBB. |
| |rate’ using pension factors developed by GAD. | |
| |Assistance is then based on this 'notional rate of| |
| |pension' | |
|Payment from normal pension age |FAS is paid at age 65 to all (except the |Normal pension age (NPA) under the admissible |
| |terminally ill and survivors who can receive |scheme rules for deferred pensions. |
| |payments at an earlier age) |Pensions in payment continue in payment whatever |
| | |the age. |
| | |People under NPA may be able to take compensation |
| | |early after age 50 subject to giving notice and |
| | |actuarial adjustment of the compensation. |
|Small payments |FAS payments are not currently made unless they |There is no de minimis for PPF compensation |
| |are calculated to be over £10 per week (£520 per |related to a defined benefit promise. However, if |
| |annum), before revaluation is applied. Changes to |a member's benefits have not vested when the |
| |abolish this minimum payment rule (de minimis) are|scheme enters assessment for the PPF, the trustees|
| |contained in new regulations. |would return the contributions they had made. |
| | | |
| |The way a member's liabilities are discharged |If a hybrid scheme enters a PPF assessment period,|
| |(whether by trivial commutation, transfer value or|the trustees will buy deferred annuities to meet |
| |purchase of annuity) will not in itself affect a |the money purchase element of the pension. |
| |member's eligibility for the FAS. If qualifying | |
| |members of qualifying schemes have taken a final | |
| |transfer value or have trivially commuted their | |
| |pension after their scheme started to wind up, | |
| |then the value of that transfer or commutation is | |
| |used to determine whether a final 'annual' payment| |
| |will be payable. | |
|Additional Voluntary |The amount of FAS payable to a scheme member is |If a member has made Additional Voluntary |
|Contributions |calculated based on the difference between 80 per |Contributions to purchase additional qualifying |
| |cent of the member’s ‘expected’ pension had the |years towards the defined benefit promise, then |
| |scheme been fully funded and the member’s ‘actual’|these will be part of the rights protected by the |
| |pension (the annuity available to them at the end |PPF. |
| |of wind up). This calculation excludes all | |
| |money-purchase / defined contribution benefits, |Money purchase AVCs are discharged as deferred |
| |including DC AVCs where the latter have been |annuities by the trustees. |
| |discharged separately. | |
| |Where defined benefit AVCs have not been | |
| |discharged separately, the DB AVCs are included in| |
| |the ‘expected’ and ‘actual’ pension when | |
| |calculating FAS assistance. | |
Chapter 5: Costs of FAS
Main findings and recommendations
• When FAS was initially announced, in May 2004, Government committed £400 million in cash, or around £240 million in Net Present Value (NPV) terms, to fund the scheme.
• The estimated lifetime costs to Government of the original FAS scheme were estimated to be around £620 million cash or £290 million NPV; however, subsequent policy changes significantly increased this.
• Under the Budget 2007 extension to FAS (80 per cent expected core pension for all, removal of the de minimis, increasing the cap to £26,000 and including schemes with a compromise agreement), Government has currently committed to pay around £8.6 billion in cash costs or £2.0 billion in NPV.
• The annual cash costs of the current arrangements (with the Budget 2007 extension) start at a relatively low level but increase rapidly as the number of people eligible for FAS grows, such that by the mid 2030’s cash costs peak at around £240 million per year; this is around £50 million in NPV terms (the NPV peak is around £65 million in the early 2020’s). Costs subsequently decrease as mortality reduces the eligible population.
Our Terms of Reference and how we have interpreted them
1. The Terms of Reference for the Review state “The intention of the Review is to determine how these [scheme assets] or other sources of non-public expenditure funding (that have not already been allocated) could be used to increase assistance for affected scheme members”.
2. We have interpreted this as requiring us to develop an understanding of the underlying costs of FAS in order to ensure that the taxpayer’s best interests are safeguarded.
Estimates of cost
3. All cost estimates have been provided to the Review by DWP, using data provided as part of the Review’s data collection exercise.[125] Under the current[126] FAS system, where Government tops up annuity payments, secured on a scheme by scheme basis, to an expected core pension level of 80 per cent, subject to a cap of £26,000, Government faces a cash cost of £8.6 billion or around £2.0 billion in NPV terms (see Box 2 for details).
Box 2: Net Present Value
Costs and benefits that occur in different time periods (cash costs) are not usually directly comparable since £1 today will, generally, buy relatively more than £1 in, for example, 2030. In order to make cash costs comparable they must be ‘discounted’ i.e. converted to a common time period. Discounting allows for the impact of inflation as well as the principle that people usually prefer to receive goods and services now (and pay costs later) and if they have to defer consumption they want to be compensated.
A simple example (ignoring the effects of inflation, uncertainty and tax) is as follows: a person can receive £100 now or they can wait a year; however, £100 in one year’s time is worth less as the money received now could be placed in a low risk investment and may grow to £105. Therefore, given a choice of £100 now or £100 in a year’s time a rational person would opt for £100 today. Given the choice of £100 now or £105 in a year’s time a person should (assuming no risk, tax, uncertainty or irrationality) be indifferent between the two options i.e. the present value of £105 to be received in a year’s time is £100.
For individuals the appropriate discount rate for converting future cash payments expressed in real terms (i.e. adjusted for inflation) to NPV is the real interest rate on money loaned or borrowed. Society as a whole also prefers to receive goods and services now (and defer costs to future generations). This is known as ‘social time preference’; the ‘social time preference rate’ (STPR) is the rate at which society values the present compared to the future.
HM Treasury issues guidance, via the Green Book,[127] on the appropriate STPR and this is currently set at 3.5 per cent real for the first 30 years of a projects life, declining to 3.0 per cent for years 31 to 75 (for the full schedule of rates see Table 6.1 in Annex 6 of the Green Book). The decline in discount rates in the long term reflects the greater uncertainty attached to the distant future.
4. This cost represents a more than doubling, in NPV terms, of the Government’s commitment from the previous FAS extension, in May 2006, to people within 15 years of retirement (NPV cost of £810 million). This in turn represented a large increase over the original FAS scheme (£290 million NPV) where assistance was only available to people within three years of pension age. Table 6 presents more details of how costs and eligibility for FAS have evolved.
|Table 6: The changing costs of FAS (2007/08 terms)[128] |
|Regime |Terms |Total Cash Cost (£m)|Total NPV Cost (£m) |No. of people helped|
|Original FAS Scheme |80% to 3 years from pension age |620[129] |290 |15,000 |
|May 2006 Extension |80% to 7 yrs, 65% to 11 yrs, 50% to |2,360 |810 |40,000 |
| |15 yrs | | | |
|Budget 2007 Extension |80% to all, £26,000 cap, no de |8,560 |1,990 |130,000 |
| |minimis, compromise cases | | | |
Note: Figures from DWP, costs are rounded to the nearest £10 million, numbers helped to the nearest 5,000 people
5. The profile over time of the cash costs of the various FAS arrangements are shown in Figure 5. Costs of the current arrangements (including the Budget 2007 extension) are broadly bell shaped i.e. relatively low at the start of FAS, as there are few members aged over 65, rising to a peak of about £240 million per year in the mid 2030’s as the number of members eligible for assistance increases and starting to tail off thereafter as eligible members die.
Figure 5: Cash costs of past and current FAS
[pic]
6. Figure 6 shows the same costs but in NPV, rather than cash, terms using the STPR (or Green Book) discount rate. The profile here is very different and clearly shows that discounting means expenditure incurred in the near future is relatively more significant from society’s viewpoint than expenditure incurred 30 or more years hence.
Figure 6: NPV costs of past and current FAS
[pic]
Government share of the total cost of FAS
7. We have also considered the total costs of FAS and how, under the current (Budget 2007) extension, these are divided between pensions provided by scheme assets (which for this purpose are assumed to be annuitised on a scheme by scheme basis in line with current practice) and the Government top up. Figure 7 shows these total cash costs, of almost £14 billion, are split with around £8.6 billion coming from the Government top up and the remaining £5.4 billion coming from scheme assets i.e. Government bears the majority of the cost.
Figure 7: Total cash costs of FAS split by scheme assets and Government top up
[pic]
Methodology for estimating costs
8. The estimates of the cost of FAS, which DWP have provided to the Review team, come from taking a sample of individual member records from scheme actuaries with details of accrued pension entitlement, assets available to secure this pension, current age, gender, normal pension age etc. This data was then used in an actuarial model to estimate, on a case by case basis, the level of expected core pension and how much of this can be paid for by annuitising the remaining scheme assets.[130] The cost to Government is then the difference between the FAS assistance rate (80 per cent of expected core pension) and that part of the of the scheme pension provided via annuities. Estimates are weighted to a population level and projected, allowing for mortality, to derive a series of cash flows.
9. Previous DWP estimates were based on a sample of around 1,300 individuals (around one per cent of the FAS eligible population) from two actuarial firms. Due to the limited nature of the data collected DWP took a conservative approach to modelling, using a cautious[131] estimate for longevity and then basing costings on the mid point of the mid and upper range of estimates of the costs.
10. In order to provide a greater degree of confidence around the estimates the Review team undertook a data collection exercise, with the co-operation of a number of the leading actuarial companies (details were provided in Annex I of our interim report), to obtain data on individual scheme members. This generated around 18,500 returns of which almost 12,500 (or around one in 10 of the eligible FAS population) were of sufficient quality to use in a new model developed by the GAD, and validated by PwC, to reconsider the current estimates of costs of FAS. Further details of the modelling and the validation are contained in “Financial Assistance Scheme Review of cost estimates”.[132]
Chapter 6: Other funding sources
Main findings and recommendations
• Our Terms of Reference have meant that we have not considered a number of areas to provide potential sources of funding. Those areas which we have considered to be out of scope include: dormant accounts in banks and building societies; ‘windfall’ taxes or additional levies on business; unclaimed assets within Government (including the National Insurance Fund ‘surplus’ and National Savings & Investments); public sector pensions; and unclaimed prizes in the National Lottery (some further details are provided in Annex L).
• We do not believe that, despite the current legislative powers that allow the FAS scheme to accept voluntary contributions from business or individuals, these contributions are likely to be forthcoming.
• We have noted a number of potential areas that Government could consider conducting further investigation into, though we have not been able to fully consider the complicated legislative and operational difficulties associated with these areas, or the likelihood of their providing “credible” amounts of funds.
• These areas include unclaimed insurance policies and unclaimed pensions in private non-trust-based pension schemes. Lost shareholdings, unclaimed assets within collective investment companies, and unclaimed winnings from gambling are also potential sources.
• Any compulsory scheme aiming to gather unclaimed assets could lead to behavioural changes by the organisations holding the assets so that there is also considerable uncertainty about the amounts that may be raised.
• We do not believe that other organisations, beyond banks and building societies, are likely to participate in a voluntary arrangement similar to that currently planned, though we recognise that some of these bodies are already actively attempting to reunite customers with their lost entitlements, and we welcome these actions.
Our Terms of Reference and how we have interpreted them
1. The primary focus of this Review is to examine how best use can be made of the residual assets in those pension schemes that are eligible for assistance from the Financial Assistance Scheme. A further objective for the Review team relates to investigating alternative sources of funding for the FAS, beyond the current public funds committed by Government:
1. “Other credible non-tax funding sources should be investigated, particularly where contributions to the scheme from external sources are deemed possible.” Furthermore, “the intention of the review is to determine how ... other sources of non-public expenditure funding (that have not already been allocated) could be used to increase assistance for affected scheme members. The Review will be open to any suggestions from interested and concerned parties.”
2. As indicated in our interim report,[133] the Review team has interpreted our Terms of Reference to mean that we should identify potential sources of funding within the financial system that could be used to increase assistance to affected members, excluding any that would draw further on public funds or increase public spending (“non-public expenditure”).
3. The Terms of Reference also exclude any sources of funding that might arise as the result of any taxes (“non-tax”). It may be noted that, the 2004 Pensions Act specifically prohibits making use of a levy or charge to fund the Financial Assistance Scheme: “Regulations under subsection (1) may not make provision for the imposition of a levy or charge on any person for the purpose of funding, directly or indirectly, the financial assistance scheme.”[134]
4. In relation to funds “that have not already been allocated”, the Review team considers funds already allocated as those which are dealt with by current or planned future legislation, including in particular those covered by the Dormant Bank and Building Society Accounts Bill 2007 and that these will also be out of scope.
5. The Review team defines a “credible” source of funding to be one where there are actually existing assets available for consideration, and where those assets might provide a significant contribution towards offsetting the costs of FAS, either by means of a one-off amount, or a cash flow over a number of years.
6. We also believe that where there are any existing assets, these should not be considered as “credible” if the removal of these funds would create a subsequent definite liability for financing to replace the primary purpose of the funds.
The scope of our investigations
7. Where possible and relevant, for each potential source of funding identified and investigated we have aimed to outline:
• what it is;
• why it arises;
• the current procedures or legal requirements relating to the monies involved;
• views that we are aware of in relation to the potential use of these funds;
• the value of any amounts that might be available for consideration;
• any issues that need to be resolved or investigated; and
• whether we consider it a “credible” possibility for use in increasing assistance to affected members.
8. In our interim report, the Review team identified a number of possible other sources of funding that could potentially be used to increase assistance to affected FAS scheme members. Where necessary these areas have now been investigated further, and some other potential sources have also been considered. The sources of funding which have been considered are those which have been suggested to us through the course of our consultations over the summer, and those which we have noted after researching the experience of countries that employ schemes which collect unclaimed assets (Annexes J and K provide further detail). Those areas that we regard as being outside the scope of our Review are dealt with in Annex L.
9. We wish to make clear that it is not the role of the Review to recommend whether Government should choose to legislate to access these funds or whether, if they do, such monies raised should go to support FAS; rather it is our role to identify the existence of these alterative sources of funds.
10. The areas the Review team identified when looking for possible alternative sources of funding are as follows:[135]
• Voluntary contributions;
• ‘Windfall’ tax;
• Levy on industry;
• Unclaimed assets:
o Dormant accounts:
▪ Banks and building societies;
▪ Credit Unions;
o Within Government:
▪ National Insurance Fund ‘surplus’;
▪ State benefits;
▪ Tax overpayment refunds;
▪ National Savings and Investments;
▪ Court Funds Office;
▪ Bona Vacantia;
o Unclaimed pension assets:
▪ Trust-based pension schemes:
▪ Public sector pensions;
▪ Other non-trust-based pension schemes;
o Insurance and life assurance policies:
▪ Inherited estate;
▪ Mutual Insurers;
▪ Friendly Societies;
o Unclaimed shareholder assets:
▪ ‘Lost’ shareholdings:
Mergers and acquisitions;
Windfall benefits from demutualisation;
Employee share schemes;
Cash entitlements from unexercised rights issues;
▪ Unclaimed dividends;
o Collective Investment Schemes:
▪ Open-Ended Funds:
Uncashed distribution;
Unclaimed units/shares;
▪ Close-Ended Funds;
o Cash balances of investment banks;
o Gambling winnings:
▪ National Lottery;
▪ Unclaimed winning bets;
o Customer payments;
o Travellers cheques (un-cashed/lost/forgotten);
o Safety deposit box contents;
o Unpaid wages;
o Air miles; and
o Royalties.
Voluntary contributions
11. The Terms of Reference for the Review refer specifically to “…contributions to the scheme from external sources.” The legislation establishing FAS permits the scheme to accept voluntary contributions as follows:[136]
• “The Secretary of State may pay other amounts into the fund where he:
i. is notified in writing that a person wishes to pay an amount into the fund;
ii. is of the opinion that that amount can be paid into the fund; and
iii. receives that amount.”
12. It has been suggested that a possible contribution could be provided in terms of facilities or professional services rather than cash, but as yet no voluntary contributions of any kind have been received, from industry or otherwise.
13. In the opinion of the Review team, despite the legislation, it is unlikely significant levels of voluntarily contributions will be forthcoming. The Review team therefore do not believe that this is a “credible” route for increasing levels of FAS assistance.
Unclaimed assets
14. ‘Unclaimed assets’ refers to money held by various institutions which has either not been claimed or is in an account and has not been used for a significant period of time. There is no recognised definition of what constitutes unclaimed assets, although HM Treasury have said that “The 2005 Pre-Budget Report …set out a Government and banking industry agreed definition that unclaimed assets should generally cover accounts where there has been no customer activity for a period of 15 years.”[137]
15. Assets can go unclaimed for a variety of reasons. Changes of address or employment, or movement of funds, could have led to individuals and institutions losing contact with each other. Entitlements may also simply have been forgotten about, particularly in the case where individuals have died and their estates are unaware of the existence of the assets.
16. It is difficult to estimate with any accuracy the extent of the potential level of funds that might be available for distribution through unclaimed assets unless a formal scheme is put in place and the necessary investigations undertaken. In many instances primary legislation would be required to enable unclaimed assets to be used for any specified purpose. New legislation may change the behaviour of the institutions concerned, and in particular increase their efforts to find the owners of the money, which could reduce the amount which otherwise might have been unclaimed. The impact of any regulatory burden should also be considered in that it may become disproportionately costly to participate, especially for smaller organisations.
17. The Review team notes that, as unclaimed assets may have built up within institutions over several years, a disproportionately large one-off initial sum is likely to be realised in any area that the Government might choose to pursue. With this having removed any historic accumulation of unclaimed assets, it would be expected that a relatively smaller ongoing cash flow would be seen after that, realised only as and when assets reach the point at which they can be newly defined as unclaimed.
18. The Review team is also aware that where unclaimed assets exist, owners or their heirs continue to have the right to demand repayment no matter how long ago they last made contact with the institution (with allowances for the underlying contractual arrangements). Any unclaimed assets scheme aiming to release money for use elsewhere will therefore carry a reclaim risk, and managing this risk will necessarily reduce the value of assets available for onward distribution. This risk may have to be carried by the Government if that is where the money is to be released to prior to distribution (and this arrangement would almost certainly be required in any compulsory scheme). The Review team believes that any scheme would also need to be accompanied by a high profile publicity campaign to encourage individuals to reclaim any assets that might otherwise be transferred.
19. Any attempts made to access unclaimed assets may raise issues relating to the contractual and property rights of the claimant and the operator, which could have implications in relation to the European Convention of Human Rights and the right to property.
Dormant accounts
Credit Unions
20. Credit Unions are financial co-operatives owned and controlled by their members, offering loans and savings schemes. The Association of British Credit Unions Limited (ABCUL) represents around 70 per cent of credit unions in England, Scotland and Wales.
21. The objectives of credit unions, as defined by the 1979 Credit Union Act, are:
• the promotion of thrift among the members by the accumulation of savings;
• the creation of sources of credit for the benefit of the members at a fair and reasonable rate of interest;
• the use and control of the members' savings for their mutual benefit; and
• the training and education of the members in the wise use of money and in the management of their financial affairs.
22. The main benefits to members are that they can save and take out loans at reasonable rates of interest. Membership is restricted to those who meet the qualification (‘the common bond’), for a particular credit union. The common bond may be one of four main types:
• residence in a locality;
• being a member of, or association with, an organisation;
• working for a common employer or in a locality; and
• following a particular occupation.
23. The ABCUL rule book contains clear procedures for dealing with money held in dormant accounts. Smaller trade associations have similar rules. The model rules could be changed by ABCUL but these would have to be approved by the FSA before being published.
24. If an account is inactive for 12 months the credit union’s Board of Directors may declare it dormant. They may also levy an annual membership fee on each dormant account. A letter of notification is sent to the member’s last known address, and after a further period of six weeks the Board of Directors may remove dormant accounts into a suspense account and subsequently expel the member from membership. Money in such accounts can be used to boost the funds of the credit union and be on-lent to other credit union members, thereby providing a source of credit for other members of the community.
25. It is probable that the amounts involved may not be significant as many credit unions have a localised membership and so may find it easier to keep in touch with their members. Indeed, the Review team understands that there are only approximately £500 million in total assets held in the credit union sector. The cost of releasing any unclaimed assets in this area seems likely to exceed the benefits gained.
26. The Review team has discounted credit unions as a potential source of funding since we do not believe there will be significant amounts available from these funds, and so do not consider it a “credible” alternative source.
Unclaimed pension assets
27. ‘Unclaimed pension assets’ are different in nature to unclaimed bank and building society assets – the latter can be a cash amount on deposit, but what might be termed unclaimed pension assets are more complex and depend on the nature of the pension scheme.
28. However, in some cases, unclaimed pension assets can be seen to be similar to the unclaimed assets in banks and building societies. In banks, an individual deposits money into an account, and has a right to reclaim this at a point in future. The bank then owes this to the individual and holds this as a liability against the total assets it holds across its business. In itself, this is similar to pensions, where a pension scheme or other institution has a note of what liabilities it holds in respect of an individual, and the individual has a right to make a claim of this amount out of the assets that are being held by the institution at some point in future.
29. The unclaimed assets scheme which was set up in Ireland (further details can be found in Annex J) was initially focused solely on dormant bank and building society accounts, but soon expanded to include both unclaimed pension assets and life assurance policies (which are considered separately elsewhere in this chapter). The extension specifically covered fixed-term, lump-sum policies; open-ended policies; and personal pension policies.[138] The unclaimed pension assets identified through the Irish scheme have been of significantly lower value than the unclaimed bank and building society assets.
30. Obtaining the primary legislation needed to introduce any unclaimed assets scheme for unclaimed pension assets would be for HM Treasury; it is unlikely that there would be voluntary participation as with the banks and building societies. The Review understands that many insurers are actively starting to try and reunite customers with ‘lost’ pensions and any compulsory scheme would potentially prove controversial and is likely to be strongly resisted by the insurance industry and/or their stakeholders and/or policyholders.
31. The Review team has looked at different areas within this ‘unclaimed pension assets’ sector including trust-based schemes, public sector pension schemes, and other non-trust-based pension schemes.
Trust-based pension schemes
32. Trust-based pension schemes can include defined benefit pension schemes and trust-based defined contribution pension schemes.
33. Some pensions in these schemes will be unclaimed at the time the owner/member reaches scheme pension age and will remain so until the death of the beneficiary. In a defined benefit scheme, there is no specific ‘pot’ of assets set aside for any unclaimed liabilities. Any uncollected pensions in either type of scheme are the property of the trust which is held for the benefit of members and the sponsoring employers.
34. Assets in the trusts go towards the pensions that are payable to members or meeting administration costs of the schemes. If assets were removed from a scheme based on the proportion of liabilities estimated as being unclaimed, an employer might have to pay further contributions. In the case of shared cost schemes, active members could also have to pay higher contributions.
35. Trustees of these schemes have a fiduciary duty to act in the best interest of their members. Representations have been made to the Review team suggesting that to pay over any monies in respect of unclaimed pensions to the Government (when trustees are aware that this will not benefit their members) may be inconsistent with their fiduciary duty.
36. It has also been suggested to the Review team that it would be inappropriate for the Government to decrease the funds of one group of pension schemes, to support an undertaking which aims to pay assistance to members of a separate group of similar schemes which have wound-up underfunded.
37. As removal of assets from these schemes might require increased contributions to make up a shortfall in funding, the Review team believes that unclaimed assets within trust-based pension schemes should not be considered.
Non-trust-based pensions
38. Further non-trust-based pensions could include contract-based personal pensions and insured defined contribution pension schemes, and assets within these are also sometimes left unclaimed once the member reaches pension age. Members may have forgotten about, or lost track of, the schemes they have contributed to, especially if they are employment-related and they change jobs regularly throughout their career. Policies owned by individuals in this area can include both with-profits and non-profits contracts.
39. Unclaimed assets in this sector are very similar in nature to life assurance policies. As a result, we will consider both of these together in the following section.
Insurance and life assurance policies
40. Companies which deal in insurance can sometimes be mutual organisations. We will consider any particular issues related to mutual organisations in the following sections on mutual insurers and friendly societies.
41. As with contract-based personal pensions and insured defined contribution pension scheme assets, life assurance policies are sometimes left unclaimed once the policy matures. Insurance policies are usually unclaimed as the policyholder has lost contact with the company. This could be because the policyholder may have moved address and failed to notify the company of their new details, or it may be that the beneficiary or the estate of a deceased policyholder is unaware of the entitlement. The number of ‘gone-away’ policyholders is invariably unknown as the company will only identify a policyholder as ‘gone-away’ when items of mail are returned.
