Newsletter 15 described how to find the Government's consultation paper on new pensions regulations and how to comment on it.  That consultation period is over.   Some of the comments during it can be found here.

The government has reacted by issuing a paper entitled "Action on Occupational Pensions".  The full document is in a link from here.  It progresses towards new regulations by making some choices where the Green Paper had alternatives and by filling detail the Green Paper did not have.   Here we summarise, with comments on what is relevant to the IBM UK scheme.

The leading idea is insurance against a trust being under-funded when the company goes bust.  Elsewhere on this site we have explained about winding-up considerations.  There have been cases where the pension scheme members got a lot less than their due because the law allowed their scheme to get under-funded and when the company folded there was nobody obliged to provide more money.  This led to Panorama programs, street demos, and petitions which in turn led to a political view that something had to be done.  The something is to be a national "Pensions Protection Fund" that will (mostly) make up the difference when the company goes bankrupt and its pension has insufficient funds.  There have been debates about where the money in the Pensions Protection Fund is to come from.  Frank Field had the idea of using the £15 billion "unclaimed assets" that insurance companies hold.  Some people felt that employees should pay, since they get the benefit.  (Existing rules make sure the retirees are largely unhurt.)  The government proposes a levy on all the relevant pensions schemes.  (There is already a levy to pay for things like OPRA and the Ombudsman's Office.)

This insurance may not be as good as making sure that schemes do have enough money in them but as there are no plans to do that the insurance is welcome.

There are what are called "moral hazards", i.e. temptations for company directors to manage schemes with an eye to using the fund to their personal advantage, but details of the levy will be set to minimise those prospects.

It will be at least 2005 before this all happens and so there are additional interim plans to do something about spreading the pain differently, for companies that go bankrupt before them.

The above is not relevant to IBM UK, if you don't expect IBM UK to go bankrupt, except that the levy will be paid from our funds.

There is a variation of wind-up that could be applicable to IBM UK, and that is wind-up by a solvent company.  Currently the regulations for this sort of wind-up are similar to those for an insolvency (ie bankruptcy).  This means a company can save money by under-funding its scheme and then closing it, with the scheme members getting less than their accrued rights (ie less pension than their work has earned them).  It may seem amazing that a company can walk away from a bargain it made like that, but it can; it is just an example of the privileges corporations have.  "Action on Occupational Pensions" proposes to cancel this privilege.  Companies will still be able to under-fund but when they want to do a windup they must then contribute the extra necessary to "buy-out" the accrued rights.  If they are obliged to provide somebody with a deferred pension, for instance, they must pay an insurance company to take over the obligation to provide the pension.  Since insurance companies charge highly for this sort of service, windups by solvent companies have just changed from being attractive propositions for the company to being unattractive ones.

This is important for two reasons.  The chief executive of OPAS has been warning of an avalanche of pensions scheme windups as many companies sought to draw a line under their pension commitments (Mail on Sunday 25/5/2003); these companies will not be able to cut costs at the expense of members in this way because the change of regulation is effective immediately.  The other aspect is the threat that companies have held over trustees in the nature of "do what we suggest or we will windup the scheme".  (In the complaints section of this website you will find the IBM trustees justifying their 1996 action by noting that they consented "in the context that IBM was able" to terminate the scheme.)  This threat is now removed and may even be reversed.  In this latest description of what replaces the Minimum Funding Requirement it says "where trustees and employers cannot reach agreement on issues fundamental to the funding of the scheme, the trustees will be given, as a last resort, powers to freeze or wind up the scheme".  Presumably the schedule of contributions from the employer to the pension funds will be considered a fundamental issue.  It is hard to see how IBM's current abnormal position on this (that employer contributions are not a matter of concern for the trustees but just a matter of agreement between company and actuary) can be maintained in the face of this planned regulation.

These changes for windups can reasonably be said to live up to the heading they are under: Protecting the Consumer.

Although windups are the flagship, the paper covers many other topics.   The TUPE:Transfer of Undertakings (Protection of Employment) issue covers what happens to pensions when companies do out-source deals or get taken over.  This has been debated for years.  Currently much depends on (at least one of) the companies wanting the moved employees to have a fair deal.  That is why, for instance, IBM UK has both a final salary I-Plan and a final salary C-Plan; the I-Plan protects its members better than the C-Plan does.  The government plans legislation to extend protection for private sector transfers of staff. 

This is a government paper so it is delicately spun.  Where the government proposes some action it includes quotes from Green Paper reactions that supported the action.  Where the government proposes some action that was not well supported it does not mention the consultation.  Where the consultation overwhelmingly criticised the government, as for its over-enthusiasm for means testing, this paper avoids the subject. 

