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UPDATED: Government loses occupational pensions appeal

The verdict will have important ramifications beyond this case.

The Secretary of State has claimed that the High Court judge and the Parliamentary Ombudsman herself were irrational to suggest that the Government is guilty of effectively 'misselling' company pensions to members, by pretending their money was safe when in fact the Government's own rules meant there was no real safety at all.

Judicial review test case 

On 14 March 2006 the Parliamentary Ombudsman ruled that the Department for Work and Pensions (DWP) had “acted maladministratively” by failing to warn pension scheme members that they had no more than a 50 per cent chance of recovering their pensions if the sponsoring company became insolvent or wound up its scheme before they had retired.

The then Minister John Hutton responded the following day, rejecting the Ombudsman’s findings and recommendations that pensions be restored.

In the first judicial review test case of its kind, however, the victims were forced to go to Court to argue that the Minister’s reasons for snubbing the Ombudsman were irrational.

They also argued that the Minister had no power to act as judge in his own cause and that once the Ombudsman had ruled there was maladministration by his department’s officials, he was legally bound to accept that.

The campaigners are represented by John Halford, a partner at leading public law solicitors Bindman and Partners, along with Dinah Rose QC and Tom Hickman.

The claimants are four of those who relied on the misleading information produced by the DWP, and who have suffered pension losses on the wind-up of final salary occupational schemes.

Dr Ros Altmann, an independent policy adviser, has supported the claimants and the legal team throughout.

Mal-administration 

Such is the importance of the case that the House of Commons itself intervened and made submissions to the Court.

The Parliamentary Ombudsman, Parliamentary Public Administration Committee and High Court Judicial Review verdicts have all agreed that the Government is responsible for what happened.

Last December's extension of the Financial Assistance Scheme (FAS) will eventually ensure that all those who lost out should receive the equivalent of what they would have been paid by the Pension Protection Fund (PPF).

This scheme still only pays 'assistance', however, not proper compensation. It is now almost exactly two years since the Parliamentary Ombudsman found the Government guilty of maladministration.

On 14 March 2006, Ann Abraham, the Parliamentary Commissioner for Administration issued a report that dealt with members of final salary occupational pension schemes which were wound up between 6 April 1997 and 31 March 2005 without sufficient funds to give their members the benefits which had been previously promised.

Although the schemes were private, the DWP and its predecessor, the Department of Social Security (DSS) prescribed the legal framework within which they operated, and issued information designed to encourage people to join and contribute to them.

Minimum Funding Requirement 

Following the Robert Maxwell scandal in the early 1990s a new pensions regime had been established under the Pensions Act 1995.

A central component of this new regime was the Minimum Funding Requirement (MFR). This set the minimum level to which schemes had to be funded.

The level was set by the DWP in regulations. Another central component of the new regime was the establishment of a “priority order” for the distribution of scheme funds when schemes wound up.

Its effect was to remove the discretion formerly afforded to pension scheme trustees to decide on the prioritisation of the distribution of assets to scheme members on the wind-up of a scheme.

Under the new regime, it was compulsory for pensions in payment to be paid in full before assets were allocated to non-pensioner members. 

In her Report, the Ombudsman uncovered the fact that the DWP had all along intended the MFR to operate - and had set it - at a level that meant that members of occupational pension schemes who had not yet retired would have a 50 per cent chance of recovering a sum which could be invested to provide a pension equivalent to their expected pension if the scheme wound up.

Series of leaflets 

Although the new pension regime established a protection fund for schemes that wound up due to fraud, there was no equivalent fund for schemes that wound up under-funded for other reasons.

Pension schemes could wind up where sponsoring companies became insolvent or where a solvent company simply decided to wind the scheme up because it did not wish to continue to fund it.

A solvent company could lawfully wind up a scheme, provided that it paid in an amount sufficient to fund the scheme up to the MFR, or reached a compromise with the trustees for payment of a lower amount.