42. Insurance companies have historically either sold policies through their industrial branch[139] or their ordinary branch.[140] Types of unclaimed policies could include matured savings plans; life policies where the insured individual has died; or event insurance where the event has taken place and the beneficiary was unaware of the policy, such as with funeral expenses. Policies could be with-profits[141] or non-profits contracts, and some contracts will have a fixed term, while others are open-ended.
43. The Review team understands that there is currently not a uniform approach in the industry to the treatment of unclaimed policies. In some cases, companies may transfer assets to a miscellaneous profit account when unclaimed policies reach a certain age (for example when the owner would have reached an age of 105 years), but there are a range of different cut-off dates and accounting practices.
44. Where a company has with-profits business, they are required to publish the Principles and Practices of Financial Management (PPFM) that are applied to the management of their with-profits funds. The Review team could find no evidence of a PPFM which explicitly details the treatment of unclaimed policies
45. In the case of with-profits contracts and other types of policy within a with-profits fund, the Review team understands that those assets associated with unclaimed policies would go to form part of the assets in the with-profits fund (as do assets associated with any with-profit contract). It is understood that when declared as ‘unclaimed’, these policies are in effect miscellaneous surplus and contribute to future returns to other policyholders and shareholders. It has been put to the Review team that as this has been past practice, and as the amounts involved are included within ‘miscellaneous profits’, then such unclaimed policies form part of a policyholder’s reasonable expectations. Therefore, removing assets related specifically to these unclaimed with-profits policies would reduce the amounts paid to other with-profits policyholders.
46. As with all the unclaimed assets we have identified, owners have a continuing right to reclaim. We have been told of the work ongoing within the insurance industry to reunite owners with their assets. Although in some cases the information held by the company is insufficient to carry out any detailed searches, some companies are employing professional tracing services to try to return entitlements to their owners. Nevertheless, in some cases the policy will lie unclaimed unless an owner comes forward independently.
47. The Review team acknowledge that in some instances the insurance industry may find these policies difficult and costly to track. However, in the light of the continuing work within the insurance industry to reunite individuals with unclaimed policies,[142] and the industry’s current practices to identify which policies lie unclaimed when the policy has reached a certain age, we also recognise that the industry will often already have measures in place for any ongoing administration that is required. As a result, if Government were to consider using these assets as an alternative funding source, then we would hope that any additional costs to the industry would be limited, although further investigations would need to take place in this area.
48. According to the ABI, “Most unclaimed policies are for very small sums of money. Such policies were often taken out before computerised records became standard business practice. The result is that the identification and tracking of such policies to hand over for other purposes would represent a significant cost to the industry, costs that should not be borne by the company and its policyholders. In many cases the costs of tracking such policies would outweigh the sums raised.”[143]
49. It is likely that many of these small unclaimed policies were sold as industrial branch products, mostly to people with low incomes. The amount of regular premiums gathered by these policies has been in decline since 1992, falling to £231m collected in 2006. However, over £1bn of regular premiums was collected in each year from 1983 to 1997, and there remain around 15.8 million such policies in force.[144]
50. The ABI has also said that “If insurers have to sell the assets underlying any policy deemed to be unclaimed, this will in some circumstances generate a liability to capital gains tax that would also need to be recognised as part of the costs of any scheme and would be very complicated to handle.”[145] However, the Review team understands that this same tax liability may exist in any case where an individual reclaims any such previously unclaimed policy and allowance for any capital gains tax liability could be made on the recovery of such assets.
51. Although the Review team has not received details from insurers of the amounts that are currently unclaimed, the team understands that some insurance companies may currently be transferring tens of millions of pounds per year to their miscellaneous profit accounts (and similar) in respect of unclaimed policies. We believe that the majority of these are from unclaimed industrial branch policies.
52. As the industry increasingly finds itself with better records on individuals and keeps track of bank details and National Insurance numbers, it may become less likely that policies go unclaimed in future. In this scenario, it is likely that any cash flow in future years may taper off. However, as it is likely that FAS will require an ongoing Government commitment over at least the next 50 years, it still may be possible for these sources to provide a medium term funding option.
53. The Review team has noted the Treasury Committee’s recommendations in their report on a UK Unclaimed Assets scheme “…urging the Government to investigate proposals for the scheme to include other classes of unclaimed asset, including insurance.” [146] We have also noted how the unclaimed assets scheme set up in Ireland was subsequently expanded to include life assurance and personal pension policies, and that many other countries, including the USA and Australia, have similarly included unclaimed insurance policies in their schemes (see Annex K). Incorporating unclaimed insurance assets into any UK unclaimed assets scheme would require primary Treasury legislation.
54. In the light of this information, the Review team believes that unclaimed insurance policies and unclaimed pensions in private non-trust-based pension arrangements might, in principle, provide a source of funding. We also believe that those policies which are not within with-profits funds are a more obvious potential source of funding than those which are within with-profits funds, and acknowledge the extra considerations that would be required in relation to any policies in with-profits funds. However, we have not been able to gather enough information from the insurance companies to make a more definitive statement and therefore cannot be certain that this source is “credible”. We also recognise that there may be complex legislative and implementation issues that we have not been able to fully bottom out and recommend Government consider conducting further investigation.
55. To this end, we agree with the Treasury Committee’s recommendation that the Government consult with the insurance industry about the possibility of its involvement in an unclaimed assets scheme at some stage in the future, perhaps once HM Treasury’s proposals for a UK Unclaimed Assets Scheme covering banks and building societies have been enacted and shown to work.
56. However, in any such discussion it would be necessary to consider a number of complex issues. These include:
• the precise legal issues surrounding the ownership of the assets;
• any changes to Financial Services Authority rules that may be required;
• issues related to capital gains tax; and
• difficulties associated with valuing and reclaiming policies which are linked to current market values of assets.
Inherited estate
57. The ‘inherited estate’ is defined in the Conduct of Business sourcebook issued by the Financial Services Authority as an amount representing the fair market value of an insurance company’s with-profits assets less the realistic value of liabilities of a with-profits fund. These funds are governed by the Financial Services Authority (FSA) under the authority of the Financial Services and Markets Act 2000. The FSA have said that: “There is no dispute that the firm owns these assets and that the with-profit policyholders have a contingent interest in receiving distributions from them.”
58. The inherited estate that is held for these with-profits policies is available to insurance companies to support current and future business by, for example, providing the benefits associated with smoothing payments between years with different investment performance, permitting investment flexibility for the fund’s assets, and maintaining the solvency of the fund. However, where some companies have built up funds over those that would be reasonably expected to meet the liabilities, the FSA permits the use of these assets for other purposes, for example to meet the cost of mis-selling claims, to meet certain shareholder tax liabilities and to provide a source of capital to support the writing of new business.
59. Any distribution from a with-profits fund to the current generation of policyholders and shareholders can usually only be made in a prescribed manner; usually in the proportion of 90 per cent to policyholders and 10 per cent to shareholders. When a fund is closed, policyholders expect, and are entitled to have, any residual estate distributed to them, and the FSA requires them to implement a ‘run-off plan’ to ensure this happens within a reasonable timescale.
60. The FSA also requires insurance companies to distribute any ‘excess surplus’ from the inherited estates. FSA rules can require a distribution when, for example, the company has more assets than it needs to support its with-profits business. However, the Review team understands that in practice there appears to be some flexibility open to the companies in deciding when there is any ‘excess surplus’ to distribute. The apportionment of such distributions between policyholders and shareholders and between different groups of policyholders would be governed by FSA and fund rules, but again normally can only be distributed in the proportion of 90 per cent to policyholders and 10 per cent to shareholders.
61. Insurance companies may also seek to ‘reattribute’ inherited estates which would change the way the estate was treated. This reattribution would be determined through negotiations between the company and an appointed Policyholder Advocate[147] and would be subject to FSA and High Court approval. With reattribution, though, there are no rules on how much policyholders should receive.
62. It has been put to the Review team that where a reattribution results in a reduction in the share going to policyholders, part or all of the corresponding increase allocated to shareholders could be considered as unclaimed assets within the context of this Review.
63. The FSA however argued that “Our strongly held view is that inherited estates are assets of insurance companies, where, following extensive consultation, there is a basis through FSA rules, and Court oversight, for distribution or reattribution where appropriate. They are therefore not available as a source of funding for the FAS”.[148]
64. The ABI commented that any change in the use of the with-profits estates would require insurers to review their Principles and Practices of Fund Management statement, and subsequently warn policyholders that returns might be lower than anticipated going forward.
65. Any attempt by Government to claim some or all of any assets in the with-profits estates would be resisted strongly and probably challenged in the courts by the companies on behalf of shareholders, and potentially also by stakeholders or policyholders. It would be seen as a ‘windfall tax’ on life funds.
66. On balance, the Review team does not believe that inherited estates are a “credible” source of alternative funding for the FAS.
Mutual Insurers
67. Mutual insurers are insurance companies which do not have shareholders but are member-owned organisations. The Association of Mutual Insurers (AMI) represents 30 members which account for 98 per cent of the UK mutual insurance market, having £82 billion in assets and 14 million policy holders.
68. If a mutual insurance company generates profits then it is the policyholders who are entitled to share in those profits. In practice this entitlement is unlikely to produce any visible benefit for the members of most mutual general insurers, as accumulated profits tend to be re- invested in the business, but this does not mean that the companies are not operating on a mutual basis. It is the entitlement to share in profits that matters, even if there are no actual distributions of profits for many years.[149]
69. Many of the arguments in relation to unclaimed policies in mutual insurers are the same as those for other insurance companies. As regards the treatment of any unclaimed assets within mutual insurers, the AMI state that “Unclaimed policies belong to the policyholder and, if remaining unclaimed, are reinvested for the benefit of all its members.”
70. As with other insurers, there will be both policies belonging to individual policyholders that go unclaimed, and there will also be the estate of the mutual insurer comprising of capital which has built up over the course of operations, particularly in association with any with-profits policies.
71. Unlike other insurers, mutual insurers do not have any shareholders to consider in the event of a surplus in this estate. As a result, all funds are reinvested for the benefit of members. Therefore, the Review team do not believe that Government should consider the estates of mutual insurers as an alternative source of funding (in line with our conclusions outlined above).
72. In relation to specific unclaimed policies, the AMI has said that “the mutual business model places member owners at the heart of the organisation with a majority based around community or affinity groups. Such a structure enables the mutual sector to be well positioned in regards to tracking down unclaimed policies because members have a close relationship with their mutual organisation. For this reason, numbers of unclaimed policies among mutual insurers are relatively few.”
73. The Review team believes that mutual insurers are generally comparable to other insurers, and hence that, with reference to the caveats listed in paragraph 57, unclaimed policies within these organisations might theoretically provide a new source of funding. However, the Review team notes that a detailed investigation of this area may reveal that the mutual business model may lead there to be very few unclaimed policies, and that the cost of retrieving these assets may exceed the benefits – meaning that this would not be a “credible” source.
Friendly Societies
74. Friendly societies are voluntary, mutual organisations, which exist to provide their members with benefits such as life and endowment assurance and with relief or maintenance during sickness, unemployment and retirement. They typically provide and promote financial products – including life insurance, income protection insurance, Child Trust Funds and savings and investment plans – to people with limited financial resources, although their products and services are generally open to all. Collectively they make up a considerable proportion of the United Kingdom’s insurance sector with funds amounting to around £16 billion and with a membership of over 5.5 million.
75. As a mutual organisation, friendly societies have no shareholders, and friendly society legislation requires that assets are used solely for the purposes of the society’s business and other activities defined by the rules of the Society. The rules will sometimes explicitly state that any unclaimed funds are to be used to maintain the society’s solvency margin and to deliver benefits to members.
76. However, legislation also allows a friendly society to include among its purposes the carrying on of any social or benevolent activity – “the making of donations, the raising of funds or any other activity carried on for a charitable purpose or for any other benevolent purpose”.[150]
77. Many of the arguments in relation to unclaimed policies in friendly societies are the same as those for other insurance companies. As with other insurers, there will be both policies belonging to individual policyholders that go unclaimed, and there will also be the estate of the friendly society comprising of capital which has built up over the course of operations – particularly in association with any with-profit policies.
78. Unlike other insurers, friendly societies do not have any shareholders to consider in the event of a surplus in their estates. As a result, all funds are reinvested for the benefit of members. Therefore, the Review team do not believe that Government should consider the estates of friendly societies as an alternative source of funding (in line with our conclusions outlined above).
79. In relation to specific unclaimed policies, the Association of Friendly Societies (AFS) currently estimate that there is “…significantly less than £50 million”[151] currently unclaimed within Friendly Societies, based on a sample of seven societies which account for just under ten per cent of managed funds. The AFS believe that “the method of distribution, the nature of products, and the social benefits of membership create high levels of loyalty [within friendly societies]. As a result very few policies go unclaimed,” and so, “the forced withdrawal of assets from friendly societies would never recuperate the costs”.
80. An additional possible point to consider for friendly societies is that they may serve a different demographic of members in relation to other insurance companies. The AFS believe that “in many respects therefore the friendly society model already delivers the kind of social redistribution of unused assets that the inquiry proposes. And because a large proportion of friendly society policyholders are the financially disadvantaged or young or are attracted by the premise of mutual self-help, that redistribution has a high social element to it.”
81. The Review team believes that friendly societies are generally comparable to other insurers, and hence that, with reference to the caveats listed in paragraph 57, unclaimed policies within these organisations might theoretically provide a new source of funding. However, the Review team notes that a detailed investigation of this area may reveal that the mutual business model may lead there to be very few unclaimed policies, and that the cost of retrieving these assets may exceed the benefits – meaning that this would not be a “credible” source.
Unclaimed shareholder assets
82. The Review team is aware that representations have been made to the Treasury Committee by the Building Societies Association arguing that it would be consistent with the principles used in HM Treasury’s proposed unclaimed asset scheme to also include the unclaimed shares and dividends of banks and other listed companies in any such a scheme.[152]
83. We have outlined below the way different unclaimed amounts may exist as unclaimed shareholder assets before reaching our conclusions in paragraph 111.
‘Lost’ shareholdings
84. Shareholder assets are usually unclaimed because the company has lost contact with its shareholders. The most common reason for this is that the shareholder moves address and does not notify the company, or its Registrar, or that they die and their estate is left unaware of the shareholding.
85. The number of ‘gone-away’ shareholders is invariably understated as the Registrar will typically identify a shareholder as ‘gone-away’ when two items of mail are returned. In practice much incorrectly addressed mail is destroyed rather than returned.
86. Similarly, the number of deceased shareholders is often higher than believed, as those administering the estate must know of the shareholding to be able to notify the Registrar of the death and claim their entitlement.
87. The articles of some listed companies contain provisions allowing the company to sell the shares of shareholders identified as ‘gone-away’ after a certain number of years and to hold the proceeds for the benefit of the shareholders concerned.
Mergers and acquisitions
88. Lost shareholdings are common following company mergers and acquisitions. When one company buys another, it usually offers shares in the ‘buying’ company to shareholders in the ‘bought’ company. The offer is typically made in the form of cash, a mixture of cash and shares, or loan notes. When a number of shareholders fail to claim such shares or cash following a merger, acquisition, or other corporate action, they are listed as ‘dissentients’ on what is called a dissentient register. In the strict sense, dissenting shareholders are those who have not assented to a formal takeover offer, but ‘lost’ shareholdings will typically play a part in this.
89. There are some frameworks within which companies can be acquired in the UK which have implications for dissenting shareholders, including schemes of arrangement and compulsory acquisitions.
90. A scheme of arrangement[153] needs approval by a 75 per cent majority members vote and also court approval. The court order may deal with the provision to be made for dissentients “within such time and in such manner as the court directs”.[154] This is likely to result in unclaimed considerations to be held on behalf of dissentients.
91. Under a compulsory acquisition,[155] the acquisition requires the offer is accepted in respect of at least 90 per cent of the ‘relevant shares’ (essentially shares not held by the offeror at the time of the offer). Companies Act 2006 legislation requires that shares which belong to dissentients must either be held in trust for the dissenting members or sold, with the proceeds returned to them. Any cash consideration, and any dividends arising from share consideration, must be held by the target company in a separate interest-bearing bank account.
92. Where these dissentients cannot be traced, this same 2006 legislation requires that, after “reasonable enquiries have been made at reasonable intervals to find the person”,[156] then, 12 years after the offer, the remaining consideration held must be paid into court. This will involve sale of any consideration shares; any costs of the required enquiries may be paid out of the trust property. In England and Wales, the payment of monies into court follows the procedure used under the Trustee Act 1925, the payment itself being handled by the Court Funds Office.[157] (The Court Funds Office is detailed further in Annex L)
93. For the year ended 31 October 2004, approximately 25 payments by companies were made into court,[158] involving 7,550 individual dissentient shareholdings with an aggregate total value of some £1.5 million.
Windfall benefits from demutualisation
94. When an existing building society or other mutual business is reorganised into a group headed by a new public limited company, qualifying members of the original institution become entitled to ‘windfall benefits’, in the form of shares or cash, as compensation for the loss of mutual membership rights and status. Many of these windfall shares are left unclaimed by their owners.
95. The Review team notes that where there are unclaimed windfall benefits at times of demutualisation, it is likely that each of these ‘lost’ members presumably represents an unclaimed policy in the cases of insurers. This then can be related to discussions in paragraph 41.
96. Although each reorganisation, or demutualisation, will have its own conditions, the principle is established that the new company can sell unclaimed shares or take unclaimed dividends after a period of years from the date of reorganisation, and use the monies for general corporate purposes.[159] This period after demutualisation was set at 10 years for Standard Life and 12 years for Bradford and Bingley. When Scottish Life transferred to Royal London, payments not claimed by former members within six years of the transfer of the business were forfeited and transferred into the Scottish Life Fund. The six-year period commenced on 1 July 2001 and has now elapsed.
97. In the example of Standard Life plc,[160] the shares (or cash) concerned have to be claimed by the former members and any unclaimed assets are placed (under the scheme terms) into an unclaimed assets trust. Any assets held in the trust which are still unclaimed 10 years after the flotation will become the property of the company for its own benefit, although it may choose to make charitable donations from this fund. In July 2007, Standard Life had yet to locate more than 200,000 people entitled to windfall shares worth in total more than £240m.[161]
98. However, the Review team is aware that it is possible to reunite members with windfall shares. Following the Woolwich BS demutualisation in 1997, £80m of shareholder assets were left unclaimed, and an additional £16m of lost shareholding was added to this following the acquisition by Barclays in 2000. After working with ICSA and the specialist asset recovery company Assets Reunited, Barclays have now been successful in finding over 80 per cent of the owners of these assets, and returned over £75m to these members.
99. The amounts of unclaimed windfall benefits arising from demutualisation as confirmed by some other companies is as follows:
• Scottish Life - £7.5m (15k members);[162]
• Standard Life - £240m (200k members);
• Friends Provident - £88m (148k members);
• Scottish Widows - £153m (59k members); and
• Halifax - £158m (75k members).
Employee share schemes
100. Employee share schemes can be a further source of unclaimed shareholder assets. Millions of UK employees have taken part in share schemes allowing them to buy equity in their company, often at a discounted price. There are currently four HMRC 'approved' or 'tax-advantaged' schemes that provide employees and employers with income tax and National Insurance advantages:
• Company Share Option Plan (CSOP);
• Enterprise Management Incentives (EMI);
• Share Incentive Plan (SIP); and
• Save As You Earn (SAYE or Sharesave).
101. Shares acquired under these schemes are free from income tax and National Insurance contributions.[163]
102. Savers should receive either cash or shares through their scheme, although ICSA quote an estimate that up to £100 million has never been claimed specifically from SAYE schemes that have matured or where ‘savers’ have left schemes prior to their maturity date.[164]
103. The Review team understands that there are a number of reasons why assets can go unclaimed in this area. Many people join share schemes through good internal marketing and peer pressure, but do not fully understand the purpose of the scheme, their options or the potential value of their regular investments. Savers can change address without notifying the scheme administrator and therefore do not receive the necessary documentation when the scheme matures or they leave the scheme. Savers can also die leaving their estates are left unaware of their contributions to the scheme.
Cash entitlements from unexercised rights issues
104. Sometimes companies offer shareholders the right to buy more shares at a discounted rate as part of a ‘rights issue’. Shareholders who do not exercise their rights are still entitled to the cash earned when the shares they were offered are subsequently sold.
105. Where there are shareholders who do not exercise their rights, FSA rules[165] require the company to make arrangements to ensure that any rights not taken up are sold for the benefit of the non-accepting shareholders, and the company then has to hold cash balances for these ‘gone-away’ shareholders.
Unclaimed dividends
106. Where there are lost shareholdings, these will logically often lead to unclaimed dividends. Legislation does not specify how unclaimed dividends should be treated, but there can sometimes be guidance within a company’s articles of association.
107. A company is free to adopt its own articles of association, although the 1985 and 2006 Companies Acts enable the Secretary of State to prescribe model articles of association,[166] which apply in default to companies of a particular description, where they have not registered any articles of their own. These model articles state that “any dividend which has remained unclaimed for twelve years from the date when it became due for payment shall, if the directors so resolve, be forfeited and cease to remain owing by the company.”[167]
108. For all unclaimed shareholder assets associated with lost shareholdings, in the first instance, the Review team believes that companies should make attempts to reunite members with their assets where possible, as was demonstrated in the case of the Woolwich demutualisation / Barclays acquisition.
109. Beyond this, those lost shareholdings associated with mergers and acquisitions are already dealt with in legislation and as such are outside the scope of this Review.
110. However, as the Review team are unaware of any such existing legislation in relation to the treatment of other unclaimed shareholder assets associated with lost shareholdings, such as those arising from demutualisation, employee share schemes, rights issues and unclaimed dividends, these might theoretically provide a new source of funding and should be investigated further by Government.
Collective Investment Schemes
111. Many investors choose to invest in pooled or collective funds, as these funds provide investors with the ability to invest in a number of stocks simultaneously, hence spreading risk. In these collective funds, investors’ money is pooled together and invested on their behalf by a fund manager. These funds can be invested in shares, gilts, bonds, property, or cash deposits, depending on the type of scheme[168] and the investment mandate of the fund. Such funds can either be open-ended or closed-ended.
Open-Ended Funds
112. Unit Trusts & Open Ended Investment Companies (OEICs) are known as open-ended funds. An investor’s money will buy units or shares in the fund, and the number of units or shares in issue may be expanded or decreased as necessary according to supply and demand. These units or shares rise and fall in value according to the performance of the underlying investments.
Uncashed distribution
113. Generally, at the end of the accounting period when a scheme distributes income, all income, net of expenses, generated by the investment of the open-ended funds must be transferred to a distribution account in order that the income is paid to the unit/shareholders. [169]
114. It is stipulated in FSA rules[170] that once distributions are unclaimed for six years (or more if the prospectus of the fund stipulates as such), the unclaimed income must be transferred to the capital account of the company, thus releasing the funds for the company to use them elsewhere.
Unclaimed units/shares
115. Open-ended investments usually have no fixed term to the investment, and shares or units are not judged dormant or unclaimed until either:
• the fund is wound up and the cheque is not banked; or
• the units/shares have been redeemed by the investor but the cheque for the proceeds has not been banked.
116. Where Unit Trusts are judged to be unclaimed using this definition, any unclaimed net proceeds or other cash (including unclaimed distribution payments) held by the trustee after one year from the date on which they became payable must be paid by the trustee into the Court Funds Office (or, in Scotland, as the court may direct), subject to the trustee having a right to retain any expenses properly incurred by them relating to that payment. The Court Funds Office is dealt with further in Annex L.
117. FSA regulations[171] for OEICs stipulate that unclaimed monies (including unclaimed distributions) as defined above must be paid into the Court Funds Office within one month of dissolution.[172]
118. It appears that unclaimed assets in association with Open Ended Funds occur, and are treated in, a broadly similar way to other unclaimed shareholder assets. If it was decided that FSA rules could be amended for uncashed distributions, there may potentially be some funds available from this source. Furthermore, the formal definition of ‘unclaimed’ used for OEICs and Unit Trusts appears to be narrower than that for assets in other industries. If Government were to consider a wider definition there may again be additional funds to review.