The Pensions Ombudsman gets a mention, but not in the section on member protection.  It is proposed "to clarify the existing jurisdiction of the Pensions Ombudsman so that cases of maladministration by an occupational or personal pension scheme fall clearly within his remit".   The reference to "existing jurisdiction" and the fact that this appears in the section "Making pension provision easier for employers" probably means that the Ombudsman has not persuaded the authorities that when Parliament introduced the offence of maladministration it intended maladministration to be more than a montage of things that were already offences before maladministration was introduced.  This is the view of the current Ombudsman and the previous one but judges (who have a distaste for the Pensions Ombudsman mechanism because they believe only judges and tribunals should pass judgements) have tended not to support this view.

(The Ombudsman's input to the Work and Pensions Select Committee refers to the "troubled relationship which the Pensions Ombudsman has had with the Courts", argues that "the people whom the law should be striving to protect are those from whom money has allegedly been filched" and asks for an indication from Parliament in support of his view of what maladministration means. See links from the Select Committee's site. ) 

It can only be speculation, but this point could be a cause for the delay in determining the IBM complaints.  It is reasonable to suppose that the resolution of what can constitute "maladministration" was necessary before the determinations could be written.   If the Ombudsman has lost his battle, that is bad news for IBM scheme members.

Nothing in this "Action for Occupational Pensions" suggests action to correct the Ombudsman's ineffectiveness.  Although the consultation responses called for more resources for his office, and there have been Parliamentary Questions on the topic, nothing is said about these.  Presumably the lack of resources that led to expediency in the treatment of the IBM complaints, taking them in serial and fragmentary way, will remain.  There is no mention of ameliorating the fundamental failing of the mechanism - that mistakes in favour of scheme members can get rectified using legal teams funded by trusts and corporate budgets yet mistakes against scheme members cannot in practice be challenged.

"Action for Occupational Pensions" lowers the protection of future pensions against inflation.  You will know that part of your pension (the part earned from post 1997 service) is partially protected from erosion in value, by regulations.  The mandatory increases to this part are known as Limited Price Indexation (LPI) and are the lesser of 5% and the Retail Prices Index change.  For employees, when they have benefits earned from future service (which they will get in retirement) the corresponding protection will now be the lesser of 2.5% and the RPI change.   There is a reasonable argument behind this - LPI was, as the name suggests, never intended as full protection against the erosion of pension value. (In its calculations of the money this change will save for employers the government assumes an average inflation of 2.5%, so that if there is fluctuation costs will be saved.)

This change will widen the gap between pensions (mostly in the public sector) which have full protection and pensions which have LPI protection.  The Conservatives call this two-tier pensions.  Since part of your council tax increase goes to providing the public sector pensions, employees might feel aggrieved that they are paying more tax while their future pension increases are being reduced.  (Of course the company can provide better protection than the law requires but would you expect IBM to do that?)

The Transport and General Workers Union has said "The lowering of mandatory indexation is condemning future pensioners to poverty in retirement".   That of course depends on what happens to future inflation.  It is worth noting that if inflation went over 3.6% then IBM's mechanical 70% rule would be better than the new LPI.  

There will be new rules about allowing partial retirement while still working for the same employer.  There will be an increase in the earliest age from which a pension may be taken from age 50 to age 55.  These changes are not in play yet so some people will have difficult assessments to make about whether they should act quickly or wait for new legislation. 

Spring 2005 is the earliest possible date for most pension reforms to come into force.

There is parallel activity on age discrimination.  As the result of European decisions the government has agreed to have age discrimination laws in place by late 2006.  A major issue is whether these laws will do away with fixed retirement ages.  (Note that for State Pensions there are no fixed retirement ages.  There are ages when State Pensions become payable but these are not tied to retirement.)  Fixed retirement ages are age discrimination because they use age rather than capability as the criterion.  They do not fit well with the flexible retirement mentioned above. They are also recognised by some as bad in practice - Unilever commented that "The abolition of compulsory retirement ages is aligned with our business principles of a commitment to diversity and our commitment to recruit, employ and promote employees on the sole basis of qualifications and abilities needed for the work to be performed".  However, there will be employers who take the line that regulation infringes their "right to manage" and that voluntary avoidance of age discrimination is sufficient.   It will be interesting to see if IBM UK moves in advance of the regulations or makes minimum moves against age discrimination as they are forced to.

The plans for Member Trustees are effectively to allow companies to appoint any members they like and label them Member Trustees.  See here for detail.  There will be considerable opposition to this subversion of the purpose of having Member Trustees.  

Home