U.K. pension regulator faulted over plan security assurancesPosted On: Feb. 25, 2007 12:00 AM CST
LONDON--The British government may have to ask taxpayers to foot a bigger share of the promised pension benefits of thousands of retirees whose employers went bankrupt, after the High Court ruled that regulators did not provide accurate information about the security of pension plans.
The court last week ordered the Department for Work and Pensions to reconsider a recommendation from the Parliamentary Ombudsman's office, a government watchdog, to restore benefits for between 75,000 and 125,000 retirees whose companies began closing down plans between April 1997 and March 31, 2004, with money potentially coming from public coffers.
Deciding on an appeal from the department last week, the court agreed with the ombudsman's finding that the department was guilty of maladministration of the law designed to guarantee solvency of pension funds.
In particular, the court found that the department, in its publications, had overstated how secure pension plans were following the enactment of a 1995 law that set minimum funding levels.
Because it found the information potentially misleading to consumers, the court ruled that the department needs to reconsider recommendations from the ombudsman that the government ought to restore all or part of the retirees' lost benefits, at an estimated present-day actuarial cost of as much as £3.5 billion ($6.83 billion).
But the High Court also said that it may not have been entirely the fault of the department that employees lost their benefits, possibly paving the way for individual judgments on how much, if any, the government would owe.
"The headlines have been, 'A victory for pensioners,"' said Stephen Yeo, a senior consultant in the London office of Arlington, Va.-based Watson Wyatt Worldwide. "But I think there's some comfort for both sides."
The case centers around a report published in March 2006 by Ombudsman Ann Abraham on flaws in the 1995 pension law that left members of final salary occupational pension plans at risk when those plans began to close.
The law established a minimum funding requirement that was designed to ensure adequate funding of future pension liabilities. The government in subsequent years lowered the requirement on the advice of the actuarial industry, but did not raise it when advised to by actuaries, according to Ms. Abraham.
Outlined in the report are four cases of workers who lost pension benefits as a result of a company insolvency or dissolution of a pension fund, with another 200 complaints referred to the ombudsman from members of Parliament.
The workers said they believed their pensions were secure because of government publications touting the minimum funding requirements, which prompted the ombudsman's office to charge the Department for Work and Pensions with maladministration.
To address the problem, the report recommended that the government consider restoring core and noncore benefits to pensioners who were affected by the insolvencies.
The report acknowledges the cost of such a commitment but pointed out that the cost would likely decline over the years because of new legal protections that the government has been implemented since then.
The report also suggests that the government consider consolatory payments and apologies to pension fund trustees for the maladministration.
The government rejected most of the Ombudsman's findings, thrusting the case into court.
A decision in the case comes as Parliament is considering reform of its pension law, and the plight of those affected by the Ombudsman's report could play a role in negotiations over the final form of that legislation.
Following the ruling, Secretary of State for Work and Pensions John Hutton told the House of Commons that he would come forward with a new proposal.
"People who have lost their pension rights in these circumstances have suffered a great deal," Mr. Hutton said.
"My aim will be to return to the house with our conclusions and our proposals for how we should proceed, and to do that before the conclusion of proceedings on the pensions bill," Mr. Hutton said.