119. As a result the Review team believes that, as in paragraph 111, unclaimed assets in this sector may potentially provide an additional source of funding and should be investigated further by Government after discussions with industry. The amount available from such a source is still uncertain, and it may not prove to be a “credible” source.
Close-Ended Funds
120. Close-ended funds include investment trusts, venture capital trusts and split capital trusts. These investment companies are listed companies with a share price quoted on a recognised stock exchange. An investment company’s assets consist of shares and securities, and an investor’s money buys shares in the investment company. Closed-ended means that the number of shares in issue is fixed. The price of the shares is then determined not just by the value of the trust’s assets, but also by levels of supply and demand in the market.
121. Investment trusts are entitled to retain some investment income to pay future dividends but they are not allowed to retain more than 15 per cent of their eligible investment income – this is a condition of the tax approval rules for investment trust companies.
122. Closed-ended investment companies are regulated differently to their open-ended equivalents. As listed companies, they are governed by the Listing Rules which are administered by the UK Listing Authority (part of the FSA).[173] They must also be operated in line with their Memorandum and Articles of Association. The FSA are currently consulting on changes to Chapter 15 of the Listing Rules which deal with investment companies.
123. As the rules and procedures for investment companies are the same as for other listed companies, the Review team understand that lost shareholdings and unclaimed distributions in this area should be treated in the same way as for other unclaimed shareholder assets. In light of this, and with reference to paragraph 111, closed-ended funds might theoretically provide a new source of funding and should be considered further by Government.
Cash balances of investment banks
124. In investment banks and brokers with client money assets, unclaimed balances arise in institutional trading on behalf of clients. Outstanding amounts could remain unclaimed over many years. Such funds were previously subject to regulation by the FSA under the client money rules[174] and, unless funds could be reunited with the original owner, the rules did not permit them to be moved.
125. From 2003-2007, the Balance Foundation oversaw the release of an estimated £8 million in funds from unclaimed assets within investment banks using a voluntary release mechanism.[175] Targeted funds were only six years old. FSA rules were amended to allow this to happen.
126. We understand the Balance Foundation was wound up during the course of 2007. However, the Review team believe that Government should consider investigating the underlying mechanism to establish if the value realised might prove a “credible” source in relation to FAS liabilities.
Gambling winnings
Unclaimed winning bets
127. Individuals who gamble with bookmakers could lose their betting ticket, or forget about the bet and not realise that they have won. Unclaimed winning bets with bookmakers are often known as ‘sleepers’.
128. The Gambling Act 2005 contains the legislation relevant for bookmakers, but it does not contain any legal mechanism for the state to claim unclaimed prizes from betting or gaming to be used for another purpose, and there is no licence condition that requires bookmakers to give away unclaimed winnings.
129. For on-course bookmakers (horse racecourses and greyhound tracks), there were rules governing circumstances where a winning bet is not claimed under the National Joint Pitch Council (NJPC) Rules,[176] but these ceased to be in force from September 2007 when the Gambling Act 2005 was implemented. The Gambling Act 2005 is silent with regards to unclaimed winning bets, but under Rule 16 of the previous NJPC rules, where a bet was not claimed the bookmaker had to leave the outstanding amount due on the winning bet with the Betting Ring Manager, together with details of the terms of the bet and the receipt number. After a period of one month if the bet remained unclaimed the winnings were returned to the bookmaker by cheque, however if it was subsequently claimed at a later date it would still be the liability of the bookmaker.
130. For off-course bookmakers (betting shops), the Review team understands that most shops have a ‘significant income’ from unclaimed winning bets, which are held for a time (usually specified in the shop’s rules) and then treated as void.[177]
131. In the case of pool-betting, such as with Littlewoods and Vernons the Gambling Commission have published Codes of Practice for Operators of Remote Pool Betting which states that “Licensees or any person they authorise to offer pool betting on their behalf under authority of section 93 of the Act must publish their rules relevant to…the period of time in which a winning bet may be claimed from the pool operator.”
132. Littlewoods have told us that prizes are paid (by cheque) on a weekly basis and that because they hold name and address details for each pools player they can pay them directly when they win. This is a different arrangement to the Lottery or a betting shop where only a bet reference number or bar code is held and the winner has to claim their prize in order to receive their winnings. For this reason there are unlikely to be “credible” amounts of unclaimed winnings within pool-betting and this area should be disregarded.
133. Further to more detailed investigations as to the amounts that may be realised, the Review team believes that these unclaimed winnings from gambling are a theoretical source of alternative funding that Government might investigate further, however we note that legislative changes are likely to be required if this is pursued.
Customer Payments
134. A business whose systems and resources cannot handle the number of transactions presented to it for processing can become overwhelmed and unable to apply payments adequately. This can give rise to types of customer payments going unclaimed. These include:
• duplicate payments;
• customer overpayments;
• unallocated cash - payments for which neither the customer nor the invoice or subscription can be identified; and
• credit notes not taken – where legitimate credit notes have been issued, but the customer has not applied the credit to any payment.
135. Where these unclaimed amounts exist, the Review team believes that business should return these amounts to the customer, particularly where both the customer and invoice or subscription can be identified. If Government were to consider this area as an alternative source of funding, companies may be more likely to do so.
136. Where the customer cannot be identified and these amounts cannot be returned, the Review team understand that some companies allocate this money to miscellaneous profit after a period of time.
137. The Review team believes that while they may be a theoretical source of alternative funding, further investigation would be required to determine whether these amounts could act as a “credible” source of funding.
Further unclaimed assets
138. The Review team is aware that other countries look at an even more extensive range of unclaimed assets than we have covered here. Some such assets include: travellers’ cheques (whether uncashed, lost, or forgotten); safety deposit box contents; unpaid wages; air miles; and royalties. The US State of Vermont is listed at Annex K as an example of such an extensive list.
139. There may be potential sources of alternative funding within these further types of unclaimed assets, but we have not investigated these further sources in any detail and believe it is unlikely in practice that any amounts available would be “credible”.
140. We wish to make clear that it is not the role of the Review to recommend whether Government should choose to legislate to access these funds or whether, if they do, such monies raised should go to support FAS; rather it is our role to identify the existence of these alterative sources of funds.
Chapter 7: Pension schemes with solvent employers
Main findings and recommendations
• The Review team considers that inclusion of schemes that have a compromise agreement in place, and the removal of the insolvency cut off date are both sensible developments.
• During the course of the Review, another 19 schemes with compromise agreements have come forward to be considered for entry in to the FAS.
• Following our interim report we collected more information between July and September on the circumstances of particular schemes that are winding up where there is a solvent employer.
• Questionnaires were issued to 390 schemes. 241 were returned in various degrees of completion; a response rate of 62 per cent.
• There are an estimated 162 pension schemes with around 11,000 members, in addition to those with compromise agreements already included within FAS, where the sponsoring employer did not undergo an insolvency event but members have lost pension amounts similar to those suffered by FAS members. There is no reason to expect the employers concerned to support these underfunded schemes.
• Six per cent of those schemes that responded indicated that negotiations with the employer to increase the level of scheme funding or to provide some alternative form of compensation to members were still taking place.
• The Review team also received representations from a small number of schemes that fall between the FAS and the PPF and are, therefore, ineligible for assistance. We have asked DWP to investigate the circumstances of these schemes further.
• The evidence which we have reviewed indicates that, in general, there is no material distinction between those schemes which have wound up underfunded with a solvent employer where a compromise agreement is in place and those schemes where no compromise agreement has been reached but any debt paid by the employer was insufficient to enable full benefits to be provided to the members.
Our Terms of Reference and how we have interpreted them
1. The primary focus of the Review has been to examine how best use can be made of the residual assets in those pension schemes that are eligible for assistance from the Financial Assistance Scheme. Eligible schemes include those defined benefit pension schemes that started winding up between 1 January 1997 and 5 April 2005 as a result of the sponsoring employer becoming insolvent and schemes where, in the same period, agreements were signed to compromise pension scheme debt in order to prevent an employer insolvency.
2. A further objective for the Review team relating to scheme eligibility was “To determine whether there are other pension schemes (in addition to those with compromise agreements) where although the sponsoring employer did not undergo an insolvency event, it would not be reasonable to expect the employer to have a continuing responsibility for supporting an underfunded scheme.” In considering whether or not it would be “reasonable” to expect employers to continue to support these underfunded schemes we have also considered the Government’s argument that employers have a continuing ‘moral obligation’ in this respect.
3. The scope of the Review excluded “schemes that were wound up by a solvent employer; schemes that are eligible for the PPF, or schemes that wound up prior to 1997”. However, it became apparent very early on that the Review team would be unable to meet the objective set out in paragraph 2 above without considering the broader context of underfunded schemes that were wound up with a solvent employer, particularly those where no compromise agreement is in place.
4. In our interim report we clarified this point further by explaining that our main objective in relation to any such schemes “is to investigate whether it is possible to establish any clear delineation between the different types of schemes that are winding up where there is a solvent employer.”[178] Our findings are set out below.
Current eligibility for FAS and recent changes
5. FAS was set up to provide assistance to members of qualifying schemes which started winding up underfunded between 1 January 1997 and 5 April 2005 and where the employer has been unable to make up the shortfall because it is insolvent or no longer exists.
6. Government subsequently announced[179] a further extension[180] to FAS to cover members of schemes that began winding up within the same timescales set out above, where a compromise agreement is in place, and where enforcing the full statutory debt against the employer would have forced the employer into insolvency. This extension was originally expected to provide help to around 8,000 scheme members in 17 schemes. During the course of the Review, another 19 such schemes have come forward to be considered for entry in to the FAS, and two of the schemes in the original list of 17 are now FAS qualifying schemes having met other entry criteria.
7. In our interim report,[181] we made clear that “The Review team agrees with Government’s plans to extend FAS to enable the inclusion of schemes where a compromise agreement is in place”. We therefore regard this issue as closed.
8. On 24 July 2007, during the debate on the Pensions Bill, Ministers also stated “…we have decided to accept the review's recommendation that we should not enforce a cut-off date for employer insolvency”.[182],[183] We believe this is a sensible way forward. Regulations[184] to introduce this change were laid on 20 November 2007.
The role of the Review team
9. Government has previously stated that it “…does not believe it is right that solvent employers should be absolved of their pension promises by the Financial Assistance Scheme” [185] Government has also been clear that an extension of the scheme to cover all solvent employers would have attached risks; in particular, Government stated “There is also an important issue of moral hazard at stake. We know of many circumstances where trustees are negotiating funding settlements with solvent employers through the wind up process of their scheme; we must not make these negotiations irrelevant, removing any incentive for the employer to meet their moral obligations, by including these schemes within the scope of the FAS.” [186]
10. The key question for the team was, therefore, whether it is feasible to draw a distinction between the following schemes where members may have lost significant amounts of pension entitlement:
• those schemes which have wound up underfunded with a solvent employer where a compromise agreement is in place, without which the employer would have gone insolvent; and
• those schemes where no compromise agreement has been reached, but any debt paid by the employer was insufficient to enable full benefits to be provided to the members.
Information gathering
11. We noted in our interim report that the Review team felt there was insufficient information available on solvent employer schemes, which started winding up underfunded between 1 January 1997 and 5 April 2005 where no compromise agreement is in place. We considered it important to try and fill this knowledge gap to ensure that any findings are objective and, where feasible, supported by factual evidence.
12. To help attempt to answer the questions at paragraph 10 and understand any differences between these two groups of schemes and the circumstances of members in those schemes the Review team launched a data collection exercise, which was administered by the FAS Operational Unit.
13. The exercise focused on obtaining information on the:
• numbers of solvent employer schemes with no compromise agreement in place winding up underfunded in the period 1 January 1997 and 5 April 2005;
• numbers of members within those schemes who are likely to suffer a reduction in their expected pension levels;
• funding levels of these schemes and the extent of any shortfalls;
• ability of the scheme to meet its liabilities; and
• the extent of ongoing negotiations with the employer to increase scheme funding levels.
14. To complement this data collection exercise, the Review team explored a number of other information channels, described in the following paragraphs, with the aim of constructing a clearer picture of the potential numbers of schemes, members and their circumstances.
15. Building on the invitation in our interim report for trustees and scheme members to provide information on their schemes we issued a final call, via a DWP press notice[187] on 6 September 2007, for them to contact the Review.
16. As a result of the publicity, the Review team continued to receive representations from trustees, administrators, scheme members and others. A number of ‘new’ pension schemes with solvent employers were identified and these were subsequently invited to take part in the data collection exercise. Annex M contains a summary of the representations received.
17. The Review team made direct approaches to the Pensions Advisory Service, bulk annuity providers and a number of actuaries to seek additional supporting information. In addition, we contacted the Pensions Regulator who provided some basic information from their register[188] on a number of schemes that had started winding up between 1 January 1997 and 5 April 2005 where the employer was shown as actively trading. These schemes have been included in the analysis set out below where sufficient information was available to do so.
Data collection exercise
18. The data collection exercise took place between July and September 2007 and involved contacting 390 schemes.[189] In the main it sought scheme - related information by means of a questionnaire[190] on key areas such as employer solvency status and scheme funding levels.
Response rate
19. Questionnaires from representatives of 241 schemes, including some from employers, were returned in various degrees of completion – some with very little information and others with partial or full information – representing a response rate of 62 per cent. Of the 241 returns:
• 172 were from schemes with solvent employers;
• 39 were from schemes with insolvent employers; and
• 30 were from schemes where the solvency status was not provided.
20. For those 30 schemes where the solvency status was not provided the majority of schemes were either unable to provide any information on the status of the employer, or they chose not to on the basis that the scheme was currently excluded from FAS and unlikely to qualify in the future. Where there is information available to suggest that specific schemes appear to be potentially eligible for FAS the FASOU has contacted them and invited them to make an application.
21. Of the 390 schemes contacted, 106 were subsequently excluded from our analysis where information was available to show that the schemes were either likely to be ineligible for FAS or likely to be included in future as a result of the extension of FAS to schemes with compromise agreements. The following schemes were excluded:
• solvent employer schemes where a compromise agreement is in place or likely to be in place once negotiations are completed;
• insolvent employer schemes;
• schemes that started to wind up before 1 January 1997;
• schemes funded to full buy out levels or above; and
• schemes that had provided sufficient information to suggest that they would not be eligible for FAS, for whatever reason.
22. Membership data are also available, either from the questionnaire or through information already held by the FAS Operational Unit, for 162 schemes which shows that these schemes contain over 11,000 scheme members.
Scheme funding and membership information
23. Defined benefit pension schemes are required to have a specified level of funding in order to meet their liabilities. The level of funding required has varied over time and further information is contained in Annex E.
24. When a defined benefit pension scheme winds up underfunded, i.e. where the scheme's liabilities exceed its assets, the shortfall[191] becomes a debt owed by the sponsoring employer to the trustees of the scheme as explained in Annex G.
25. A total of 175 schemes, containing 11,695[192] deferred and active members, provided information on the funding basis used to calculate the debt payable by the employer as set out in Table 7. Although some schemes provided funding information, there was insufficient data on which to estimate the average funding levels. The schemes shown as giving a funding level relative to full buy out did not necessarily pay a ‘debt’ measured on that basis – it is rather the basis on which they provided data on the actual funding level of the scheme.
|Table 7: Scheme funding level bases for group and scheme member numbers |
|Funding level basis |Number of schemes |Percentage of responses|Number of members[193] (and |
| | | |percentage of total) |
|Minimum Funding Requirement (MFR) |54 |31 per cent |6,315 (54 per cent ) |
|Full buy out |106 |61 per cent |4,385 (38 per cent) |
|MFR and full buy out both quoted |2 |1 per cent |476 (4 per cent) |
|Other |13 |7 per cent |519 (4 per cent) |
|Total |175 |100 per cent |11,695 |
Note: numbers not adjusted for non response and includes all schemes that responded
Additional schemes with compromise agreements
26. Following the Government’s announcement to extend FAS to those schemes where a compromise agreement is in place, and where enforcing the full statutory debt against the employer would have forced the employer into insolvency, an additional[194] 19 schemes have come forward. Less than half of these schemes gave scheme membership numbers.
27. Whether or not these schemes will eventually become qualifying schemes for FAS purposes will depend on the scope of the regulations.[195] Scheme representatives will also be required to provide any necessary supporting evidence. While it is clear that the majority of schemes coming forward have entered into a compromise agreement[196] it is not known whether, in all cases, enforcing the debt against the employer would have resulted in the employer being forced into insolvency.
Other schemes
28. Despite Government’s intentions to design a system where schemes whose sponsoring employer has become insolvent are either eligible for FAS or the PPF, it appears that a few schemes may have fallen into unintended gaps between the schemes.
29. The Review team has had representations from members of a scheme who advised us that the scheme started to wind up a few months after the FAS deadline of 5 April 2005. We were advised that in all other respects this scheme would qualify for support from FAS – the employer had entered into a members’ voluntary liquidation before 5 April 2005, which is a qualifying insolvency event for FAS purposes but not for the PPF. Even though the scheme started to wind up after 6 April 2005, it would not be eligible for help from the PPF unless a qualifying insolvency event had occurred in relation to the scheme’s employer.
30. In a similar case, we received representations from a scheme where the sole employer involved with the scheme entered into a members’ voluntary liquidation before 5 April 2005 but wind up started over 18 months later in 2006. For the same reasons given above, the scheme would not meet the current qualifying conditions for entry into either the FAS or PPF.
31. The Review team feel that whilst these decisions are in line with law, they may not be in line with the intended policy. We believe that these schemes, and any others with similar circumstances that fall between the FAS and the PPF, should be considered as to whether they should be eligible for assistance. We have, therefore, asked DWP policy officials to consider this matter further and the Department is currently examining the options available for those schemes which appear to be ineligible for either FAS or PPF protection.
32. Another representation involved a scheme that should have started to wind up when the employer ceased making any contributions in 1993, as this would have been an automatic wind up trigger, but there was no resolution by the trustees to defer wind up. We understand that this scheme is deemed to have started winding up in 1993, which means that it would be excluded from both the FAS and the PPF. However, given the winding up date for this scheme it is outside the scope of the Terms of Reference for this Review.
Employers’ responsibility for supporting underfunded schemes
Key issues for investigation
33. In investigating the key question highlighted at paragraph 10 we looked at whether it is feasible to draw a distinction between:
• those schemes which have wound up underfunded with a solvent employer where a compromise agreement is in place, without which the employer would have gone insolvent; and
• those schemes where no compromise agreement has been reached but any debt paid by the employer was insufficient to enable full benefits to be provided to the members.
34. In this respect it is also helpful to look at the different positions of defined benefit schemes with a solvent sponsoring employer, that started winding up underfunded between 1 January 1997 and 5 April 2005, whose members might find themselves facing pension losses. These are discussed in more detail later on but cover the following types of situations:
• schemes where a compromise agreement is in place;
• schemes, in specific circumstances, where the employer entered into a members’ voluntary liquidation;
• schemes where the employer undergoes a relevant insolvency event for FAS purposes but outside the existing cut off date; and
• other schemes not included above and currently outside the scope of FAS.
35. Whether or not it would be “reasonable” in certain circumstances to expect the employer to have a continuing responsibility for supporting an underfunded scheme is more difficult to answer as it depends on how this is defined and what factors are taken into account.
36. The first test of whether it is “reasonable” is to look at the legal obligations in place at the time the scheme started to wind up and how far the employer has met their obligations. The second might be how far the employer is able or, importantly, willing to meet their moral obligation to support the pension scheme. However, regardless of the type of test that might be applied, the fact remains that unless there is a legal obligation on employers to “have a continuing responsibility for supporting an underfunded scheme” it is unlikely that many will provide additional financial support. Ultimately it is for the Government to decide how it would enforce this responsibility on employers.
Schemes with compromise agreements
37. Compromise agreements refer to specific agreements between the trustee(s) of a pension scheme and the employer in relation to the amount of debt owed to the scheme. When a defined benefit occupational pension scheme starts to wind up and its assets are less than its liabilities, an amount equal to the difference is treated as a debt due from the employer to the trustees of the scheme. Legislation does not require trustees to enforce the debt. Under the Trustee Act 1925, they may reach a compromise agreement with the employer, where they accept an amount less than the debt owed by the employer. Trustees also have a fiduciary duty to act in the interests of all scheme members and beneficiaries to negotiate the best settlement that they can.
38. The level of debt payable by solvent employers has varied over time (see Annex G) and was increased from the shortfall relative to the MFR level to full buy out from 11 June 2003, which means that the debt on the employer is now calculated on the basis that the scheme should be able to meet the full costs of winding up and the full benefits that scheme members have accrued and expect to receive.
39. By extending eligibility to schemes where there is a compromise agreement is in place the Government is, in effect, stepping in and helping in those cases where the employer could not have been reasonably expected to make any further contributions to the pension scheme because of the financial difficulties it was in at the time that the compromise agreement was reached. Since then, it may be that the financial circumstances of those employers have changed.
40. With hindsight, had trustees known at the time of entering into negotiations with solvent employers on recovering the debt for their schemes that the scope of FAS would be extended so significantly they might well have decided to pursue a different course of action. Had a compromise agreement not been entered into the only option would have been to force the employer into insolvency unless the employer was able to meet the cost of a full buy out on whatever basis was appropriate at the time.
41. Regulations have introduced the extension to include schemes where there is a compromise agreement in place.
Members’ Voluntary Liquidation
42. Even where there was a full buy out requirement three schemes in this position that started to wind up on or after 11 June 2003 reported, as part of our solvent employer data collection exercise, that they are funded below the statutory requirements. One of the circumstances where this situation might have arisen is where the employer had entered into a members’ voluntary liquidation (MVL) which would have resulted in employers for these schemes having to meet the debt due calculated on the MFR basis rather than the full buy out basis.
43. Annex G provides more detail and sets out the legislative changes that were made from 15 February 2005[197] to close this loophole and remove the risk of solvent companies avoiding the full buy out cost by entering into a MVL. Schemes where the employer entered into a members’ voluntary liquidation, or do so in the future, and that started winding up underfunded between 1 January 1997 and 5 April 2005 are already potentially eligible for FAS.
Insolvency event outside the current cut off date
44. The Review team welcomes the Government’s new regulations[198] to extend indefinitely the time period by which an employer must have an insolvency event in order for their scheme to be eligible for FAS.[199] Even if FAS is not extended to members of all solvent schemes, this provision, if approved by parliament, should ensure that those schemes with solvent employers that started to wind up between 1 January 1997 and 5 April 2005 and which undergo a relevant insolvency event in the future are not excluded from FAS, provided that they can show a link between the wind up of the scheme and the insolvency event of the employer.
45. Winding up a pension scheme can be a protracted process for a number of reasons. Annex F provides further information on this and the DWP report “Speeding Up Winding Up Of Occupational Pension Schemes”[200] published in November 2006 set out the Government’s proposals for speeding up this process. The Pensions Regulator has a key role in facilitating wind up where it believes that progress is being hindered and wind up is unlikely to be completed within a reasonable timescale.
Schemes outside the scope of the FAS
46. Members of schemes that are not covered by the Government’s proposals mentioned above, or by the announced extension,[201] are in a very different position. In particular where the debt payable by the employer was set at the Minimum Funding Requirement[202] level, there was a great likelihood that members would suffer financial losses as it was not designed to provide sufficient pension assets within schemes to meet the full costs of securing member benefits for deferred members.
47. The impact of the MFR on scheme funding was highlighted by the Parliamentary Commissioner for Administration, in her report published last year,[203] which found, in relation to the MFR, that “….where an employer discharged in full its legal liabilities in relation to scheme funding this might still have led to significant – but lawful – shortfalls.”
48. In its response to the House of Commons Public Administration Select Committee[204] the Government has acknowledged that it was legal for employers to close a pension scheme funded to Minimum Funding Requirement levels, even if the benefits promised by the scheme could not be secured “The MFR was not … designed to ensure …that those benefits would be secured in full if the scheme wound up.”
