Rescue operation gives limited help to the chosen few
The Financial Assistance Scheme provides help for a limited number of defined-benefit pension scheme members whose employers are insolvent and who lost benefits due to scheme wind ups before the introduction of the PPF. We describe the parameters of the assistance arrangement and outline the procedures for application, reviews and appeals.
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Summary of key points
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Having been set up to help people who lost their retirement savings - after building up a pension in good faith and often for many years - the existence of the financial assistance scheme (FAS) is rooted in events that are highly charged with emotion. The government introduced the arrangement in response to pressure following a spate of final-salary scheme wind ups - including the high-profile Allied Steel and Wire case - which resulted in thousands of members losing some or all of their pension entitlements.
Cause for rescue
Although the original Pensions Bill included provisions for the introduction of a Pension Protection Fund (PPF), this was only designed to provide a safety net for people whose schemes went into wind up due to employer insolvency after the Pensions Act 2004 came into force. Potentially, therefore, thousands of members who had already lost benefits remained without aid.
Following relentless campaigning by those individuals who had already lost benefits - backed by several unions, MPs, and the influential pensions adviser Dr Ros Altmann - the government eventually announced the introduction of its £400 million assistance package and introduced relevant amendments to the Pensions Bill.
Precursory provisions for the establishment of the FAS were included in the Pensions Act 2004. Subsequently, regulations (see box 1) have been published, fleshing out the details of what the FAS will provide and to whom, and how procedures such as determination reviews and appeals will work.
The FAS is administered by the Department for Work and Pensions (DWP) and is managed by a national FAS Operational Unit (FAS OU), which opened for business on 1 September 2005. Currently, scheme information is still being processed, and no assistance payments have yet been paid. However, the FAS OU hopes to make the first payment before the end of the calendar year.
Limited scope
Initial research by the government revealed that some 65,000 members faced losses of 20% or more of their expected pensions due to underfunded schemes winding up with an insolvent employer between April 1997 and April 2004. Among this group, an estimated 35,000 members had lost more than 50% of their benefits and 50,000 had losses of 40% or more. Since that time, it has become apparent that this is just the minimum number affected. The latest estimate from the Pensions Action Group1 (comprising scheme wind-up victims) is 80,000, resulting from nearly 400 scheme closures.
One of the most difficult and contested points about the FAS in its current form is that it only provides assistance to a limited number of individuals. While all the affected individuals were originally led to believe they might receive help, it has now become clear that the £400 million of public money, pledged over 20 years, will only go to the older individuals affected. Malcolm Wicks, who was the Minister for Pensions when details were announced earlier this year, made it clear that those nearest to retirement age - and least able to make up for their losses over time - would be given priority.
Those who are not covered by the assistance scheme are continuing to campaign for help and, in September 2005, a group of them, accompanied by Dr Altmann, met with David Blunkett - the then Work and Pensions Secretary - to discuss whether further aid will be forthcoming. As yet, no additional pledge has been made, although the government intends to review the FAS funding level in the Treasury's next spending review.
Eligible schemes
Only defined-benefit schemes qualify for help from the FAS. Money-purchase and certain other types of schemes - including public sector, non-tax approved, small self-administered schemes and schemes with less than two members - are not eligible.
To be a "qualifying scheme" for the purposes of the FAS, a scheme must have begun winding up between 1 January 1997 and 5 April 2005 (but will still be potentially eligible even if the winding-up process has been completed). The principal employer must also have experienced an insolvency event before 28 February 2006 (or later in some exceptional cases), except in cases where the employer cannot become insolvent (such as unions and charities), in which case they need to provide evidence that they are being discontinued. Where no employer exists due to the dissolution of the company, the scheme may also be considered.
Where a scheme or section of a scheme contains more than one employer (a "multi-employer scheme" or "multi-employer section"), the principal employer is the relevant employer for FAS qualification purposes. If a scheme or section does not have a principal employer, then all employers within that scheme or section have to have had an insolvency event in order for the scheme or section to qualify.
The definition of an insolvency event for the purposes of the FAS mirrors the PPF definition (See Pensions lifeboat promises hope for sinking schemes) with the additional inclusion of members' voluntary liquidations. The definition is intended to capture schemes where insolvency may have occurred some time after wind up started. The qualifying insolvency events (listed in the FAS guide2 for trustees and pension professionals) relate to companies, partnerships and individuals. Regulations also provide for certain additional events in relation to specified types of bodies, such as building societies and friendly societies, to be classified as qualifying insolvency events.
Notification and qualification
For a scheme to be considered under the FAS rules, initial notification needs to be sent to the FAS OU between 1 September 2005 and 28 February 2006 (or later, if there are exceptional circumstances). The information required for notification differs according to whether or not the scheme has already been wound up.
For schemes that have been wound up, the FAS OU must be notified, under signature, of the name of the scheme and the name and address of the employer. Those that can notify the FAS OU in these circumstances are:
- former trustees or managers;
- former members or their appointed representatives;
- surviving spouses or civil partners of a former member who has died;
- former professional advisers to the scheme; or
- any insurance company that is paying annuities to former members.
For schemes that are still in wind up, the FAS OU must be notified, under signature, of the name of the scheme, its pension scheme registration number, the name and address of the employer and the name and address of at least one trustee of the scheme. Those that can provide these details are:
- any member or their appointed representative;
- surviving spouses or civil partners of a former member who has died;
- trustees associated with the scheme; or
- professional advisers associated with the scheme.