49. Government also acknowledged that trustees and members have no legal means by which they might ensure full benefits are paid – “No legal recourse would be available in relation to the employer debt legislation for pre 11 June 2003 wind ups, if solvent employers had met their legal obligation to pay the debt calculated in accordance with the legislation.”
50. So, although it is clear that employers acted within the parameters of the regulatory framework in place at the time and met their legal obligations, a consequence of this is that some pension scheme members have lost part of the pensions they were expecting. In these circumstances, scheme members have no legal grounds on which to pursue the employer to make good any loss of expected benefits.
51. Information from the data collection exercise suggests that in a good number of schemes that started to wind up between 1 January 1997 and 5 April 2005 the employer debt was set at MFR levels. It is not possible to provide exact numbers for these types of schemes as the scheme funding position is normally assessed on a three-yearly cycle, which means that the valuation measure may be different from the funding level at which the employer debt is set. Nevertheless, substantial numbers of scheme members in this type of scheme appear, through no fault of their own, to have lost a significant proportion of their expected pension.
Negotiations with employers
52. In our interim report, we noted that we were aware of the argument that simply extending FAS to cover all pension schemes which wound up underfunded with a solvent employer would allow some employers to avoid their moral responsibilities and render ongoing negotiations irrelevant.[205]
53. It is also fair to say that there has been a far from universal acceptance of the Government’s position to persuade employers to meet their moral obligations with the Public Administration Select Committee stating Government “…is using the position of scheme members to exert pressure on employers. This is not acceptable. The losses suffered by scheme members are identical, whether or not an employer still exists. The employers’ actions might have been deplorable, but they were certainly legal.” [206]
54. As part of our data collection exercise we asked for details of any ongoing negotiations with the employer, for schemes in wind up, to increase the level of scheme funding or to provide some alternative form of compensation to members. From the responses we received, only 15 of these schemes, six per cent of the total who responded, indicated that negotiations were still taking place.
55. This suggests that relatively few employers are likely to fund any shortfall in the pension scheme beyond the minimum statutory requirement. The Review team is aware that there are a limited number of employers who have provided funding beyond their statutory requirements, for example where wind up started before the change to the debt regulations but where the employer funded the scheme to full buy out levels.
Improving scheme funding levels
56. We understand that trustees are unlikely to have protracted negotiations with employers to improve funding levels for particular schemes where these would not prove fruitful and where they would deplete scheme funding levels even further. While this might be viewed, at best, as disappointing, employers have nevertheless met their legal obligations.
57. However, this does not mean that employers or trustees should be absolved from continuing their negotiations on how to improve the funding levels of those pension schemes for which they have responsibilities. If the Government was minded to extend FAS to those schemes with solvent employers currently outside the scope of FAS it would be important, perhaps through legislation, to avoid creating any loopholes for employers to pass their pension scheme liabilities on to taxpayers where avoidable.
58. But we do not expect many such employers to provide further material support where they have met their liabilities, particularly when the debt is calculated on a full buy out basis.
59. We believe that members of schemes which are sponsored by a solvent employer are in a broadly similar position to those in schemes where the employer has undergone an insolvency event. In our interim report[207] we stated that a substantial majority of eligible FAS schemes were above 75 per cent funding on the MFR basis with over a quarter of schemes reporting funding on this basis being above 100 per cent. The data collection showed that of the solvent schemes reporting funding on an MFR basis, most (around three-quarters) reported funding levels in excess of 90 per cent, with around half of all the schemes that reported on an MFR basis saying funding was in excess of 100 per cent. This means that there is very limited scope for the legal debt to make an impact on the members’ entitlements.
Employers’ moral obligations to support their pension schemes
60. As mentioned in paragraph 55 we are aware that a very small number of employers have provided funding beyond their statutory requirements. But in the main, employers appear to be reluctant to provide what they see as an ‘additional’ injection of funding into the pension scheme over and above the statutory minimum set out in legislation.
61. During the course of the Review we talked to a number of trustees, pension scheme administrators, scheme managers and scheme members who confirmed that some of the most common triggers for solvent employer schemes starting to wind up include:
• major restructuring or takeovers within companies resulting in the new employer being unwilling to support the pension scheme for ex-employees (see case study in Box 3 below);
• employers ceasing to contribute to their pension schemes thus triggering scheme wind up by the trustee(s) in accordance with the scheme’s rules (see case study in Box 4 below); or
• the financial position of the company being such that had trustees enforced the debt on the company in full this would have resulted in company insolvency (see case study in Box 5 below).
Box 3: Solvent scheme case study 1
The scheme
This case study relates to a financial sector scheme where the principal employer continues to take responsibility for all the active members, who have been moved into a new scheme. The scheme comprises all the deferred members in this closed scheme and started to wind up at the end of 2000.
The employer
The employer is solvent and performing well financially.
Reason for wind up
During a number of restructures and mergers over the years the new principal employer was able to negotiate taking responsibility only for existing employees following a change in company ownership.
Likelihood of employer providing funding over and above statutory debt
Unlikely. The employer does not consider that they are liable for funding deferred members of a closed scheme even though they could afford to pay more. The scheme is funded up to the relevant statutory debt level.
Box 4: Solvent scheme case study 2
The scheme
This particular case study relates to a number of schemes where industry wide arrangements are in place. Although subject to an industry wide arrangement, the individual schemes have very different scheme rules and benefit structures. Most of the schemes started to wind up between 1997 and 2003.
The employers
The employers’ financial circumstances vary considerably - all are currently solvent but to different degrees.
Reason for wind up
Although in some cases there was limited restructuring, a general downturn in the industry and consequent impact on the employers’ economic position forced most of the employers to stop contributing and trustees had no option but to wind up these schemes.
Likelihood of employer providing funding over and above statutory debt
Unlikely in most cases. “Smaller local employers in tight knit communities might be swayed by the moral responsibility arguments.” Larger employers are not persuaded given their uncertain financial position but trustees are still pursuing employers where appropriate and where this does not create an unacceptable drain on the pension fund.
Box 5: Solvent scheme case study 3
The scheme
This case study relates to a manufacturing sector scheme. A large proportion of the scheme’s members are still employed by the company. The scheme started to wind up towards the end of 2001. A compromise agreement has been in place for some time and it appears that scheme members were unaware of the Government’s proposals to extend FAS to schemes with compromises agreements where enforcing the full statutory debt against the employer would have forced the employer into insolvency.
The employer
The employer is solvent but has been in some financial difficulty since the late 1990s when it was first sold. It has since been actively seeking a buyer for the company, which has now changed ownership.
Reason for wind up
Pension scheme closed as, at that time, had the trustees enforced the debt on the company in full this would have resulted in company insolvency.
Likelihood of employer providing funding over and above statutory debt
Unlikely. A compromise agreement is in place and the employer has now paid the agreed debt.
62. One trustee told us that “the current generation of owners don’t want to know [about these pension scheme members]”. “They won’t pay for the past as current shareholders come first. There is no question of moral responsibility for them”. Another said “very few employers would go further than the legal minimum”. And an administrator told us that “employers make a choice about what to put in to schemes and then try and blame trustees for the poor level of scheme funding”.
63. So although employer actions and intentions appear mixed, it seems that very few employers could be encouraged to pay more than the statutory minimum on a voluntary basis. Even where the current employer is financially buoyant, as in the first case study, the ‘new’ employer considers their responsibility to support any previous closed pension schemes as being discharged following restructure of the company. And this may indeed be the case, legally if not morally, depending on the nature of any contractual arrangements in place at the time of the take over or restructuring of the company.
64. In some circumstances, because of the length of time it takes to wind up a scheme fully, the link between the sponsoring employer and the pension scheme weakens over time. We have been told that this is particularly the case where the employer has changed, for example following a restructuring of the business.
65. Even where the business remains unchanged, an employer’s financial circumstances can change quite significantly over time. In some cases, for example where a compromise agreement is in place, the employer may have been on the verge of insolvency and unable to meet their full liabilities in respect of the debt owed to the pension scheme (as was the case for the employer in the third case study). At the time, the trustee may have chosen not to enforce the full debt and accept a lower amount rather than making the company insolvent even though the employer’s financial circumstances might have improved substantially some years later. In this respect schemes with solvent employers currently excluded from FAS appear little different from those schemes with compromise agreements in place.
Conclusions and recommendations
66. Government considers employers have a moral obligation to meet their pension promises. Employers also have a legal obligation to their scheme members.
67. Our investigations suggest that employers have met their legal obligations, but most have not fulfilled their moral obligations.
68. From the perspective of an individual scheme member the evidence which we have reviewed indicates that there is, in general, no material distinction between:
• those schemes which have wound up underfunded with a solvent employer where a compromise agreement is in place, without which the employer would have gone insolvent; and
• those schemes where no compromise agreement has been reached but any debt paid by the employer was insufficient to enable full benefits to be provided to the members.
Annex A: FAS Review terms of reference
Review of the use of assets in FAS pension schemes
Having now settled the public expenditure support for these schemes, the Secretary of State for Work and Pensions will establish a review to examine how we make best use of the assets in pension schemes that are winding up underfunded with an insolvent employer or who come within the extension for solvent employers whose schemes signed a compromise agreement. The intention of the Review is to determine how these or other sources of non-public expenditure funding (that have not already been allocated) could be used to increase assistance for affected scheme members. The Review will be open to any suggestions from interested and concerned parties.
Scope
• The Review will focus on those pension schemes that are eligible for assistance from the Financial Assistance Scheme. That is, those schemes that started winding up between 1st January 1997 and 5th April 2005 as a result of the sponsoring employer becoming insolvent.
• The Review will include those schemes where, in the same period, agreements were signed to compromise pension scheme debt in order to prevent an employer insolvency.
• The Review will (other than the above) not include schemes that were wound up by a solvent employer; schemes that are eligible for the PPF, or schemes that wound up prior to 1997.
Objectives
• To determine the potential value, current stewardship and current allocation to different asset classes of the assets that were the property of the relevant pensions schemes on their commencement of wind up, in order to assess what assets might be available.
• To make recommendations on the optimal use of these assets, bearing in mind:
o The optimal economic use of these assets for meeting the liabilities
o The implementation issues – ensuring any proposals for asset reallocation or change of stewardship are feasible
o The ongoing administrative issues and costs involved in any proposals
o The transfer of risk, including to the Government.
• To determine whether there are other pension schemes (in addition to those with compromise agreements) where although the sponsoring employer did not undergo an insolvency event, it would not be reasonable to expect the employer to have a continuing responsibility for supporting an underfunded scheme.
• The Review will present appropriate risk management structures for any proposals, to ensure the pension scheme member benefits are no less protected than currently and that any risks to the wider taxpayer are minimized.
• The Review must ensure that the benefits of all members of these Pension schemes should be taken into account
• The Review should not propose solutions that would subject Government on behalf of the taxpayer to the management of significant incremental risk.
• Other credible non-tax funding sources should be investigated, particularly where contributions to the scheme from external sources are deemed possible
• The Review should engage all relevant stakeholders on the feasibility of any proposals.
• The Review must ensure the speed of payment of assistance to scheme members is not unduly impeded.
Timing
The Review will commence today, provide an initial view in the summer and make a report to the Secretary of State by the end of 2007.
Annex B: The Review team
Review team lead
• The Review is led by Andrew Young, who is a consulting actuary at the Government Actuary’s Department
Review team – external experts
• Alan Higham was most recently a Non-Executive Director of Higham Dunnett Shaw (HDS).
• Ashok Gupta is a director on the Board of Pearl Group Limited.
• Jane Samsworth is a partner at the international law firm Lovells.
• Chris Martin is Managing Director at Independent Trustee Services (ITS) Limited.
• Professor David Blake is Professor of Pension Economics at Cass Business School and Director of the Pensions Institute.
• Angela Hills is an administrator for Mercers Human Resource Consulting Limited.
• Martin Clarke is the Executive Director of Financial Risk at the Pension Protection Fund.
Annex C: Interim report findings
1. The main findings and recommendations from the Review’s interim report[208] were as follows.
Funding and assets
2. There were around £1.7 billion in assets available in the 525 FAS eligible schemes that have yet to complete wind up; approximately £1.3 billion of these assets in schemes that have yet to commit anything to annuitisation and around £0.4 billion remaining in schemes that have started to annuitise.
3. These assets are unequally distributed, with a large number of schemes having relatively little and a small number having a large asset share. The vast majority of the remaining assets are held in ‘gilts and fixed interest’.
4. Scheme funding levels vary widely, but some FAS schemes are relatively well funded and therefore, given the statutory priority order, likely to be able to secure the majority of scheme benefits for pensioner members. Those affected by scheme benefit cut backs are mainly deferred members.
Use of assets
5. The Review team considered that the process of annuitisation on a scheme by scheme basis was unlikely to offer the best use of residual scheme assets.
6. It is probable that additional benefits, over and above those available from the current arrangements, could be secured through either increased scale or scope. For example, pooling assets and using them for a bulk annuity purchase across FAS schemes should bring increased economies of scale which might then be further increased by changes to the FAS benefit structure or other management of liabilities, alternative methods of risk sharing or the creation of a managed fund similar to that operated by the PPF.
7. These options raise a number of complicated legal, administrative and operational issues that required further investigation to ensure that they deliver the most appropriate solutions for all parties.
Other sources of funding
8. Having identified a number of potential non-tax funding sources the Review team would conduct further investigation, involving Government and industry as required, to determine the viability (both legally and operationally as well as their likelihood of providing sufficient funds) of some of these options.
9. The Review team did not consider that any voluntary contributions, ‘windfall’ taxes, an extension of the PPF or tPR levies, the National Insurance Fund ‘surplus’, defined benefit pensions, ‘orphan’ assets or NS&I ‘unclaimed assets’ were credible alternative funding sources.
10. Unclaimed personal pensions and life assurance policies might in principle provide a source of funding; there would however be substantial legislative and administrative barriers to establishing such a scheme, with a very uncertain income.
11. There may be additional funds available in further types of unclaimed assets and the Review team would investigate these further for the final report.
Solvent employers
12. The Review team believed that there were significant gaps in understanding around the circumstances of many solvent employers with pension schemes that have wound up underfunded. Further investigation and data collection would be undertaken to fill these gaps. The Review team would then consider whether it would be reasonable to expect these employers to have a continuing responsibility for supporting an underfunded scheme.
13. The Review team welcomed Government extending eligibility for FAS to those schemes that had a valid compromise agreement in place without which the sponsoring employer would have become insolvent.
14. The Review team recommended that Government did not action the cut-off dates for scheme insolvency events to avoid the exclusion of some schemes from FAS whilst our investigations were ongoing.
Annex D: The priority order
1. At wind up the order in which trustees satisfy scheme benefits through the use of the remaining scheme assets is defined by a priority order. This varies depending on whether the wind up started:
• before 6 April 1997;
• from 6 April 1997 but before 10 May 2004;
• from 10 May 2004 but before 6 April 2005; or
• from 6 April 2005.
Effect on FAS
2. The following paragraphs outline the provisions on priority orders during (and after) the FAS period. FAS schemes are governed by pre 6 April 2005 wind up legislation (dependent on the time they started to wind up) and priority orders. Pensioner liabilities (without future increases to pensions) in these schemes are generally either fully, or nearly fully, secured, normally leaving relatively few assets to provide for deferred members or pension increases.
Priority order pre 6 April 1997
3. For schemes where the winding up process started prior to 6 April 1997 the individual schemes rules dictate the priority order. There was no detailed statutory framework in place to allocate assets between different priority liabilities, except that all contracted-out liabilities ranked above non-contracted-out liabilities for non-pensioners. Usually, all pensioners' benefits (including increases) receive a high priority.
4. Given FAS covers schemes that started to wind up between 1 January 1997 and 5 April 2005 only 28, of around 700, FAS eligible schemes are affected by this. Of these, 21 schemes with around 3,000 deferred members and 1,300 pensioner members are still to complete wind up and seven schemes with around 1,200 members (evenly split between pensioners and deferred members) have completed wind up.[209]
Priority order from 6 April 1997 but before 10 May 2004
5. For schemes where the winding up started on or after 6 April 1997 but before 10 May 2004, the order of priority as laid down in legislation,[210] is broadly as follows:
a) pensions and other benefits bought by voluntary contributions;
b) certain pre-1997 insurance contracts;
c) pensions and other benefits already in payment (excluding increases to pensions);
d) accrued contracted-out rights (including safeguarded rights relating to pension credit, under the pension sharing on divorce legislation, and refunds of contributions for members with less than two years' pensionable service) (excluding increases to pensions);
e) pension increases on benefits in categories c) above;
f) pension increases on benefits in category d) above; and
g) other accrued benefits and future benefits relating to pension credits (including pension increases).
6. The majority of FAS schemes, 583 of around 700, are covered by this priority order. Of these, 443 schemes with around 79,000 deferred members and 34,000 pensioner members are still to complete wind up and 140 schemes with around 12,600 members (10,000 pensioners and 2,500 deferred members) have completed wind up.[211]
Priority order from 10 May 2004 but before 6 April 2005
7. The order of priority for schemes where the winding up started on or after 10 May 2004 but before 6 April 2005 can be found in The Occupational Pension Schemes (Winding Up) (Amendment) Regulations 2004 SI 2004/1140, and is broadly as follows:
a) pensions and other benefits bought by voluntary contributions;
b) certain pre-1997 insurance contracts;
c) pensions or other benefits already in payment (excluding increases to pensions);
d) the accrued rights of non-pensioners (excluding increases to pensions);
e) pension increases on benefits in categories c) above; and
f) pension increases on benefits in categories d) above.
8. Around one in 10 FAS schemes (72) are covered by this priority order. Of these, 70 schemes with around 20,000 deferred members and 12,000 pensioner members are still to complete wind up and only 2 schemes with a total of around 20 members have completed wind up.
Priority order from 6 April 2005
9. The order of priority for schemes where the winding-up started on or after 6 April 2005 can be found in section 73 of the Pensions Act 1995 and The Occupational Pension Schemes (Winding Up etc,) Regulations 2005 SI 2005/706, and is broadly as follows:
a) certain pre-1997 insurance contracts;
b) any liability to the extent that it does not exceed the corresponding Pension Protection Fund liability;
c) pensions and other benefits bought by voluntary contributions (not covered in b); and
d) any other accrued benefits.
10. The post April 2005 regime coincides with the introduction of the Pensions Protection Fund and therefore does not affect FAS schemes.
Annex E: Scheme funding regimes
1. The level of assets which defined benefit pension schemes are required to hold, and therefore their ability to meet their liabilities, has varied over time. In particular there have been three regimes, broadly covering the following periods:
• before 6 April 1997;
• from 6 April 1997 but before 30 December 2005; and
• from 30 December 2005.
Funding regime before 6 April 1997
2. Prior to 6 April 1997 there were no general legislative requirements on the level of assets a pension scheme needed to hold; this was decided in accordance with the scheme rules. Occupational schemes generally undertook regular, usually three-yearly, actuarial valuations to assess the adequacy of the scheme’s assets to meet its pension liabilities as they fell due. However, these actuarial valuations, generally carried out on the basis of long-term actuarial assumptions about the future, were usually based on the premise that the scheme would continue (an ‘ongoing’ valuation) rather than specifically providing protection in the event of the scheme’s discontinuance.
3. A key legislative requirement on scheme funding came with the introduction of contracting out in 1978. Scheme actuaries were given the statutory responsibility of certifying that contracted-out schemes had enough assets to meet contracted out liabilities and any liabilities ranking higher in the scheme's priority order (pensioners usually fell in this category). This was mainly to ensure that taxpayers would not have to make good shortfalls if schemes wound up without enough assets to pay the benefits the state would have provided.
4. However, for those pension schemes that had been in existence for a significant time prior to 1978 the contracting out portion was relatively small (since it was only earned after April 1978). Therefore, it was still possible for a scheme to be significantly underfunded, compared with the cost of providing the full benefits people might have expected to receive (through securing with an insurance company).
5. High profile cases in the early 1990’s, when pension scheme assets were used to prop up ailing companies, focussed attention on the lack of legislative protection for scheme members. The then Government’s response to the perceived inadequacies of the regime then in place included the introduction of the Minimum Funding Requirement (MFR) under the Pensions Act 1995.
The Minimum Funding Requirement - 6 April 1997 to 30 December 2005
6. The Minimum Funding Requirement (MFR) came into force from 6 April 1997. It required private sector[212] defined benefit pension schemes to hold a minimum level of assets, measured by reference to their liabilities assessed on a prescribed basis, and to restore any shortfalls against this minimum level within prescribed periods.
7. The MFR was never intended to be sufficient to ensure that all members' benefits could be fully secured[213] should the scheme wind up. It was intended to ensure that a scheme which was fully funded[214] on the basis of the MFR should have sufficient assets, in the event of it winding up, to fully protect pensions already in payment (by buying annuities), and to give younger deferred members a cash amount which, if placed in a personal pension, would give them at least an even chance - but not a guarantee - of, at retirement, getting benefits equivalent to those they would have received.
8. Legislation required the scheme funding position to be assessed through an actuarial valuation prepared by the scheme actuary, on at least a three-yearly cycle, in accordance with guidance provided by the UK actuarial profession and approved by DSS Ministers. Where an MFR valuation[215] showed a shortfall against the MFR basis, legislation required the deficit to be made good within specified periods. Shortfalls below 100 per cent of the MFR funding level had to be restored within five years (the period was later extended to 10 years), but any shortfalls below 90 per cent of the MFR funding level had to be corrected within one year (this period was later extended to three years). These requirements were subject to transitional provisions which initially allowed longer periods.
9. The MFR introduced, for the first time, a minimum required level for scheme funding, but trustees were still required to obtain regular actuarial valuations of their scheme. There were concerns, however, that some sponsoring employers may have begun to view the MFR as a ‘benchmark’, rather than a minimum funding underpin.
10. The actuarial basis for MFR valuations contained a number of actuarial assumptions,[216] and from the outset the actuarial profession kept this under review with a view to recommending changes if they felt they were necessary to realign the MFR with its intended strength.
Scheme specific funding - from 30 December 2005
11. The MFR was replaced with a scheme specific funding regime which came into effect on 30 December 2005 under the Pensions Act 2004. It requires private sector defined benefit pension schemes to meet a scheme specific statutory funding objective rather than a common funding measure.
12. This objective requires schemes to have sufficient, and appropriate, assets to cover their ‘technical provisions’.[217] This broadly means a scheme must have sufficient assets, on the basis of the actuarial methods and assumptions used, to pay its accrued pensions commitments as they become due.[218]
13. The regime allows funding arrangements to take account of the particular circumstances of each individual scheme, for example, schemes with a larger share of younger members (whose liabilities are not due for several years) may reflect this in their target level of ‘technical provisions’, taking into account a prudent assessment of the outcome from their investment strategy.
14. Pension scheme trustees, having taken advice from the scheme actuary, are generally required to agree with the sponsoring employer a strategy for funding the pension commitments and for correcting any funding deficits. These are set out in a statement of funding principles (SFP), with proposals for correcting any funding deficits set out in a recovery plan.
15. Under the new requirements the trustees must obtain actuarial valuations at least every three years. The actuarial assumptions to be used in valuations of the scheme must be chosen prudently by the trustees, having obtained advice from the scheme acutary and, generally, the agreement of the sponsoring employer.
16. The regime also provides powers for the Pensions Regulator (tPR) to intervene where it appears that the trustees have failed to comply with the legislation, or have failed to reach agreement with the sponsoring employer.[219]
Annex F: The scheme wind up process
The basics of scheme wind up
1. Winding up[220] of a company’s pension scheme normally occurs in one of three circumstances:
• when the sponsoring employer decides it no longer wants to make the necessary contributions to the scheme, for example, on grounds of cost;
• when the sponsoring employer is no longer able to make the necessary contributions to the scheme, for example, due to insolvency; or
• merger or take over of the sponsoring employer.
2. Employers can generally choose to wind up their pension scheme at any time since, beyond providing access to a stakeholder pension,[221] there is currently no requirement on an employer to either provide, or contribute, to a pension scheme.[222]
3. Having decided to wind up their scheme, the employer sets a date after which members no longer accrue scheme benefits. The trustees of the scheme will then make a detailed assessment of the scheme's assets and liabilities in line with scheme rules and statutory provisions. If assets exceed liabilities the scheme has a surplus otherwise the scheme is in deficit.
4. Where surplus assets remain after the winding up of a scheme has been completed, scheme rules may define how surplus assets are be dealt with, subject to any overriding legislation. It is possible that surplus assets in this situation could be used to provide extra benefits for members, or to be paid to the sponsoring employer (even when insolvent). Payments in this situation would need to comply with HMRC requirements.
5. Schemes that wind up with a deficit are commonly known as underfunded;[223] the shortfall in assets becomes a debt owed from the employer to the trustees (Annex G provides further details).
6. Once accruals have ceased, every member's entitlement will be calculated and then met as far as the assets of the scheme will allow and in accordance with the statutory priority order (see Annex D). The benefits will then be secured either through the purchase of annuities (both immediate and deferred annuities as appropriate) or, for people yet to retire, transfer to an alternative pension arrangement willing and able to accept this (including defined contribution pensions such as stakeholders or any new employers pension scheme).[224] At the end of the winding up process, all scheme monies will have been paid out and the scheme will be wound up.
The winding up process
7. Winding up a company pension scheme is frequently a lengthy process, often taking a number of years to complete.[225] There are a number of stages that have to be completed in wind up, but whilst the stages are relatively well defined the order they occur in, and the time they take, varies considerably.
8. The first part of the winding up process (after members have been notified that wind up is going to happen) normally consists of the trustees checking the accuracy of the scheme data.[226] This is followed by trustees making an assessment of the value of scheme's assets, and comparing this to the level of liabilities (which are calculated on a member by member basis with reference to scheme rules and legislation). Trustees then have to realise the scheme assets i.e. sell any investments the scheme may own. These assets are then used to secure members’ individual entitlements via annuities or transfers (where appropriate). Following the securing of liabilities there is a final notification procedure and then the scheme is fully wound up.
Information provided during wind up
9. During wind up trustees must provide members with information on an ongoing basis. This starts with a notice to inform all members and beneficiaries (except those deferred pensioners who cannot be traced) in writing, within one month of the winding up having commenced, of:
• the reasons the scheme is being wound up;
• whether death benefits will continue to be provided for active members;
• if relevant, that an independent trustee[227] has been appointed; and
• provide a name and address for further enquires.
10. Regulations introduced in 2006 (SI 1733) also require trustees to make available a copy of the ‘winding up procedure’ (a winding up plan) to members and their representatives.[228]
11. The trustees also need to issue a progress report to members at least every 12 months thereafter. These subsequent reports must give details of:
• progress in establishing the scheme's assets and liabilities;
• details of actions being taken to recover any assets not immediately available;
• the estimated date when final details of members' benefits are likely to be known; and
• the extent (if any) to which the value of the member's benefits is likely to be reduced (if relevant and the trustees have sufficient information to state this).
Legislation and winding up
12. Measures intended to place greater visible accountability on those people involved in winding up a pension scheme came into force in April 2002. This compels trustees of occupational pension schemes to keep written records of their decision to wind up the scheme, or to defer winding up, and the steps, which should be taken for these purposes. The records should also include the date of wind up.
13. For any scheme that began to wind up on or after 1 April 1973 the trustees must make periodic reports (at least every 12 months) to the Pensions Regulator[229] (tPR) about the progress of the winding up if it has not been completed within three years.[230]
14. If tPR believes that progress is being hindered, and wind up is unlikely to be completed within a reasonable time period without intervention, then they may make directions about the scheme to facilitate wind up. However, at present tPR has not issued a direction following receipt of a section 72A report.
Annex G: Scheme deficits and employer debt
1. When a defined benefit pension scheme winds up underfunded, i.e. where the scheme's liabilities exceed its assets, the shortfall[231] becomes a debt owed by the sponsoring employer to the trustees of the scheme.
2. Section 75 of the Pensions Act 1995 and the Occupational Pension Schemes (Deficiency on Winding-Up etc.) Regulations 1996[232] contain rules on the calculation of the assets and liabilities of a pension scheme that is winding up in order to establish whether there is a debt on the employer.
3. The purpose of the provisions is to ensure that, when defined benefit occupational pension schemes are wound up, employers are made liable for the debts they owe to those schemes. However, in cases where the sponsoring employer has become insolvent there is generally little prospect of recovery of this debt.
Solvent employers
4. Where the sponsoring employer is solvent and started to wind up the scheme before 11 June 2003, the employer debt for these schemes is set at an amount that brings the scheme’s assets up to a level sufficient to:
• meet the trustees’ estimate of all expenses likely to be incurred when winding up the scheme;
• meet the scheme actuary’s estimate of the costs of buying indexed annuities for pensioners (from 19 March 2002); and
• provide cash equivalent transfer values, on the MFR basis, for people who have not retired.
5. Even where the debt is recovered, the value of the benefits for those members yet to reach retirement age is based upon their transfer value. This means that they will not receive their full promised pension benefit but instead would get an amount, which varies with their age, to be invested with an insurance company, which gives them an even chance, but not a guarantee, of reaching their full expected benefits on retirement.
6. Where the sponsoring employer is solvent and started to wind up the scheme on or after 11 June 2003, the employer debts are calculated so as to bring the scheme’s assets up to a level sufficient to:
• meet the trustees’ estimate of all expenses likely to be incurred when winding up the scheme;
• meet the actuary’s estimate of the cost of buying annuities (including indexation) for pensioner members; and
• meet the actuary’s estimate of the cost of buying deferred annuities (including indexation) for non-pensioner members.
7. Therefore, the key difference between pre and post 11 June 2003 solvent scheme wind up is the addition of a full buy out requirement. If the employer could not meet this requirement they may try to compromise the debt (see below), and some scheme trustees would have found this an acceptable solution before the PPF was introduced, since enforcing insolvency was unlikely to result in members getting any additional money.
8. However, despite the full buy out requirement on post 11 June 2003 wind up, a small number of schemes in this position that responded to our solvent employer data collection exercise (Chapter 7 provides more details) informed us they are only funded to, for example, 50 per cent.
9. This could arise as, prior to 15 February 2005, there was a risk that solvent companies could avoid the full buy out cost by putting the company into a Members’ Voluntary Liquidation (MVL), a form of solvent liquidation. Under MVL firms can decide to go into liquidation even when they are solvent in the normal sense of the word[233] and able to meet all of their debts. One of the situations where this could happen is when a parent company seeks to dispose of a subsidiary.
10. As the Pensions Act 1995 includes MVL in its definition of insolvency,[234] whilst such companies would have to meet the debt due, because they would be classed as insolvent, this debt would be calculated on the MFR basis rather than the full buy out basis.
11. From 15th February 2005, regulations were introduced which introduced a full buy out requirement for schemes whose sponsoring employer became insolvent; primarily to close that loophole.
Insolvent employers
12. If the sponsoring employer is insolvent when the scheme starts to wind up, the trustees' claims have to rank equally with all other non-preferential and unsecured creditors, so any recovery of the debt is highly unlikely.
13. Members of schemes which started winding up underfunded between 1 January 1997 and 5 April 2005, and where the employer has been unable to make up the shortfall because it is insolvent or no longer exists, may be eligible for FAS.
14. If a company becomes insolvent after 6 April 2005, and starts to wind up their pension scheme because of this, members may be eligible to receive compensation from the Pensions Protection Fund.
Compromise agreements
15. In some cases a scheme that enters wind up may have a solvent sponsoring employer, but this employer may be unable to cover the full cost of buying out the required benefits. In these cases the trustee may choose not to enforce the full debt,[235] but instead come to an agreement to accept a lower amount rather than making the company insolvent by requesting the full amount, and thus risk receiving much less.[236] This is known as a compromise agreement.
16. Before entering into a compromise agreement,[237] trustees are required to take appropriate independent expert advice, and any agreement to compromise the debt should be reported, by both the employer and the trustees, to tPR.[238]
Annex H: Differences between FAS and PPF
Table 8 : PPF versus FAS, key differences at a glance
|Scheme Feature |Financial Assistance Scheme (FAS) |Pensions Protection Fund (PPF) |
|Funding Source |The FAS is funded through: |The PPF is funded through: |
| |scheme pension, secured by annuity purchase; and |compulsory levies charged to all eligible schemes; |
| |a top up, to a pre defined level, funded by the taxpayer on a pay as you go basis. |any assets remaining in schemes which transfer to the PPF at the end of an assessment |
| | |period; and |
| | |the proceeds from the investment of these levies and assets. |
|Qualifying schemes |Defined benefit schemes that started winding up, underfunded, between 1 January 1997 and |Eligible defined benefit schemes (and the defined benefit element of hybrid schemes) |
| |5 April 2005, where the principal employer is: |where a qualifying insolvency event has occurred to the employer after 6 April 2005. |
| |insolvent; | |
| |dissolved; | |
| |unable to undergo a qualifying insolvency event, but is no longer a going concern; or | |
| |has a valid compromise agreement in place. | |
|Help provided to qualifying |Payments will provide a top up equivalent to 80 per cent of the expected core pension |Compensation will be paid at two levels: |
|members |benefits, to qualifying members. |100 per cent level of compensation for people who have reached the scheme’s normal |
| |The expected core pension refers to the standard core pension rights qualifying members |pension age and for those under the scheme’s normal pension age who are either in receipt|
| |accrued within their schemes. It does not include additional non-standard elements that |of survivors’ benefit or already in receipt of pension on the grounds of ill-health; and |
| |may have been offered by individual schemes such as benefits that may have arisen in |90 per cent level of compensation for people below that age, subject to an overall |
| |relation to early retirement or for dependent children. |compensation cap and subject to a review of the scheme’s rules. |
| | |Compensation is paid on the basis of the annual rate of pension the person was entitled |
| | |to at the date the scheme entered assessment (including revaluation and indexation under |
| | |scheme rules) - referred to as ‘the protected amount’ in legislation - and then further |
| | |revalued and indexed under PPF rules from the date of assessment and paid at 90 per cent |
| | |if Normal Pension Age was not reached before assessment. |
|Help provided to surviving |Depending on whether the deceased member’s rights have been settled by the scheme, |Where a pension would be payable under the admissible scheme rules, surviving spouses and|
|spouses or civil partners of |FAS annual payments will: |partners are entitled to 50 per cent of the compensation, or half the accrued amount. |
|qualifying members |be 50 per cent of the late spouse or civil partner’s FAS entitlement; or | |
| |top up the survivor’s pension to a level broadly equivalent to 40 per cent of the | |
| |deceased member’s expected core pension. | |
|Help for dependants |No |Where admissible scheme rules provide for dependants the amount of compensation payable |
| | |where compensation is also payable to a surviving spouse or partner is as follows: |
| | |One child 25 per cent of member’s periodic compensation |
| | |Two or more children 50 per cent of member’s periodic compensation, divided equally |
| | |between the children |
| | |Exceptions apply where the pension scheme’s admissible rules: |
| | |provide compensation for surviving spouses or unmarried partners but such a pension is |
| | |not in payment; or |
| | |do not provide compensation for a surviving spouse/partner at all. |
|Age payable |Usually at 65 to men and women.[239] |Normal pension age (NPA) under the admissible scheme rules for deferred pensions. |
| |For those who reached their 65th birthday before 14 May 2004 (the date FAS was announced)|It is possible to have separate tranches of benefits which have different normal pension |
| |payments will only be backdated to that date. |ages, such as benefits payable for a period of service when that benefit accrued with a |
| | |different normal pension age. |
| | |Pensions in payment continue in payment whatever the age. |
| | |People under NPA may be able to take compensation early after age 50 subject to giving |
| | |notice and actuarial adjustment of the compensation. |
|Lump sums payable |No – though many members will be able to opt to receive lump sums from their scheme |Members can choose to take some of their compensation as a tax-free lump sum. |
| |(depending on the funding position and scheme rules). | |
|How many qualifying schemes |Currently around 700. |Around 190 schemes are currently in an assessment period, the eventual number of eligible|
| | |schemes may be higher. |
|Number members expected to |130,000 |Ten schemes have currently transferred into the PPF with over 7,000 scheme members. The |
|benefit | |numbers of members expected to benefit will be in the hundreds of thousands – over |
| | |100,000 individuals are members of schemes currently undergoing assessment. |
|Cap |Was £12,000. Commitment to raise this to £26,000 by end of 2007. |Currently £29,928.56[240] and uprated in line with earnings. |
| | | |
| |Currently, cap applied at the point we compare expected and actual pension – the |After applying the 90 per cent compensation requirement, this provides a maximum level of|
| |certification date. Assistance is then revalued to the date it comes into payment |compensation of £26,935.70 for a member who first claims compensation at age 65 on or |
| |(usually at age 65) |after 1 April 2007. |
|De minimis |Currently £520 per annum, with commitment to remove entirely by end of 2007. |None |
|Approach to revaluation |Revaluation as per FAS rules to those core pension rights that were due to be revalued |Revaluation is in line with the increase in the Retail Prices Index between the |
| |under a scheme’s rules to provide the expected core pension figure. |assessment date and the commencement of compensation payments (subject to a maximum |
| |If a member left the scheme before the date wind up began, FAS will apply revaluation |increase for the whole period calculated by assuming RPI rose by 5 per cent each year). |
| |broadly in line with the scheme’s rules from the date of leaving up to the day before |This compensation is subject to the compensation cap. |
| |wind up began. |From the end of service to the assessment date the scheme rules are used to calculate |
| |FAS then applies revaluation in line with prices (subject to a maximum of 5 per cent |revaluation. From the assessment date it is RPI capped at 5 per cent per annum over the |
| |compound per year) to those core pension rights that were due to be revalued under a |revaluation period. |
| |scheme’s rules, from the day wind up began up to the ‘certification date’ for the FAS |The assessment date is the fixed date, based on the insolvency event, from which all the |
| |assessment (mirrors the PPF approach from assessment date to commencement date). |calculations are derived. The calculations themselves may be carried out a year or |
| | |possibly several years later. Prior to the assessment date revaluation is carried out |
| |[A worked example is included at the end of this Annex] |under the scheme rules, even if the calculation is being carried out by the PPF after the|
| | |assessment date. |
|Indexation |Up to the point of first payment (in line with RPI capped at 5 per cent). No indexation |Compensation derived from employment after March 1997 is increased annually in line with |
| |available once FAS is in payment. |inflation, subject to a 2.5 per cent limit. |
|Taxable |Yes |Yes |
Worked example to illustrate FAS revaluation
Circumstances
• Final payment
• Member left service – 12 April 1994.
• Scheme began to wind up – 23 March 2003.
• GMP at date of leaving service - £300
• Scheme GMP revaluation method – Fixed Rate
• Revaluing pension above GMP - £300.
• Certification date – 19 June 2006
• Scheme pension - £100 per annum.
• Date of birth – 4 December 1942
• Date at which FAS payable – 4 December 2007
First revaluation period
Revaluation applied from the date the member left the scheme to the day before the start date of wind up.
GMP
The revaluation period is from the tax year (6 April to 5 April inclusive) in which the member left contracted-out employment, until the tax year in which wind up started. Different rates of revaluation are applied if the member reached GMP payment age during that period. The relevant annual rate corresponding to the date at which the member left service should be applied cumulatively to the revaluation period.
The tax year of leaving service was 1994-95. The tax year in which the scheme started to wind up was 2002-03. The member reaches GMP pension age on 4 December 2007 and therefore had not reached this age before the scheme started to wind up. Hence the revaluation is for eight years.
As the member left active service in tax year 1994-95 the relevant annual rate for 6 April 1993 to 5 April 1997 applies, which is 7.0 per cent. The revaluation for the GMP element of the member’s pension in this case 71.8 per cent (i.e. 100 per cent x 1.077 – 100)
So, in this case the amount of GMP revaluation would be 71.8 per cent of £300, which is £215.40
Revaluing pension above the GMP
The annual rate of revaluing pension in excess of the GMP is revalued in line with the relevant revaluation order applying to the calendar year in which the member left pensionable service and the calendar year in which the scheme started to wind up. The revaluation period applies to complete calendar years only.
The calendar year of leaving service in this case is 1994 and the scheme started to wind up in calendar year 2003. Eight complete years of revaluation apply. The revaluation order made in November 2002 and coming into force on 31 December 2002 (Occupational Pensions (Revaluation) Order 2002 (SI2002/2951)) applies. This gives a revaluation factor of 22.5 per cent for a revaluation period of eight years ending in 2003. So, in this case the amount of revaluation for the revaluing pension in excess of GMP would be £300 x 22.5 per cent, which is £67.50.
Second revaluation period
The GMP and the revaluing excess above the GMP plus the total revaluation amount for the first revaluation period is revalued in line with prices.
This is done in line with changes in the Retail Price Index (RPI) using the following formula:
(100 times a divided by b) minus 100
Where a is the RPI entry two months before certification date (in this case 196.5 as at April 2006) and b is the RPI entry two months before the start of wind up (in this case 178.4 as at January 2003).
In this case (100 x 196.5 divided by 178.4) - 100 = 10.15 per cent; and
(£300 + £215.40 + £300 + £67.50) x 110.15 per cent = £972.50
Total expected pension = £972.50
FAS assistance at the certification date
This is an example of a final FAS payment which tops up a scheme pension to 80 per cent of the ‘expected pension’.
So, in this case the amount of FAS assistance at the certification date would be £972.5 x 80 per cent - £100 = £678.
FAS payment = £678pa
Revaluation of the FAS payment
If there is a month or more between the certification date and the FAS payment date then the FAS assistance rate at the certification date is revalued before it comes into payment. In this case the FAS assistance of £678 would be revalued from 19 June 2006 up to 4 December 2007. Revaluation would be applied in line with prices as described in relation to the second revaluation period above.
Annex I: Schemes providing information as part of the Review team’s data collection exercise on solvent employers
The Review team would like to thank trustees, actuaries, administrators and others for information provided[241] on the solvency status, membership numbers and funding levels of the schemes listed below. We would also like to thank other schemes, not mentioned here, that have provided additional information.
Note: not all schemes listed here are linked to a solvent employer. Inclusion in this list does not imply eligibility or otherwise for FAS now or in the future.
A R Brown McFarlane & Co Ltd Retirement Benefits Scheme
ABE Pension Fund-ABEC Section
ACI Limited Pension Fund
Andrea Merzario Retirement and Death Benefits Scheme
Barrhead Kid Co Retirement and Death Benefit Scheme
Bennetts Garage Ltd
Berendsen Fluid Power Limited 1993 Pension Scheme
Berisfords Ribbons Scheme for Junior Staff and Weekly Paid Employees
Berkshire China Company Limited Retirement Savings Plan
Berrymans Staff Pension Scheme
Berwin & Berwin Limited - Stanplan F
Bischof & Klein (UK) Limited
Black and Edgington Limited Retirement Benefits Scheme
Bletchley Motor Group Ltd
Blue Prince Mushrooms Limited Pension and Life Assurance Fund
BOM Holdings Plc Pension & Life Assurance Scheme
British Approvals Board for Telecommunications Pension and Life Assurance Scheme
British Association of Social Workers Retirement Benefits Scheme
British West Indian Airways Limited UK Pension Scheme
Britten Norman Limited Staff Pension & Life Assurance Plan
C B Hillier Parker Management Services Pension and Life Assurance Plan
C Bruce Miller & Co Ltd Retirement Benefit Scheme
Caisse Nationale de Credit Agricole Retirement
Calhoun Holdings Pension Fund
Capitol Passport Final Salary Pension Scheme
Carrs (Birmingham) Pension Fund
Charles Clifford Industries Limited Pension and Assurance Scheme
Charter Reinsurance Retirement Plan
Christys Hatmakers (York)
Circatex Ltd
C J Lang & Sons Ltd Pension and Life Assurance Scheme
Clachan Construction Limited Retirement Benefits Plan
Clancey Sons & Stacey Retirement Benefits Scheme
Cleansing Services Group Retirement Benefits Scheme
Clement Joscelyne
Clycan Management Limited - Stanplan F
Conway Carlisle Retirement and Savings Plan
Cooling Power Industries Group Pension Fund
Corus Engineering Steel Pension Scheme
County Hotels Defined Benefit Scheme
CPS Fuels Limited Retirement Benefits Scheme
Craig and Rose Plc Retirement Benefits Scheme
Diversified Products Pension and Life Assurance Scheme
Dragon Cosmetics Pension Plan
Drake Insurance Pension and Life Assurance Plan (1994)
E J Purdie & Son Pension & Life Assurance Scheme
EBS No2 Pension Scheme
Elliott-Thwaites Pension Scheme No 1
Engine Express Components Limited Pension Scheme
Essex Engineering and Fabrication Ltd Retirement and Death Benefit Scheme
First Bank Of Nigeria Retirement And Death Benefits Plan
Fishley Sebley Associates (Travel) Limited Retirement and Death Benefit Scheme
FMI Retirement Benefits Scheme
Franklin's Garage Ltd
Fredk H Burgess Limited Pension and Life Assurance Scheme
Gaches Cook Limited
Genchem Pension Scheme
Glenfrome Engineering Ltd
Graham Packaging UK Pension Scheme
Green Pennant Engineering
Hanro 1990 Pension & Assurance Scheme
Harris-Marinoni UK Pension Fund
Hartnolls Retirement and Death Benefit Scheme
Headway Group Pension Fund
Heaps Collis and Harrison Limited Pension Fund
Henry Barrett Group Plc Pension & Life Assurance Scheme
H Erben Ltd. Pension Fund
H E Stringer Pension Fund and Life Assurance Scheme
Hewitt Group Pension Scheme
Highfield Timber Products Limited Pension and Life Assurance Scheme
Hook Norton Brewery Co Limited Pension and Life Assurance Scheme
Horizon Pension Plan
H Pickup Mechanical and Electrical Services Limited Pension Scheme
HRP Limited Pension and Assurance Scheme
Huntsworth Plc Pension & Life Assurance Plan
Inchbrook Retirement Benefits Plan
Independent Insurance Company Limited Pension Scheme
Isolated Systems Limited - Stanplan F
Isotrans Limited Pension Fund
J & D Wilkie Ltd Pension Scheme 1982
James Boardman Limited Pension Fund
Jan Bobrowski and Partners Pension and Assurance Scheme
John Carr and Associates (Leicester) Limited Main Retirement and Death Benefit Scheme
John Dennis Food Group Limited Retirement and Death Benefit Scheme
Kellys Poortman Pension Scheme
Keynsham Bodyworks Limited Retirement and Death Benefit Scheme
Kingsmead Pension Scheme
Lawrie & Symington 1993 Pension Fund
Loders Garage (Dorchester) Limited 1978 Retirement Benefits Scheme
Longford Gear Cutting Co Limited Pension Scheme
Mann Judd Gordon Retirement and Death Benefit Scheme
Marshall Welded Steel Limited Retirement Benefits Scheme
Maxwell Media Pension Plan
Mayfair Andrews Holdings Ltd Pension and Life Assurance Scheme
McLay Collier and Partners Pension and Life Assurance Scheme
McLeod and Co Retirement Security Plan
Mersey Equipment Company Limited Retirement Benefits Scheme
Moore Products Co
Mosscare Housing Limited 1978 Retirement & Death Benefits Scheme
Northampton Diesel and Electrical Services Limited Pension and Life Assurance Scheme
Oakwood Group Limited Retirement and Death Benefit Scheme
Parker International Group Limited Pension Scheme
PCL Computer Services Ltd Pension Scheme
PEL Group Limited Staff Retirement Benefits Plan
Phocean Ship Agency Limited - Stanplan F
Pirie Limited Retirement Benefit Scheme
Poseidon Average Adjusters (London) Ltd Retirement Death Benefit
PSL International Plc - Stanplan F
R Hewison and Son
R K Timber Pension Fund
Radyne Holdings Ltd Pension and Assurance Scheme
Rael Brook Group Ltd Retirement and Death Benefit Plan
Rael Brook Group Ltd Staff Pension and Life Assurance Scheme
Ralph Williams Ltd Retirement Benefits Scheme
RAMM Business Services Retirement and Death Benefit Scheme
Rees Hough Limited Pension Scheme
Rocket of London Retirement and Death Benefit Scheme
Roy Pollard Limited Retirement and Death Benefit Scheme
Ryall & Edwards Limited Retirement Benefit Scheme
Sadler Tankers Limited Pension and Life Assurance Scheme
Sharnco Tool Limited Retirement Security Plan
Shipham & Company Retirement Benefits Plan
Shopfitters (Lancashire) Retirement and Death Benefit Scheme
Sifam Limited Retirement and Death Benefits Plan
Silvermines Group Pension Plan
Skandia Pension and Assurance Scheme
Skipton Ford (The Motor Industry Pension Plan)
Smith Knight Fay Retirement Security Plan
South and Western Building Services Limited Pension Scheme
S R Jeffrey and Son Limited Retirement and Death Benefit Scheme
Stankiewicz UK Pension Scheme
Stanway Brothers Ltd
Stockham Triangle Pension Plan
Stokes Forgings Limited Pension and Life Assurance Scheme
Swedoor UK Ltd Retirement Benefit Scheme
Tanks and Drums Executive Pension Plan
Taylors(Cannock)Ltd Retirement and Death Benefit Scheme
The BC Staff Pension Fund
The Chapman Group Pension Scheme
The Daybrook Laundry Pension and Life Assurance Scheme
The Expamet International Plc Group Retirement and Life Assurance Scheme
The Hewitt Group Pension and Life Assurance Plan
The Lufthansa German Airlines Retirement Benefits Plan (1974)
The Motor Industry Pension Plan - (Leslie Hall & Son (Bolton) Ltd)
The Motor Industry Pension Plan - Leslie H Trainer & Sons Ltd
The Motor Industry Pension Plan - Miller & Son Ltd
The Motor Industry Pension Plan (Abbey Garage SW Ltd)
The Motor Industry Pension Plan (Arundale Ltd)
The Motor Industry Pension Plan (Ashmore Green Garage Ltd)
The Motor Industry Pension Plan (AVW)
The Motor Industry Pension Plan (B and F Triangle Autos Ltd)
The Motor Industry Pension Plan (B and H Motors Limited)
The Motor Industry Pension Plan (Bay Horse Motors)
The Motor Industry Pension Plan (Bristol Port Service Station)
The Motor Industry Pension Plan (Bullwinkles of Baumber)
The Motor Industry Pension Plan (Burns Garage Ltd)
The Motor Industry Pension Plan (C F Hunt)
The Motor Industry Pension Plan (Calamart Ltd)
The Motor Industry Pension Plan (Central Motors (Chard) Ltd)
The Motor Industry Pension Plan (Crown Garage Limited)
The Motor Industry Pension Plan (G and F Allitt Ltd)
The Motor Industry Pension Plan (George Banks Congleton Ltd)
The Motor Industry Pension Plan (Goodfellows Garage Ltd)
The Motor Industry Pension Plan (Highambury Garage Limited)
The Motor Industry Pension Plan (Hockmeyer Motors Limited)
The Motor Industry Pension Plan (Horncastle Garage Limited)
The Motor Industry Pension Plan (Horsburghs Garage)
The Motor Industry Pension Plan (M & R Auto Repairs Ltd)
The Motor Industry Pension Plan (Mangoletsi Holdings Ltd)
The Motor Industry Pension Plan (Millwood Motor Co Ltd) (N/A Cam Motors)
The Motor Industry Pension Plan (Miranda Motors)
The Motor Industry Pension Plan (Moorland Motors Ltd)
The Motor Industry Pension Plan (Old Oak Motor Co Ltd)
The Motor Industry Pension Plan (Oulton Broad Garage)
The Motor Industry Pension Plan (Pointer Motor Company Ltd)
The Motor Industry Pension Plan (Pratt and Gelsthorpe Limited)
The Motor Industry Pension Plan (R F Brown and Son (Hereford) Ltd)
The Motor Industry Pension Plan (Riccardo Emiliani Ltd)
The Motor Industry Pension Plan (Ripon Auto Electrics Limited)
The Motor Industry Pension Plan (S J Heighton & Co Ltd)
The Motor Industry Pension Plan (Sam Edwards and Company Limited)
The Motor Industry Pension Plan (Total Convenience Store/Petropolis)
The Motor Industry Pension Plan (Trinity Garage (Hotwells) Ltd)
The Motor Industry Pension Plan (Trinity Motors (Bond St) Ltd)
The Motor Industry Pension Plan (Troy Autopoint)
The Motor Industry Pension Plan (W J Phillips)
The Motor Industry Pension Plan (White Hart Garage Ltd)
The Motor Industry Pension Plan (Woodchester Corporate Limited)
The Motor Industry Pension Plan (Woodland Forecourt Services Limited)
The Motor Industry Pension Plan (A L Davis and Co)
The Motor Industry Pension Plan (Frank Stones Garage Ltd)
The Motor Industry Pension Plan (Grosvenor Garage Guilford Limited)
The Motor Industry Pension Plan (Tate Ford (Manchester) Ltd)
The Motor Industry Pension Plan (W P Lewis & Son Limited)
The National Trust for Scotland Retirement and Death Benefit Plan
The Nikko Europe Plc Retirement and Death Benefit Plan
The Nobel Biocare UK Limited Pension Scheme
The Norman Butcher and Jones Holdings Ltd Retirement and Death Benefits Plan
The Parsons Group International Ltd Pension and Life Assurance Scheme
The Pension and Life Assurance Scheme of the Prestige Group UK Plc
The Premier Oilfield Services Ltd Pension Scheme
The Ryton Gravel Co Limited & Associate Companies Retirement & Death Benefits Plan
The Stationery Office Pension Scheme
Thorpe Hall School Trust Retirement Benefits Scheme
Thunder Lane Garage Ltd
Tom Green Construction Ltd & Associated Companies Retirement Benefits Scheme
Trenholmes Garage Nefyn
Tudor Garage (Ystradowen) Ltd
Tyn Lon Garage Ltd
U E F Lincoln
UMD Pension Plan
Unisea Limited Retirement and Death Benefit Scheme
United Merchants & Manufacturers RBS
Viasystems Selkirk Pension and Life Assurance Plan
Vivitar (Europe) Limited Pension and Assurance Scheme
Vospers Motor House (Plymouth) Ltd Retirement and Death Benefits Scheme
Vulcana Gas Appliances Limited Life & Pension Scheme
W & FC Bonham & Sons Ltd (1988) Retirement Fund
Ward Holdings Plc Pension and Life Assurance Scheme
Warrenpoint Harbour Authority Pension and Life Assurance Scheme
Webbs Country Foods Limited Executive Pension Scheme
Welbeck Pension Scheme
Wensum Pension Scheme
Whitaker (Holdings) Limited Retirement Benefit Plan 1978
Whitford Plastics Limited Pension Scheme
Winterflood Securities Limited Retirement Benefits Scheme
Wm R Stewart & Sons (Hacklemakers) Limited Retirement Benefits Plan
Wokingham Plastics Ltd Pension & Life Assurance Scheme
W Paterson (Foundry Materials) Limited 1988 Retirement and Death Benefit Scheme
Yuasa Warwick Machinery Limited Pension Scheme
Zaehnsdorf Limited Pension and Life Assurance Scheme
Annex J: Republic of Ireland unclaimed assets scheme
The Irish scheme
1. In Ireland, the Dormant Accounts Act 2001 and Unclaimed Life Assurance Policies Act 2003 allow unclaimed assets to be reunited with owners or, where this cannot be done, transferred to a Dormant Accounts Fund managed by the National Treasury Management Agency (NTMA). The Dormant Accounts Board is then responsible for planning and monitoring disbursements from the Fund. These disbursements go to programmes designed to assist the personal, educational and social development of persons who are economically, educationally or socially disadvantaged or persons with a disability, and to projects that are designed to assist primary school students with learning disabilities.
2. This is a compulsory scheme, in contrast to the UK Government’s proposals for using unclaimed bank and building society assets, which is to be voluntary.
3. The Dormant Accounts Act 2001 came into effect in Ireland in 2002. It focused on assets held in banks, building societies and national savings (dormant current accounts, deposit accounts, savings certificates and bonds). The Act was later widened by the introduction of the Unclaimed Life Assurance Policies Act 2003, which covers three main types of assets:
• fixed-term lump-sum policies - classed as ‘unclaimed’ where the policy term expired at least five years ago and the insurer has had no communication from the policyholder since the term expired;
• open-ended policies - classed as ‘unclaimed’ when the policyholder has had no contact with the insurer for at least 15 years; and
• personal pension policies (those not included in an employer's pension scheme) – classed as ‘unclaimed’ where more than five years have passed, without communication from the policyholder, from the latest retirement date in the policy.
4. From its inception in 2003 to the end of 2006 the Fund has received transfers totalling £253 million.[242] This breaks down into £107 million from banks and building societies, £120 million from An Post (similar to National Savings) and £26 million from life assurance and personal pension policies. Actual transfers to the Fund in 2003 and 2004 fell short of expectations as advertising campaigns to reunite these assets with their owners resulted in over half the unclaimed assets being claimed. Table 9 shows a yearly breakdown of the amounts received.
|Table 9: The Republic of Ireland unclaimed assets scheme |
|Inflows |2003 |2004 |2005 |2006 |Total |
|Banks & Building Societies |£72m[243] |£12m |£9m |£14m |£107m |
|An Post |£61m |£10m |£13m |£36m |£120m |
|Life Assurance Policies |- |£16m[244] |£5m |£5m |£26m |
|(includes personal pensions) | | | | | |
|Total |£133m |£38m |£28m |£54m |£253m |
Note: Original figures were € millions and were converted to £ millions at rate of €1 to £0.677
5. To the end of 2006, the amount generated from unclaimed life assurance policies and pension policies in Ireland represented approximately 10 per cent of the total collected. Although the ratio of life assurance and personal pension policies is unknown the Review team understands that personal pensions are likely to represent a small proportion of these overall assets.
Reclaim risk
6. In Ireland the exchequer carries the reclaim risk and in the event of a reclaim makes a payment to the bank or insurer to enable the net encashment value of the unclaimed policy to be paid to the policy holder. At present NTMA hold back 15 per cent of the assets received as a reserve fund to meet any reclaims.
7. In practice, it is relatively difficult to obtain a precise estimate of the reclaim rate since it is difficult to be sure which year’s collection the reclaim relates to. Bearing this in mind, to the end of 2006, for banks and savings, total reclaims amounted to 15 per cent of total transfers;[245] and for insurance total reclaims were 14 per cent of the relevant total transfers.[246] Transfers from An Post saw a much higher reclaim rate with 47 per cent of transfers having been reclaimed overall.[247]
Application to the UK
8. There is a lack of information on the relative proportions of the population in Ireland or the UK that hold life assurance or personal pension policies. However, if we were to assume that approximately the same numbers of residents have life assurance/personal pension policies in each country, it might be possible to gauge very broadly the maximum level of potential revenue for UK policies.
9. To over-simplify, Ireland has a population of around 4 million compared with a UK population of approximately 60 million, which results in a ratio of 1:15. This ratio could be used to scale the Irish figures, but a more accurate estimate would compare more relevant years, and account for likely differences in demographics. There would also be the need to factor in rates of reclaims.
Annex K: Comparison of unclaimed assets collected outside the UK
1. The following paragraphs outline unclaimed asset regimes in Australia, New Zealand, Spain and the United States of America. These are merely examples and there are many similar systems in other countries.
Australia
2. Sub-section 69(1) of the Banking Act 1959 defines unclaimed money to be: "all principal, interest, dividends, bonuses, profits and sums of money legally payable by an ADI [authorised deposit-taking institution] but in respect of which the time within which proceedings may be taken for the recovery thereof has expired, and includes moneys to the credit of an account that has not been operated on either by deposit or withdrawal for a period of not less than 7 years."
3. Money from banks, credit unions, building societies, companies (shares) and life policies that has been unclaimed for seven years are transferred to the Commonwealth Government.
4. For example, the Western Australian Unclaimed Money Act 1990 establishes a system where unclaimed moneys are lodged with the Treasurer for retention until claimed by the rightful owner. However, this Act only applies to moneys which are held in Western Australian, and each State operates similar legislation, or Acts, which generally apply to organisations registered in that State:
• the Unclaimed Money Act 1995 of New South Wales;
• the Unclaimed Moneys Act 1962 of Victoria;
• Part 8 of the Public Trustee Act 1978 of Queensland;
• the Unclaimed Moneys Act 1891 of South Australia;
• the Unclaimed Moneys Act 1918 of Tasmania;
• the Unclaimed Moneys Act 1950 of the Australian Capital Territory; and
• the Companies (Unclaimed Assets and Moneys) Act of the Northern Territory.
New Zealand
5. Unclaimed assets in the New Zealand financial system are funds left untouched for six years or more in financial institutions such as insurance companies and include unclaimed funds such as cheques or wages.
6. Unclaimed money is eventually transferred to the Crown, usually to the Treasury or the Inland Revenue Department, or the Public Trust.
7. The following are examples of money (and entitlements to money) that may be unclaimed, many being dealt with by legislation in the 1971 Unclaimed Money Act:[248]
• trust money;
• money held by the Maori trustee;
• money in solicitors’ trust accounts;
• deposits in banks and financial institutions;
• wages and employee benefits;
• dividends;
• proceeds from life insurance policies;
• property administered by the public trust;
• money held by Government departments and crown entities;
• proceeds from superannuation schemes, such as:
Government Superannuation Fund (GSF);
National Provident Fund (NPF);
private superannuation schemes;
New Zealand superannuation;
• Government-issued bonds;
• war bonds and liberty bonds; and
• proceeds from unclaimed property left at hotels, motels and other lodgings.
Spain
8. Those assets which are included in Spain are securities, deposited money and other personal property:
• current account balances,
• savings account balances;
• Treasury stock;
• negotiable securities and other financial instruments;
• security certificates; and
• personal property deposited in safe-boxes.
United States of America
9. Many states in the United States of America have adopted modified forms of the Uniform Unclaimed Property Act (1995) (‘Uniform Act’).[249] The Uniform Act requires businesses to attempt to notify a customer of intangible property in its possession after a set period of time. If the customer does not claim the property, it is then turned over to the state, along with any known details of the property owner. The state attempts to locate the owner and holds the property for the rightful owner in perpetuity.
10. Most states use the money turned over by businesses to either supplement their general fund or to use in special designated funds. They also maintain a minimum level of funding in an account designated to administer and refund unclaimed property. The states honour all valid claims to property in perpetuity, but the number of claims is significantly less than the money turned over.
11. According to a 2000 press release by the NCCUSL, “Although the primary purpose of unclaimed property legislation is to preserve property for the rightful owners, in fact, unclaimed property is also one of the single largest non-tax forms of revenue available to the states - in some states exceeding even the lottery”.
12. Most states maintain websites where people can search for property being held in their name. A central website linking all state websites is maintained by The National Association of Unclaimed Property Administrators.[250]
13. The following case studies of New York and Vermont are examples of the types of unclaimed asset schemes in operation.
New York, USA
14. State law requires banks, insurance companies, utilities, and other businesses to turn dormant savings accounts, unclaimed insurance and stock dividends, and other inactive holdings over to the State. If there has been no activity in the account for a set period of time, usually between two and five years, the money is considered unclaimed or abandoned.
15. Before unclaimed funds are turned over to the State, banks and insurance companies attempt to notify individuals by mail and are required to publish newspaper listings of names and addresses. Despite these efforts, many funds remain unclaimed and are turned over to the State Comptroller, who acts as custodian.
16. New York State holds unclaimed funds in trust - with the State Comptroller as custodian - until the funds are claimed by the owner or heir. The State never takes ownership of the money and it is held until an individual claims it. If an individual can prove their entitlement to the money, it will be returned without charge.
17. Funds that can be considered unclaimed in New York include:
• savings accounts;
• checking accounts;
• uncashed checks;
• telephone/utility deposits;
• rental security deposits;
• wages;
• insurance benefits/policies;
• safe deposit box contents;
• mortgage insurance refunds;
• stocks and dividends;
• mutual funds;
• certificates of deposit;
• trust funds; and
• estate proceeds.
18. According to a fact sheet from the Office of the New York State Comptroller, the total funds unclaimed in New York amount to $8 billion, relating to more than 22 million account records. The cash received in 2006-07 was $541 million and an average of 32 per cent of the funds are claimed by their rightful owners annually. In 2006-07 the funds paid out equalled approximately $169 million, with more than 264,000 accounts processed. 31 per cent of claims are for $50 or less, and about 58 per cent are $100 or less. The largest individual account claim paid was $5.9 million to heirs in New York State in 2005.
19. In 2006-07 the funds raised arose from the following sources:
• Banks: 42 per cent;
• Corporations: 31 per cent;
• Insurance Companies: 10 per cent;
• Brokers/Dealers: 7 per cent;
• State Court Funds: 4 per cent; and
• Other: 6 per cent.
Vermont, USA
20. The primary function of the Vermont Unclaimed Property Division is to locate and return various forms of unclaimed financial property to the rightful owners or their heirs. The Vermont State Treasurer's Office acts as custodian to safeguard the assets until they can be claimed by the rightful owners or heirs. There is no charge to the owner or heirs for the recovery of funds directly through the State Treasurer's Office.
21. In Vermont, unclaimed property is defined to be any financial asset, usually intangible, being held for a person or entity that cannot be found. It is not real estate, abandoned personal property, or lost and found items. The property comes from many sources such as banks, credit unions, corporations, utilities, insurance companies, retailers, and governmental agencies throughout the United States. Vermont's Unclaimed Property Law requires these institutions to annually report and deliver property to the Treasurer's Office after there has been no customer activity on the account for over three years.
22. All citizens of the state benefit from property that remains unclaimed, since the interest earned on this fund is used help public programs. The law was enacted to prevent holders of Unclaimed Property from using individuals’ money and taking it into their business income.
23. The amount of money paid to Vermonters in fiscal year 2006 was more than $4.5 million to more than 7,600 Vermonters. Over the prior four years, the average in paid claims was approximately $3.7 million to 5,200 claimants per year.
24. Unclaimed property in Vermont can include:
• dormant savings and checking accounts;
• certificates of deposit;
• safe deposit box contents;
• uncashed money orders
• cashier's checks and traveller’s checks;
• uncashed payroll checks;
• unused gift certificates;
• uncashed stock;
• mutual fund dividends;
• stock certificates;
• unclaimed security deposits;
• utility deposits;
• customer deposits, overpayments, credit balances, and refunds;
• court deposits;
• insurance payments;
• probate court judgments;
• property overlooked in the probate of an estate;
• paid up life insurance policies; and
• uncashed death benefit checks and life insurance proceeds.
Annex L: Other sources of funding that are outside the scope of this Review
‘Windfall’ tax / Levy on industry
1. The Review has received representations suggesting that a ‘windfall’ tax on either profits of private equity firms, pension providers or actuaries could be a feasible way of providing funding to support FAS.
2. Similarly, some people have proposed that the Government could consider raising funds to support FAS by imposing a new tax on the business community, for example through raising a levy such as those collected by the Pensions Regulator (tPR) and the Pension Protection Fund (PPF).
3. The Terms of Reference for the Review exclude any sources of funding that might arise as a result of taxes, and as a result these options are outside the scope of this Review.
Dormant accounts
Banks and building societies
4. As detailed in our interim report, there is no overlap between the scope of this Review and the Government’s Dormant Bank and Building Society Accounts Bill as introduced to Parliament on 7 November 2007. Given plans are already in place for legislation in relation to the use of unclaimed assets within banks and building societies, this area is out of scope for the Review.
‘Unclaimed assets’ within Government
5. Some ‘unclaimed assets’ which are said to lie within Government include:
• NIF surplus and unclaimed state benefits such as social security and state pension;
• tax overpayment refunds;
• unclaimed assets within National Savings and Investments (NS&I);
• unclaimed balances held in the Court Funds Office; and
• Bona Vacantia.
National Insurance Fund ‘surplus’ and state benefits
6. The National Insurance Fund (NIF) is run on a pay as you go basis with current income from contributions paying for current benefit expenditure.[251] National Insurance Contributions (NICs) are taken in and by law can only be used for two elements of public spending: to pay contributory benefits as they fall due (mainly, but not solely, state retirement pension); and the National Health Service. NICs and associated social security benefits operate within the Government's fiscal rules designed to ensure sound public finances.[252]
7. If the amount of NICs taken in during any one year is lower than the amount needed there is a statutory provision for a transfer from the Consolidated Fund (general taxation) to make up the shortfall. The Government Actuary advises on whether such a transfer is necessary to make good any shortfall, and on the amount of the payment required.
8. A surplus of NICs over social security benefits in any one year is often known as the NIF surplus. The surplus is invested by the Commissioners for the Reduction of the National Debt, currently in a short-term investment account called the Debt Management Account Deposit Facility.[253] Interest received on the investments increases the surplus. A working balance surplus is necessary because the NIF has no borrowing powers and because changes in contribution levels in response to the needs of the fund take time to implement. Without this, the Government would need to raise the equivalent amount through other means, such as increased taxation.
9. Using the NIF surplus would in reality be no different from using taxpayers’ money directly. Any purported transfer of spending provision to FAS from these areas would involve an increase in overall spending and taxation unless existing levels of social security benefits were cut. Primary legislation would also be required to change the uses to which the NIF can be put.
10. As funding associated with NICs is already covered by existing legislation, and using these funds would draw further on public funds, this source of funding is outside the scope of this Review.
Tax overpayment refunds
11. Any overpayments of tax and associated refunds, as well as any unclaimed social security benefits, are factored into the Government's forecast for the fiscal position. This is used to set the Government’s spending position. This means that there is no unclaimed 'pot' of tax overpayments or benefit underpayments that could be drawn on for specific purposes. So as with the NIF ‘surplus’, to pursue funds associated with tax overpayment refunds would result in increasing public expenditure; therefore, this area is out of scope for this Review.
National Savings and Investments
12. According to evidence given by the Economic Secretary to the Treasury Committee,[254] NS&I holds “£436 million of unclaimed assets, using the same definition as the banks and the building societies; £974 million if you also include Savings Certificates; and then £993 million including unclaimed Premium Bond prizes.”
13. The Review team has also noted the Treasury Committee’s recommendation that “NS&I be brought into the scope of the Unclaimed Asset Scheme”,[255] the scheme currently proposed by HM Treasury in relation to unclaimed bank and building society assets.
14. NS&I raises debt finance for Government on the retail market. As a result, NS&I does not hold investors’ deposits on its own balance sheet as banks and building societies do, rather it is all held on the Exchequer where it is used to fund public spending. Diverting these assets into a different scheme would therefore result in either decreased public spending or an increase in taxation or borrowing to enable funding commitments to be met. As with the NIF, whilst there may be unclaimed entitlements, there are no supporting assets lying dormant in any of these areas.
15. So, as with the NIF ‘surplus’, to make use of any unclaimed assets within NS&I would draw further on public funds; therefore, this source of funding is outside the scope of this Review.
Court Funds Office
16. The Court Funds Office provides a banking and investment service for the courts throughout England and Wales, including the High Court. It accounts for money being paid into and out of court and, as directed by the court, looks after any investments made with that money.[256]
17. The Court Funds Office also holds unclaimed sums of money and is responsible for the Unclaimed Balances Fund. The fund is made up of money paid into court that has not been claimed or where the rightful owner cannot be found.
18. The Review team understands that there is around £130 million being held in the unclaimed balance fund.[257] As at March 2007 the Unclaimed Balances Division had paid back over £38 million.[258]
19. There are various kinds of unclaimed Funds in Court, often loosely called ‘Estates in Chancery’ or ‘Money in Chancery’. All assets will have been sold, and it is the proceeds of the sale that are lodged in Court. The main types of Funds in Court include:
• monies paid in under Civil litigation and other proceedings dealt with in County Courts and the High Court where no transaction has taken place for a period of 10 years (5 years before 1 December, 2000);
• awards of the Family Court;
• compensation from the Civil Injuries Compensation Board;
• compensation under Compulsory Purchase Acts, in cases where either the ownership of the property is unknown or the owner refuses to accept it;
• legacies, where missing heirs cannot be found;
• money lodged for dissenting shareholders; and
• mortgage foreclosures, when the mortgagor cannot be traced: the net proceeds of sale.
20. Under the Administration of Justice Act 1982, all funds received by the Court Funds Office are ‘invested’ with the National Debt Commissioners with a view to paying off the national debt.
21. An account that has been opened in the Court Funds Office, from monies lodged, where no movement of funds into or out of the account has taken place for a period of 10 years becomes Dormant Funds and no longer attracts interest.
22. As these unclaimed assets are already allocated in legislation, and to make use of them would draw further on public funds, they are outside the scope of this Review.
Bona vacantia
23. One of the Funds in Court includes legacies where missing heirs cannot be found. In English law, title to property must belong to, or 'vest in', an identifiable person or body. No property or goods are ownerless. If legal ownership cannot be established by anyone else, it falls to the Crown to deal with the assets concerned. Such property or goods are known as 'bona vacantia'. ‘Bona vacantia’ literally means ‘vacant goods’ and is the legal name for ownerless property, which by law passes to the Crown.[259]
24. The Treasury Solicitor is the Crown's Nominee for the purposes of the administration of the estates of persons who die intestate and without known kin and for the collection of the assets of dissolved companies and other miscellaneous bona vacantia in England and Wales. In Northern Ireland, these matters are dealt with by the Crown Solicitor as the Treasury Solicitor's Nominee. In Scotland, bona vacantia is administered by the Queen's and Lord Treasurer's Remembrancer.
25. Bona vacantia which passes to the Treasury Solicitor is held for up to 12 years after the estate has been administered. After the 12 years any claim to the money is statute barred by the Limitation Act, but the Bona Vacantia Division at the Treasury Solicitor’s Department will, at their discretion, account to kin for the money they are holding on the understanding that no interest is paid on the money between 12 and 30 years.
26. In 2006/07, the Bona Vacantia Division handled over 11,000 new cases and receipts of over £38m.[260] £37m was transferred to the Exchequer from bona vacantia collected during this period, which represents the annual transfer of money to the Consolidated Fund, and a one-off payment of £30m to clear a surplus balance that had built up over a number of years. The costs of the Division are met from receipts.
27. The procedures followed in Scotland, Northern Ireland, the Duchy of Lancaster and the Duchy of Cornwall are substantially the same as those followed by the Treasury Solicitor in England and Wales.[261]
28. As bona vacantia is already allocated to the Crown through legislation, these assets are outside the scope of this Review.
Unclaimed pension assets
Public Sector pensions
29. Most public sector pensions like the NHS, Teachers and Civil Service pension schemes are unfunded i.e. not backed by funds or assets. Although there may be unclaimed liabilities associated with these schemes, there are no specific, ring-fenced, assets to support them; the schemes are run on a pay as you go basis in a similar fashion to the National Insurance Fund as detailed above. Therefore using these funds would increase public expenditure, so these areas are outside the scope of this.
30. The remaining public service pensions are funded. As with other schemes, some pensions may go unclaimed, but the right for individuals and their estates to claim their entitlements extends into the future.
31. Of these remaining schemes, most are trust-based, and assets are held for the collective purposes of the trust. Therefore the arguments noted above about trust-based schemes apply here too[262] and unclaimed assets within trust-based pension schemes should not be considered.
32. The funded Local Government Pension Scheme (LGPS) is not trust-based and has benefits guaranteed by statute like the unfunded schemes.[263] With 3.5 million members, the LGPS is one of the largest public sector pension schemes in the UK and is by far the biggest funded public services scheme.[264]
33. If funds were to be removed from this scheme for any purpose, this would create the need for extra contributions from the employers. However, due to the nature of the employers as local authorities and public service organisations, this would in turn imply a need for council tax rises or grants from central Government, and thus increased pressures on public spending. Hence, this area is not within the scope of this Review.
Gambling winnings
National Lottery
34. The National Lottery sometimes sees some prizes left unclaimed. Unclaimed prizes are those that are not claimed in accordance with relevant rules for the constituent lottery (and therefore can no longer be the subject of a valid claim). Applicable prize claim periods for different games are as follows:
• Draw-based games – within 180 days of the relevant draw;
• Scratchcard games – within 180 days of the announced closure of the particular game; and
• Interactive Instant Win Games – within 180 days of the day on which the relevant play was purchased.
35. The National Lottery etc. Act 1993 (as amended) established the National Lottery Distribution Fund (NLDF) and arrangements for payment of proceeds of lotteries forming part of the National Lottery into it. Prizes (as above) which are not claimed within 180 days of the draw date go to the NLDF to distribute to good causes.
36. The good causes which benefit from Lottery proceeds are defined in primary legislation, specifically the National Lottery etc Act 1993, the National Lottery Act 1998 and the National Lottery Act 2006. At present there are five good causes, namely:
• the arts;
• the national heritage;
• sport;
• expenditure which is charitable or is connected with health, education or the environment; and
• the London Olympic and Paralympic Games in 2012.
37. From 2004/05 to 2006/07, £390m worth of prizes went unclaimed and was passed to the NLDF for distribution to good causes.
38. As unclaimed National Lottery prizes are already dealt with in legislation, these are outside the scope of this Review and are not being considered further.
Annex M: Summary of written representations made to the Review team
1. In our interim report[265] we said that “the Review team would welcome comments on any aspects of this report or our programme of future work more generally”.
2. The Review team has received written representations from individual scheme members, trustees, administrators and other interested parties on a wide range of issues as shown below:
|Subject |Number of representations |
|Scheme assets | |
|Halting annuitisation |2 |
|Use of scheme assets | |
|Complexity of current benefit structure within pension schemes |1 |
|Possible simplification measures to support a revised FAS scheme |1 |
|Treatment of AVCs for future FAS |1 |
|Other funding sources | |
|Use of unclaimed assets, mainly in banks and building societies, to |8 |
|fund any future extension to FAS | |
|Use of unclaimed assets in insurance industry (including potential |4 |
|drawbacks) | |
|Pension schemes with solvent employers | |
|Pension schemes with compromise agreements in place (additional) |14 |
|Extension of FAS to pension schemes outside the current and proposed |54 |
|eligibility criteria | |
|Cut off date for insolvency events for FAS qualification |2 |
|Contact details for schemes |5 |
|Employer debt – trustee behaviour in litigation cases |1 |
|Future FAS – benefits structure | |
|Payment from scheme pension age |38 |
|Payment at PPF levels |5 |
|Mirror PPF benefits |1 |
|Offer a tax free lump sum payment at retirement |1 |
|Offer full indexation |1 |
|Offer early retirement option |1 |
|Other issues | |
|Pension schemes outside the scope of FAS or the PPF |4 |
|Current FAS policy issues |2 |
|Total |146 |
Note: some responses from individual commentators cover more than one subject area
List of abbreviations used
ABCUL – Association of British Credit Unions Limited
ABI – Association of British Insurers
AFS – Association of Friendly Societies
AMI – Association of Mutual Insurers
AVC – Additional Voluntary Contribution
BSP – Basic State Pension
CRND – Commissioners for the Reduction of the National Debt
CSOP – Company Share Option Plan
CVL – Creditors Voluntary Liquidation
DB – Defined Benefit
DBB – Deemed Buy Back
DC – Defined Contribution
DMADF - Debt Management Account Deposit Facility
DMO – Debt Management Office
DWP – Department for Work and Pensions
EMI – Enterprise Management Incentives
EU – European Union
FAS – Financial Assistance Scheme
FASOU – Financial Assistance Scheme Operational Unit
FSA – Financial Services Authority
FSCS – Financial Services Compensation Scheme
FSMA – Financial Services and Markets Act
GAD – Government Actuary’s Department
GMP – Guaranteed Minimum Pension
HMG – Her Majesty’s Government
HMRC – Her Majesty’s Revenue and Customs
HMT – Her Majesty’s Treasury
IB – Industrial Business
ICA – Individual Capital Assessment
ICSA – Institute of Chartered Secretaries and Administrators
ISA – Individual Savings Account
LGPS – Local Government Pension Scheme
LPI – Limited Price Indexation
MFR – Minimum Funding Requirement
MVL – Members Voluntary Liquidation
NCCUSL – National Conference of Commissioners on Uniform State Laws
NIC – National Insurance Contribution
NIF – National Insurance Fund
NILO – National Investment Loans Office
NLDF – National Lottery Distribution Fund
NPA – Normal Pension Age
NPV – Net Present Value
NRA – Normal Retirement Age
NS&I – National Savings and Investments
NTMA – National Treasury Management Agency
OB – Ordinary Business
OEIC – Open Ended Investment Companies
OPG – Office of HM Paymaster General
PASC – Public Administration Select Committee
PPF – Pension Protection Fund
PPFM – Principles and Practices of Financial Management
PwC – PricewaterhouseCoopers
RPI – Retail Price Inflation
S2P – State Second Pension
SAYE – Save As You Earn
SERPS – State Earnings Related Pension
SFP – Statement of Funding Principles
SI – Statutory Instrument
SIP – Share Incentive Plan
SPA – Scheme Pension Age
STPR – Social Time Preference Rate
TPAS – The Pensions Advisory Service
tPR – The Pensions Regulator
UAR – Unclaimed Assets Register
-----------------------
[1] Net Present Value – for further explanation see Chapter 2.
[2] Statement by John Hutton, Secretary of State for Work and Pensions, 28 March 2007
[3] See
[4] Large here is defined relative to the total amount of uncommitted scheme assets rather than other potential measures of size such as number of scheme members.
[5] The Financial Assistance Scheme (Halting Annuitisation) Regulations 2007, Statutory Instrument 2007 No. 2533 (), came into force on 26 September 2007.
[6] Schemes will frequently secure pensioner benefits through annuity purchase early in the scheme wind up since the statutory priority orders make it relatively simple to determine pensioner entitlements. Amounts for deferred members are harder to determine since they comprise the residual of assets after wind up is completed; therefore these benefits are usually secured at the very end of the process.
[7] Foreword in Financial Assistance Scheme Review of Scheme Assets, Interim Report, July 2007, DWP
[8] Deemed Buy Back (DBB) allows eligible people who have incurred losses, where a scheme is unable to meet its liabilities in full, to be fully or partly reinstated into the State Second Pension scheme or SERPS for the period they were contracted out into an occupational pension scheme. The option allows people to ‘buy back’ into the state Additional Pension at less than the full cost of doing so. Any shortfall is ‘deemed’ to have been paid
[9] 65 is the age at which FAS payments currently start, though members with a normal pension age (NPA) below 65 can receive a (scaled back) scheme pension from their NPA.
[10] Available at
[11] A compromise agreement arises when a scheme winds up underfunded, but the trustee does not enforce the full amount of the debt owed by the employer to the scheme; instead they accept an amount less than the debt owed by the employer. Trustees may take this option rather than force the employer into insolvency that would cause job losses and would also be unlikely to generate them any additional money (since the pension scheme is treated as a non-preferential unsecured creditor).
[12] See the foreword of our interim report.
[13] The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007.
[14] See the Terms of Reference in Annex A.
[15] See the foreword of our interim report.
[16] Statement by John Hutton, Secretary of State for Work and Pensions, 28 March 2007
[17] See
[18] Available at .uk/pensionsreform/pdfs/InterimReportJuly2007.pdf
[19] The FAS (Miscellaneous Amendment) Regulations 2007.
[20] See Statutory Instrument 2007 No. 2533, The Financial Assistance Scheme (Halting Annuitisation) Regulations 2007 for further details.
[21] The amount payable from FAS previously depended on how far a person was from their normal retirement age:
a) If an individual expected to reach their normal retirement age anytime up to and including 14 May 2011 FAS would top up to 80 per cent of expected core pension;
b) If an individual expected to reach their normal retirement age between 15 May 2011 and 14 May 2015 FAS would top up to 65 per cent of expected core pension; or
c) If an individual expected to reach normal retirement age between 15 May 2015 and 14 May 2019 FAS would top up to 50 per cent of expected core pension.
[22] Previously, initial payments topped up interim pensions to 60 per cent of expected core pension (subject to the cap).
[23] FAS payments can be made earlier than 65 where the qualifying member is terminally ill.
[24] Information from tPR suggests that the vast majority of these schemes (which are limited to a maximum of 12 members) are defined contribution and therefore, by definition, not eligible for FAS. However, there is at least one small self-administered defined benefit scheme that is winding up underfunded with an insolvent employer and whose members are in a similar position to other schemes being assisted by FAS.
[25] See
[26] Schemes that are eligible for FAS assistance but are fully wound up were not contacted since their assets have already been used to secure scheme pensions through annuity purchase.
[27] The period of data collection ran from 12 June 2007 to 4 July 2007, a total of 403 returns were provided, two being delivered after the exercise closed (inspection of these two schemes returns suggests they have combined assets of approximately £30 million, however given current estimates are weighted for non-response this should not have any effect on our estimates). A small number (14) of scheme returns were excluded due to inadequate data.
[28] The FAS Operational Unit supplied information on the total number of members (both eligible and not eligible for FAS assistance) in FAS schemes.
[29] To convert our estimates of assets from the sample to the entire FAS eligible population, we have used an uprating factor of 1.16.
[30] All estimates of assets are shown uprated to a whole population basis unless stated otherwise.
[31] Here ‘largest’ refers to the value of assets in the schemes.
[32] The ranking is on the basis of asset values and has been done separately for schemes that have and have not started to annuitise.
[33] Largest is defined by asset value and includes all schemes whether they have started to annuitise or not.
[34] The Financial Assistance Scheme (Halting Annuitisation) Regulations 2007, Statutory Instrument 2007 No. 2533 (), came into force on 26 September 2007.
[35] The scheme size bands are defined by the total number of scheme members including all active, deferred and pensioner members not all of whom will be eligible for FAS assistance.
[36] This information was shown in Figure 2 in our interim report.
[37] Some caution should be attached to these numbers as:
a) The number of schemes contributing to the ‘Other investments’ category is small and schemes may have misinterpreted what should have been recorded here e.g. including managed funds which may have been recorded elsewhere as ‘Equities’ or ‘Insurance Policies’ or including deposits which may have been recorded elsewhere as ‘Cash’;
b) A few schemes did not give percentage asset allocations, and asset figures for such schemes have been divided up between asset types pro rata to proportions for schemes which did give full details; and
c) The date which the asset breakdown applied at may have been a different date from the value of assets.
[38] Other investments include property.
[39] Chapter 3, paragraphs 3.15 to 3.21.
[40] For schemes which have already committed some, or all, of their assets to insurance companies for the purchase of annuities, the quoted funding levels would generally be as at a date before any transfer of monies to the insurer had taken place.
[41] The MFR was part of a package of measures that was introduced in the 1995 Pensions Act and came into force in April 1997 (see Annex E for more details). It required defined benefit pension schemes to hold a minimum level of assets to meet their liabilities (though it never guaranteed full benefits for all), and set out time limits within which any underfunding had to be met.
[42] The amount required to secure the full liabilities of the scheme (see Annex E for more details). Full buyout involves a complete transfer of scheme assets and liabilities to an insurance company, allowing the sponsoring employer and scheme trustees to be completely discharged of their liabilities to the scheme.
[43] Under the statutory priority orders likely to apply to most FAS schemes, pensioners are the first group to have their liabilities secured – see Annex D for more details.
[44] Not all members will be eligible for FAS since they are entitled to scheme benefits that exceed FAS levels.
[45] Some caution has to be attached to these figures since in some cases schemes were either only able to supply estimates, or the pensioner/non-pensioner split provided may not reflect that used to divide assets at wind up.
[46] The priority order determines how scheme assets are utilised on wind up and which benefits are secured in what order.
[47] Typically about 45 per cent of the liabilities in an ongoing pension scheme might be in respect of pensioners; therefore, if the scheme was fully funded, 45 per cent of the assets would belong to pensioners. However, given FAS schemes which:
a) are generally underfunded, affecting assets allocated to non-pensioners in particular; and
b) pensioners and non-pensioners are defined at the crystallisation date (some time in the past) some of the pensioner liabilities will have run off.
It is probably reasonable to assume that the pensioner assets fall to around 40 per cent, but deferred members assets decline to around 20 per cent of the full buy out basis and hence pensioners are entitled to 67 per cent (40 divided by 60) of the remainder.
[48] This assumes that 67 per cent of the £1.3 billion (around £870 million) is attributable to pensioners, but the £0.4 billion assets in schemes that have started to annuitise is wholly in respect of deferred members (which is probably reasonable as pensioners will be the first group to have their benefits secured).
[49] In addition there are around 14,000 people in schemes that have wound up, around three quarters of which are deferred members.
[50] Around 130,000 people are eligible for FAS assistance. The remaining members have scheme benefits that exceed FAS levels and are therefore not eligible.
[51] Numbers are shown after weighting for non-response and are rounded to the nearest 1,000.
[52] Available at
[53] FAS is paid for out of general taxation on an ongoing basis; funds are not set aside in advance.
[54] Under the new FAS arrangements, introduced via the Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007, eligible members will be topped up to a maximum of 80 percent of core pension subject to a cap (previously set at £12,000, but increasing to £26,000 under new legislation).
[55] It is possible, in principle, for Government to pre-fund FAS by transferring sufficient funds to fully annuitise everyone. However, this is unlikely to be an option that would be actively considered given it would require all the Government expenditure to be made up front.
[56] Government need not actually administer payment of the top up, they could instead pass the funds (on either an ongoing or one off basis) to an insurer or fund manager to make the payment on their behalf; this would offer the advantage that recipients received a single payment stream removing some duplicate activities that occur in the current arrangements.
[57] The PPF had around £850 million in assets under management with eight external fund managers at October 2007; this is from a combination of funds from collapsed schemes, income from levy payers and investment growth.
[58] In practice, given the open-ended nature of liabilities and the attached uncertainties, prices may prove to have been fair and reasonable. There is a lack of long term matching instruments available, particularly for index linked pensions, and the long timescales attached to deferred annuities tend to push insurers towards backing their products with bonds. These tend to have low yields, particular at long durations, due to the high demand from investors such as pension funds. There may also be additional margins reflecting the uncertainty over exactly what is being insured, for example, the proportion married who may, therefore, leave a survivor entitled to an ongoing pension.
[59] A transfer payment would normally bring forward expenditure. However, for deferred annuitants securing their pension now, through a deferred annuity purchase, when they may not receive payment till several years later, already has this effect. In options where assets are used to create a fund, transfer payments would reduce the quantity of assets that could be ‘managed’ and is therefore less likely to be attractive.
[60] For example, Government would agree to pay the entire FAS payment to anyone aged over 90, but the assets would finance more of the payments up to that age.
[61] For example, Government would agree that if longevity exceeds forecasts by over 5 per cent then it would take full responsibility for that part of any payment.
[62] It would be less costly to the insurer and so they would offer a better price since they would be carrying relatively less risk; in effect the amount of insurance purchased would be reduced. However, the corollary of this is Government would carry relatively more risk. The overall quantum of risk should not have changed, but if insurers and Government had relatively different preferences, and prices, for the types and profiles of risk they held then a reallocation could improve efficiency.
[63] At present members gets a scheme pension from NPA (assuming this is less than 65) to 65, then they get FAS and scheme pension from 65. Paying FAS from NPA would make this much simpler and make attribution of scheme assets easier since there would not be a need to earmark those assets required to pay pensions till FAS assistance starts.
[64] In effect all the options we have proposed have this feature.
[65] Generally this would be via transfers and therefore similar issues apply to those outlined for younger deferred annuitants.
[66] See for more details.
[67] In particular section 286 (3)(b) explicitly allows for regulations to be made “for the person who manages the financial assistance scheme (“the scheme manager”) to hold (whether on trust or otherwise), manage and apply a fund in accordance with the regulations or, where the fund is held on trust, the deed of trust;”
[68] The level of payment depends on the ability to consolidate assets as without this consolidation new arrangements are unlikely to be feasible and it is these new arrangements that should deliver additional value.
[69] There are a number of people in FAS eligible schemes who are not currently eligible for assistance but where scheme assets in relation to them may also be transferred so that those assets may be used to generate further value through, for example, the provision of additional scale.
[70] Though we are aware that some of the commonly cited reasons for delay e.g. the lack of clarity over who was a pensioner arising from the Trustee Solutions vs. Dubery case have recently been removed.
[71] ‘Speeding Up Winding Up Of Occupational Pension Schemes’ November 2006, DWP,
[72] tPR provide best practice guidance, and model winding up plans, for different types of schemes including indicative timeframes for the different stages of wind up.
[73] PPF aims to bring at least 75 per cent of schemes to the end of assessment within two years.
[74] Numbers will be increased by the extension to schemes with a compromise agreement.
[75] These 190 schemes have around 120,000 members.
[76] See Annexes D to G for more details.
[77] However, in the PPF model trustee behaviour has, arguably, to an extent, been influenced by the PPF caseworkers’ oversight
[78] In the event of a fully anticipated increase in longevity annuity rates would be lower leaving Government to face a higher top up cost to reach 80 per cent. However, an unanticipated increase in longevity would be reflected in annuity providers’ profits rather than prices.
[79] Government could, if it wanted, get rid of any longevity risk amongst FAS cases by buying top-up annuities sufficient to reach the appropriate level of core pension from the relevant existing annuity provider. This would have the advantage of removing continuing Government responsibility for these members, but at the cost of paying upfront for the annuity i.e. converting FAS from a PAYG to a funded system. Government is, in practice, likely to be willing to accept at least some degree of longevity risk as demonstrated by the current arrangements.
[80] This assumes that a fund could not hedge mortality, through for example, longevity bonds.
[81] In practice a proportion of the assets in FAS schemes have already been used to secure benefits through annuitisation and as Government are unlikely to be able, or indeed want, to unwind existing annuity contracts it would only be assuming the full risk on those remaining assets.
[82] Technical provisions outline how insurance liabilities should be measured. This is a complicated area, but the main point is that the valuation should be based on the expected present value of forecast future cash flows on a ‘best estimate’ basis, together with an explicit risk margin. The risk margin is the additional capital required to cover liabilities given a sequence of ‘stress tests’ which simulate adverse market events.
[83] The total liability of the unfunded public service occupational pension schemes, as at 31 March 2005, was estimated by the Government Actuary’s Department (GAD) to have been approximately £530 billion. For further details see the note by HM Treasury at .
[84] Pensioner benefits are defined as Basic State Pension, Additional Pension, Non Contributory Retirement Pension, Pension Credit, Winter Fuel Payment, Over 75s TV licences, Christmas Bonus, plus Housing Benefit, Council Tax Benefit, Attendance Allowance and Disability Living Allowance paid to pensioners.
[85] This compares to a total lifetime NPV of FAS, over the next 80+ years, of only around £2 billion on current arrangements.
[86] The £100 million is the additional NPV cost of paying the top up under the highest longevity variant suggested by GAD less the cost of paying on a central, or best estimate, basis. There is, of course, a possibility longevity improvements are even greater than the current forecast maximum in which case costs would be correspondingly higher.
[87] All NPV estimates are on a Green Book consistent basis – see Chapter 2 for more details.
[88] As an illustration of the different forecasts male life expectancy at age 65 in 2024 are 28.4 years in the high longevity scenario, 24.1 in the central scenario and 21.2 in the low longevity scenario.
[89] Given the limited market in mortality insurance it is unlikely that this risk could be passed to the private sector.
[90] Conventionally, due to the FSA rules around solvency, most annuities are backed by relatively lower risk instruments such as bonds. This is not a requirement of the rules, but if higher risk assets like equities were used there would be a need to hold relatively more reserves.
[91] See for more details. The current PPF strategy, at October 2007, is to hold 20 per cent of assets in UK bonds/cash, 50 per cent in global bonds, 12.5 per cent in UK equities, 7.5 per cent in global equity, 7.5 per cent in property and 2.5 per cent in currency.
[92] The PPF’s Statement of investment principles describes its risk tolerance as “…the maximum ex-ante standard deviation of the difference between the asset return and the return on the ‘liability benchmark’. This liability benchmark is the notional portfolio of assets that exactly matches the expected liability cash flows.”
[93] The lower end of the range assumes all gilts, with some limited movement towards investment grade corporate bonds at the upper end of this range.
[94] Arguably there is also an inflation risk on level annuities in so far as with low inflation the real value stays higher for longer and therefore the NPV of the payment stream will be larger. In practice insurers are likely to price both level and indexed annuities with relation to an expected level of inflation and deviations from these expectations rather than the absolute level are likely to be one important factor in determining their profit or loss.
[95] These cover factors such as longevity, scheme funding levels, the type and value of annuity that is secured etc.
[96] These cover, for example, factors such as longevity, presence of spouses etc.
[97] The risk of the other party in any agreement defaulting is known as counterparty risk.
[98] For further details see .
[99] The statutory priority order defines how scheme assets are apportioned; it does not define what benefits are then purchased with these asset shares. On wind up some trustees will try to replicate scheme benefits and buy a proportion of the promised pension in line with the priority order, others will use an individual’s share of assets to secure benefits that differ from the priority order, or scheme rules, since they believe this to be more efficient. For example, trustees may use scheme assets to secure indexation; this would lead to lower initial annuity payments and a higher level of FAS assistance which is not subsequently revised as annuity payments increase.
[100] Paragraphs 3.8 and 3.9 in our interim report have some more details about prospects of recovery. Generally, relatively few schemes indicated they are trying to recover assets and the amounts concerned are relatively limited.
[101] Some trustees may prefer to annuitise assets rather than transfer them to a ‘manager’ but Government has introduced regulations to prevent annuity purchase without the scheme manager’s permission (which will be granted only where the annuity purchase is demonstrably in members’ best interests) unless there is a pre-existing commitment to purchase.
[102] “The commitment that we are announcing today is to match the extra funds that the review identifies with the goal of moving towards 90 per cent of expected core pension for all recipients” , statement by Mike O’Brien, Minister of State for Pensions Reform in the House of Commons, 17 July 2007
[103] For example, pre-discontinuance pensioners are likely, under statutory priority orders, to receive 100 per cent of their expected scheme benefits. However, as we explained in Chapter 2, around half of the £1.7 billion of assets we have identified could be in respect of such members. Allowing their assets to be annuitised would reduce the quantum available to generate additional value. Whilst these members would not gain from this additional value, since they already stand to receive 100 per cent, the extra that assets from their scheme helped to realise could generate additional assistance for others.
[104] Statement by Mike O’Brien, Minister of State for Pensions Reform in the House of Commons, 17 July 2007.
[105] Figures are shown rounded to the nearest £5 million or 1 per cent, and are not including the promised Government match.
[106] Government taking in scheme assets is equivalent to the lower end of this range.
[107] Arguably, since one insurer told us that it would not be possible to derive any gains from bulk annuitisation the lower point of the range could be zero.
[108] This is derived from the percentage gain above multiplied by £1.7 billion in scheme assets.
[109] Values for gross additional Government liabilities and longevity estimates in Table 3 are based upon deflation using HMT Green Book NPV principles. This is calculated using a central longevity estimate.
[110] Arising from pension payments to people aged in excess of the longevity cut-off.
[111] If Government takes responsibility for the scheme assets and their associated payments (liabilities) or if the fund was classified as within the public sector boundary then this would become £1.7 billion, but would be matched by the assets taken in.
[112] Risk of additional spending due to uncertain longevity is calculated using a central longevity estimate, and then taking a high longevity estimate and comparing the difference. Figures in are shown in HMT Green Book NPV.
[113] In a fund where there is a move away from an all gilts investment strategy the risk starts to become non-trivial.
[114] Providers find certain types of annuity relatively easier and hence cheaper to supply than others due to the FSA solvency requirements and availability of suitable backing instruments. For example, level annuities do not provide inflation protection so do not expose providers of them to inflation risks, whereas index linked (or escalating) annuities expose providers to inflation risk, which they may need to hedge against, resulting in additional costs.
[115] There is also a moral hazard in that since Government has committed to top up by what ever amount is necessary to meet the appropriate level of core pension, annuity providers may have a reduced incentive to offer the most competitive annuity rates and trustees a reduced incentive to negotiate the most competitive terms.
[116] In practice some trustees will try to secure a proportion of scheme benefits, others will take the asset share allocated to an individual and ‘reshape’ their benefits through purchasing a more standard annuity product. This discretion leads to some potential moral hazard risk e.g. trustees could purchase annuities with escalation which would give a relatively lower starting level of pension and therefore a higher entitlement to FAS.
[117] For example, annuitising on a scheme by scheme basis means annuitants in any single scheme tend to have similar characteristics due to the region and occupation that they worked in, hence the mortality experience is likely to be broadly similar. Whereas annuitising at the level of the entire FAS population means there will be a greater variety of people and hence some offsetting effects i.e. benefits of pooling. There is a possibility that, for some FAS schemes that have particular characteristics, pooling risks may lead to annuities being offered on less attractive terms than if they individually annuitised (since low risk people are combined with other higher risk groups). However, these people would not lose out since Government would be ensuring a common benefit across schemes.
[118] In arrangements where Government takes all the longevity risk it gets the potential ‘gain’ from heavier than anticipated mortality in exchange for being willing to accept the ‘loss’ from lighter than expected mortality. However, in risk sharing arrangements any potential upside gain would go to insurers and Government would only be left with downside potential.
[119] Clearly the outsourcers providing services to the PPF will be seeking to make a profit.
[120] The £2 million is across the whole of FAS, rather than in each scheme.
[121] Due to the increased scale of funds under management there would be a probable saving in fund management expenditure, particularly with relation to bonds. For example, Figure 1 in ‘How to evaluate alternative proposals for personal account pensions, An economic framework to compare the NPSS and Industry models, Oxera, October 2006’, suggests that there are significant economies of scale in fund management below £500 million and still some gains up to £1 billion (particularly in passively managed funds).
[122] CRND is part of the DMO; provides more details of its role and remit.
[123] A NILO stock is a non marketable stock that is created by the National Loans Fund (NLF) specifically for a CRND fund that needs to hold gilt type instruments. It has the same characteristics as a 'parent' gilt (i.e. pays a regular coupon and has a defined maturity) except that it cannot be traded in the secondary market on the London Stock Exchange. However, the CRND fund can cancel the NILO stock by selling it to the NLF before maturity for the market price of the 'parent' gilt e.g. if it wished to switch its investments to cash.
[124]Assumes the combined value of FAS assistance plus actual accrued rights is paid at the rate of £16,000. The 'limit' of £16,000 is for illustrative purposes only and is based on the commutation limit (1 per cent of the lifetime allowance) for a winding up lump sum payment payable under paragraph 10, Part 1, of Schedule 29 of the Finance Act 2004. In practice not everyone would get the maximum payment of £16,000 as this would vary depending on an individual's circumstances and the level of rights that they had accrued.
[125] See “Financial Assistance Scheme Review of cost estimates” published by DWP for more details of these costings.
[126] See Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007.
[127] The Green Book, Appraisal and Evaluation in Central Government, HM Treasury, London, TSO, also see
[128] These estimates differ slightly from previously published results as they have been re-estimated using a new model.
[129] £620 million was the estimated lifetime cash costs of the original FAS scheme, though the promised Government commitment was £400 million cash.
[130] The annuity secured is one based on contemporary bulk buy out rates.
[131] As with most estimates of mortality what seems a cautious assumption at the time its made may, with the benefit of additional information, turn out not to have been cautious enough given rapid (and not fully anticipated) increases in longevity.
[132] Available at
[133] Available at
[134] Section 286(5), Pensions Act 2004
[135] Note that not all of these are dealt with in this chapter, those that we regard as outside the scope of this review are detailed in Annex L.
[136] As defined in Regulation 6 of The Financial Assistance Scheme Regulations 2005 S.I. 2005/1986
[137] “A UK Unclaimed Asset Scheme: a consultation, March 2007, HM Treasury”. It is worth noting that a suitable definition for banks and building societies may be less applicable to, for example, pension funds where these may often be characterised by long periods without customer interaction.
[138] The 2003 Act in Ireland defines ‘policy’ as including “a Personal Retirement Savings Account established with an insurance undertaking”, i.e. not an occupational scheme.
[139] Industrial branch insurance is where the premiums are collected, frequently in cash (on a weekly, fortnightly or monthly basis for instance), using door-to door agents rather than through a banking arrangement. The high labour costs of collections can mean that the benefits can be comparatively lower, and this method of selling has often only focused on those who could afford relatively small premiums. There is almost no selling which currently takes place within industrial branch insurance.
[140] Ordinary branch insurance will usually collect premiums in the form of annual, quarterly or monthly direct debit payments, and there will often be conditions on minimum premiums to be paid. As a result, ordinary branch customers are often comparatively more affluent than industrial branch customers.
[141] With-profits policies are long-term investments provided by insurance companies. Policyholders pay premiums which are then put together in a pooled fund which is invested by the insurance company. If the investments perform well, a bonus is allocated to policies. Companies routinely hold back some investment returns in good years, so that bonuses can be topped up in years when the fund performs poorly. This is known as 'smoothing'.
[142] For example, Norwich Union announced on 5 November 2007 that they are to try to return around £40 million of unclaimed life and pension policies to 40,000 customers. The money is held in life and pension policies dating as far back as the 1950s, with many held by other companies which were subsequently merged into Norwich Union and its subsidiaries in the late 1990s.
[143] Written submission of 22 June 2007 to the FAS Review of Scheme Assets
[144] Figures sent to Review team by ABI
[145] Written submission of 22 June 2007 to the FAS Review of Scheme Assets
[146] Treasury Committee report published on 6 August 2007: “Unclaimed assets within the financial system”.
[147] Under rules introduced by the FSA in 2005.
[148] Submission to the FAS Review team from FSA, 29 November 2007.
[149]
[150] Friendly Societies Act 1992 (S10)
[151] Submission to FAS Review of Scheme Assets on 14 September 2007
[152] Building Society Association: Ev 81, 6 August 2007 Treasury Committee report: “Unclaimed assets within the financial system”: “In a building society, as a mutual, its account holders (with the exception of a few depositors) are also its members, i.e. its shareholders.”
[153] Under section 425 of the Companies Act 1985
[154] Section 427(3) Companies Act 1985
[155] For offers made after 5 April 2007, compulsory acquisition is governed by Part 28, sections 974-987, of the Companies Act 2006
[156] Legislation is not specific as to what ‘reasonable intervals’ are.
[157] This procedure requires details to be provided of the consideration to be paid into court, together with the reasons for the dissentient balances, and the name and last known address of each dissentient shareholder.
[158] Under the provisions of s430 (11)
[159] Ev 69, 6th August 2007 Treasury Committee report: “Unclaimed assets within the financial system”
[160] Demutualised through an insurance business transfer scheme under Part VII FSMA2000 (approved by a member’s resolution).
[161]
[162] Figures refer to volumes prior to transfer into the Scottish Life Fund on July 2007 expiry date.
[163] The acquisition of shares and securities in connection with an employment other than through one of the above schemes are commonly referred to as ‘unapproved’ or 'taxed' schemes’. This means that neither the employee, nor the employer benefit from income tax or National Insurance advantages and these do not require HMRC approval.
[164]
[165] Listing Rules (9.5.4):
[166] Usually referred to as Tables A-F
[167] Article 108 of Table A
[168] i.e. Undertaking for Collective Investment in Transferable Securities (UCITS), Non-UCITS Retail Scheme (NURS) or a Qualified Investor Scheme (QIS)
[169] As opposed to accumulation where income is transferred directly to the capital property
[170] Pg 93 of 104, New Collective Investment Schemes: COLL 6.8.4 R
[171] COLL 7.3.7 R (10)
[172] “Where any sum of money stands to the account of the OEIC at the date of its dissolution, the ACD must arrange for the depositary to pay or lodge that sum within one month after that date in accordance with regulation 33(4) or (5) of the OEIC Regulations (Dissolution in other circumstances).”
[173] Some investment companies specifically adopt model articles contained in the 1985 Companies Act which provide that after 12 years directors can resolve that unclaimed dividends can be forfeited, as is the case with other PLCs. Again, these sums are then used for the benefit of the remaining shareholders or donated to charity.
[174] FSA’s CASS 4.3.99R: Where an investment bank or non-bank broker holds money for customers as client money under the Financial Services and Markets Act 2000, it is required to maintain cash in a segregated bank account, which it holds as trustee for the customers concerned under a statutory trust created by the client money rules of the FSA. Accordingly, cash held as client money can be paid away only in circumstances permitted by the client money rules. The FSA’s waiver procedure ensures that payments may be made to charity without the firm breaching the client money rules.
[175] The Balance Foundation was a private-sector charitable initiative whose objective was to develop and test a voluntary mechanism for the release of unclaimed assets held by UK financial institutions. The scheme focused on the unclaimed assets in cash balances of investment banks as this held little political contention, and appeared to be the easiest asset to locate and release.
[176] Prior to September 2007, the National Joint Pitch Council was responsible for the administration of betting with bookmakers, under the National Pitch Rules, in the betting areas of Britain's 59 horseracing courses.
[177] HMRC Tactical and Information Package for Bookmakers June 2007:
[178] Paragraph 6.11 of the Interim Report.
[179] Announcement by the then Minister of State for Pensions Reform, James Purnell, on 18 April 2007.
[180] See The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007.
[181] See paragraph 1.21.
[182] Statement from Lord McKenzie of Luton (Parliamentary Under-Secretary, Department for Work and Pensions) in the House of Lords 24 July 2007.
[183] On the 27 February 2007, James Purnell, the then Minister of State for Pensions Reform, announced Government would extend the date by which an employer of a scheme in wind up had to experience an insolvency event in order for that scheme to qualify for FAS to 31 August 2007.
[184] The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007.
[185] See James Purnell’s letter to the Chairman of the Public Administration Select Committee, 5 June 2007, contained as Annex 1 in “The Pensions Bill and the FAS: An Update Including the Government Response to the Fifth Report of Session 2006-07, Eighth Report of Session 2006-07, House of Commons Public Administration Select Committee.”
[186] As per footnote above.
[187]
[188] The Pensions Regulator maintains a register of all UK pension schemes and is responsible for the collection of scheme return information. Under the Pensions Act 2004 trustees are required to provide a regular return of information – called a scheme return – to the Pensions Regulator. The information is used by tPR to: identify schemes where there is a risk, or potential risk, to members' benefits; to make sure that the information it holds on the register of pension schemes is accurate; and to calculate levies due from pension schemes.
[189] The schemes comprised those previously identified by the FASOU as non-qualifying schemes where the relevant employer had not undergone an insolvency event and those for which information had been provided to the Review team or where direct contact had been made to the FASOU as a result of our publicity about the data collection exercise.
[190]
[191] The shortfall is the amount necessary to bring the scheme in line with the appropriate funding regime (see Annex E) and to meet the expenses likely to be incurred when winding up the scheme.
[192] This figure is not the same as the figure of “over 11,000 scheme members” mentioned at paragraph 22 as not all schemes provided member data and some schemes were excluded for the reasons set out in paragraph 21.
[193] Excludes pensioner members.
[194] In addition to the 17 schemes shown on the indicative list of schemes potentially eligible for support from FAS where a compromise agreement is understood to be in place, shown in Annex G of our interim report.
[195] The Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007.
[196] A trustee’s power to enter into a compromise agreement is in Section 15(f) of the Trustee Act 1925.
[197] Contained in the Occupational Pension Schemes (Winding Up, Deficiency on Winding Up and Transfer Values) (Amendment) Regulations 2005 S.I. 2005/72.
[198] Financial Assistance Scheme (Miscellaneous Amendments) Regulations 2007.
[199] Subject to a link being established between the insolvency event and the winding up of the scheme.
[200]
[201] Extension to include schemes where a compromise agreement is in place and enforcing the debt would have forced the employer into insolvency.
[202] If a scheme met its MFR requirements it could be wound up, even though this would not guarantee the scheme had enough assets to meet its pension promises in full.
[203] “Trusting in the pensions promise: Government bodies and the security of final salary occupational pensions, 6th Report of Session, 2005-2006”, presented to Parliament Pursuant to Section 10(3) of the Parliamentary Commissioner Act 1967 on 14 March 2006.
[204] See page 23 of the House of Commons Public Administration Select Committee “Pensions Bill: Government Undertakings relating to the Financial Assistance Scheme, 5th report of Session, 2006-07”.
[205] Paragraph 6.15 of the Interim Report.
[206] “The Pensions Bill and the FAS: An Update Including the Government Response to the Fifth Report of Session 2006-07, Eighth Report of Session 2006-07”, House of Commons Public Administration Select Committee.
[207] Paragraph 3.18
[208] Available at .uk/pensionsreform/pdfs/InterimReportJuly2007.pdf
[209] Figures are supplied by the FAS Operational Unit based on the initial A1 data; they are subject to changes during the lifetime of FAS involvement and should be regarded as indicative rather than definitive. They are current as at 12 September 2007.
[210] Section 73 of the Pensions Act 1995 and The Occupational Pension Schemes (Winding Up) Regulations 1996 (SI 1996/3126).
[211] Numbers may not sum due to rounding.
[212] Public sector defined benefit schemes are not usually funded, but instead paid for on a pay as you go basis from general taxation, and are therefore exempt from the MFR.
[213] This would be done through the purchase of immediate and deferred annuities from an insurance company.
[214] 100 per cent funded on the MFR basis.
[215] The MFR was introduced on a phased basis from April 1997, and to allow schemes and employers the time to incorporate the new requirement, transitional rules allowed trustees to obtain their first MFR valuation in line with their scheme’s existing (generally three-yearly) actuarial valuation cycle.
[216] Set out in actuarial guidance and covering matters such as investment returns (by asset class), longevity and inflation.
[217] The term technical provisions is taken from the EU Directive on Institutions for Occupational Retirement Provision 2003 / 41 (referred to as the Occupational Pensions Directive).
[218] Accrued pension commitments includes pensions in payment, benefits payable to the survivors of former members and those benefits accrued by other members which will be payable in the future.
[219] The Pensions Regulator has specific powers to intervene where the trustees or the scheme actuary are unable to meet their obligations under the scheme funding requirements, including the power to:
a) modify future accrual of benefits;
b) direct how technical provisions are to be calculated;
c) direct the period within which, and how, any failure to meet the statutory funding objective is to be remedied; and
d) impose a schedule of contributions.
[220] Defined contribution schemes are affected in a different way by wind up as, in these schemes, the pension received at retirement depends on investment performance and the annuity rate that can be secured.
[221] Under the Welfare Reform and Pensions Act 1999 employers must offer their employees access to a stakeholder pension, unless the employer is exempt as it already provides a workplace pension scheme meeting certain minimum standards. Employers must also designate (formally choose) a stakeholder plan that their employees can join if they want. The designation requirement applies if the employer has five or more eligible employees. The employer is not compelled to contribute to the stakeholder pension.
[222] This will change with the planned system of personal accounts, where employers will be compelled to contribute to either a personal account or an exempt employer scheme for all eligible employees that do not opt out.
[223] In practice, as Annex E, shows a scheme could be fully funded on an MFR basis, but unable to secure the full scheme benefits.
[224] There is also the possibility, in certain circumstances, of either being brought back into the state second pension (via deemed buy back) or paid a cash sum.
[225] The Pensions Advisory Service website provides details of commonly cited reasons for the delays in wind up. These include resolution of disputes, difficulties in tracing members etc . Also see ‘Speeding Up Winding Up Of Occupational Pension Schemes’ November 2006, DWP, available at
[226] This process is often particularly complex in schemes where the sponsoring employer has become insolvent since scheme records are generally less well maintained.
[227] When an employer becomes insolvent an insolvency practitioner is appointed in their place. The Pensions Regulator is then notified and under the 1995 Pensions Act an independent trustee is required to be appointed to fully protect members’ interests during wind up. The scheme trustees retain their duties, but any discretionary powers rest solely with the independent trustee who is paid from scheme assets.
[228] See The Occupational Pension Schemes (Winding up Procedure Requirement) Regulations 2006, Statutory Instrument 2006 (1733) .
[229] Under Section 72A of the Pensions Act 1995
[230] Regulations introduced on 1 October 2007 changed this to two, rather than three years, for schemes that started winding up on or after that date.
[231] The shortfall is the amount necessary to bring the scheme in line with the appropriate funding regime (see Annex E) and to meet the expenses likely to be incurred when winding up the scheme.
[232] Statutory Instrument 1996 No. 3128
[233] In fact for an MVL to be implemented a majority of the company's directors must make a statutory declaration of solvency in the 5 weeks before a resolution to wind up the company is passed. The statutory declaration will state that the directors have made a full inquiry into the company's affairs and that, having done so, they believe that the company will be able to pay its debts in full within 12 months from the start of the winding up. The declaration will include a statement of the company's assets and liabilities as at the latest practicable date before making the declaration. See the Companies House website for further details on liquidation and insolvency
[234] MVL is also a relevant insolvency event for FAS qualification.
[235] They are not legally compelled to do so.
[236] Trustees do, however, still have a fiduciary duty to act in the interests of all scheme members and beneficiaries to negotiate the best settlement they can.
[237] A trustee’s power to enter into a compromise agreement is in Section 15(f) of the Trustee Act 1925
[238] Following the introduction of PPF no trustee should accept a compromise below PPF levels since this is clearly not in members best interests as an insolvent scheme would qualify for PPF.
[239] However, no ‘payment age’ applies to terminally ill members or survivors.
[240] See for further details.
[241] Not all schemes provided the full range of information requested.
[242] Original NTMA figures converted from ¬ to £ at rate of ¬ 1 to £0.677
[243] First year of income following introduction of legislation - Dormant Accounts Act 2001
[244] FirOriginal NTMA figures converted from € to £ at rate of €1 to £0.677
[245] First year of income following introduction of legislation - Dormant Accounts Act 2001
[246] First year of Income following introduction of legislation - Unclaimed Life Assurance Policies Act 2003
[247] £16 million of £107 million
[248] £4 million of £26 million
[249] £57 million of £120 million
[250]
[251] The Uniform Act was drafted by The National Conference of Commissioners on Uniform State Laws (NCCUSL) as a model Act to promote uniformity in state laws in relation to unclaimed property: .
[252]
[253] Contribution rates are set at a level broadly necessary to meet expected benefits expenditure in that year, after taking account of other payments and receipts, and to maintain a working balance (the NIF surplus).
[254] HM Treasury Fiscal policy in the UK:
[255] The DMADF is run by the UK Debt Management Office (an executive agency of the Treasury). It is a deposit facility created in April 2002 for the use of Local authorities, but available to other Government funds. It allows deposits at call and also fixed deposits with a term of up to 6 months. The DMADF pays a market related return and the deposits have the backing of the Treasury.
[256] Oral evidence taken before the Treasury Committee on 19 June 2007
[257] Treasury Committee report published on 6 August 2007: “Unclaimed assets within the financial system”.
[258] Fines and fixed penalties imposed by courts are ultimately paid centrally to Government and held in the Consolidated Fund, though speeding fines are collected by the court service and passed through the Department for Transport to the safety camera partnerships to be reinvested.
[259]
[260]
[261] Bona Vacantia arises, in origin, by virtue of the Royal Prerogative, i.e. at common law. To some extent this is still the position although the right to bona vacantia of the two major categories is now based on statute: the Administration of Estates Act 1925 and the Companies Act 1985 (both as amended). The work of Bona Vacantia dates from the Norman Conquest making it the earliest duty of what is now the Treasury Solicitor.
[262]
[263] Duchy of Lancaster:
Duchy of Cornwall:
[264] It could also be argued that reductions in assets might also indirectly impact on public spending, as these schemes are generally dependent on employer and employee contributions, and the employers often receive funding direct from Government.
[265] Rules are set out in the Superannuation Act 1972.
[266] LGPS is a nationwide pension scheme for people working in Local Government or for other types of employer participating in the Scheme, including local authorities and public service organisations. The Scheme is administered for participating employers locally through regional pension funds.
[267] Paragraph 7.3
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