Details of the schemes that have completed the notification requirements are available on the DWP website3.
Once notification has been received, the trustees (if applicable) and the person who notified the FAS OU will be contacted and invited to send in further details and documents that are needed to decide whether the scheme qualifies, within six months. These are listed in the FAS guide2. Once a decision has been made by the FAS OU, the trustees are required to make their scheme members aware of whether or not their scheme is a qualifying pension scheme.
Member eligibility
If a scheme is told it qualifies for assistance, further information relating to individual members needs to be sent to the FAS OU when winding up is complete or close to completion. This will be used to ascertain which individuals are eligible for the FAS and how much assistance is due. Although the FAS OU has been allocated an initial £16 million for setup and administration costs in the first three years, this will not cover any expenses incurred by individual schemes when compiling and gathering information about its members.
Information required (detailed in the FAS guide) includes members' date of birth and death (where applicable), normal retirement age (NRA), start and finish dates of active service and details of annual pension payments due or made at a specified point. The FAS OU says that each qualifying pension scheme will be assigned a dedicated account manager.
While the FAS OU assesses individual member eligibility, scheme trustees are expected to "manage members' expectations" as to whether or not they will qualify and they are required to make members aware that personal data is being passed to the FAS OU for assessment. The DWP has produced information4, including a leaflet (FAS P1), to help people determine whether they might be eligible.
To be a qualifying member, an individual must have been a member of a qualifying scheme (or in receipt of a survivor's pension from that scheme) immediately before it commenced wind up, or have become a pension credit member (through pension sharing on divorce) after the start of wind up. In addition, each member must have reached the scheme's NRA, or be due to reach it on or before 14 May 2007. This means that if the NRA is 65, the member must have been born before 14 May 1942. NRAs above 65 will be treated as 65. The member must also have failed to receive the pension in full due to the scheme having insufficient assets.
In the government's response5 to the FAS consultation, the DWP acknowledges the strength of feeling that having such a cut-off date arouses. It qualifies its decision by saying: "The government believes that, given the funds available for the FAS, help must be focused on those who are facing the most urgent difficulties and are closest to, or have already arrived at, retirement age and therefore less able to replace their lost pensions."
Award calculation
The government has also made it clear that the FAS will not match the full amount of expected benefits. Assistance is paid to top up any pension that will be paid or is already in payment, up to the value of 80% of the "core benefits" the member (active, deferred or pensioner) would have received, had the scheme been able to meet its obligations. Survivors will receive a total income from the qualifying pension scheme and the FAS equivalent to at least 50% of the total core income the member would have received from the scheme, and from the FAS, had they lived.
When calculating the "core benefits", the FAS looks at the amount of pension built up when a member stops accruing pension benefits under their scheme (either when the member left the scheme or the scheme began winding up). In the case of existing pensioners, it would be the rate of pension being paid at the start of wind up. The FAS does not take into account pension increases or other benefits such as survivor's benefits in its calculations. Neither does it take into account any money-purchase benefits and benefits derived from additional voluntary contributions.
FAS payments are not means-tested and are subject to a cap of £12,000 a year (reflecting the average value of occupational pensions). This ceiling includes the amount of the scheme pension that is or will be paid through annuities or scheme assets, so if a member was due £15,000 from the scheme and receives £10,000, the FAS will only make an award of £2,000. If the member was due £15,000 and receives nothing from the scheme, the FAS award will be £12,000. There is also a de minimis rule, which means that awards of less than £520 a year (£10 a week) are not payable to members and awards of less than £260 a year are not paid to survivors.
If an individual belongs to more than one failed company, and loses out from the demise of more than one pension scheme, the cap would apply to each payment. This means that an individual could potentially receive over £12,000 in total. In the same way, members who are also survivors could receive an FAS award in their own right as well as 50% of their deceased husband's, wife's, or civil partner's award.
Points of contention
During the FAS consultation process, several respondents expressed disquiet about the existence of a cap, which disproportionately affects long-term employees and those who have amassed, and come to expect, sizeable pensions. There was concern that its application would mean that some people will get considerably less than the 80% of their expected pension that the FAS implies. Concern was also expressed that application of the de minimis rule would deprive those on low incomes of money to which they were entitled.
In its response, the government points out that its aim is to target available resources on those with the most significant losses. It adds that increasing the cap would not make significant numbers of additional people eligible for the FAS and would, in practice, give more money to those already eligible.
A further point of contention, raised by Dr Altmann and members of the Pensions Action Group, is the question of whether it is right that schemes should be pressurised into buying annuities with the assets of schemes that are winding up. As Dr Altmann points out, this incurs expense, while if the money were to be used to fund ongoing pension payments year by year, as with the PPF, there would be more funds available in the longer term.
Dr Altmann says: "If annuity purchase is stopped, then all members should receive higher pension payments from the same pool of assets (since no risk and profit margins will be taken out of the funds). The government would have many years over which to set aside money to pay FAS assistance, rather than having to commit large sums now."
A spokesperson at the DWP confirms that schemes applying for FAS assistance are encouraged to carry on winding up as normal. He says: "We carefully considered the pros and cons of halting annuitisation and pooling the remaining assets of qualifying schemes and running them on. We decided that such a 'pooled approach' is not in the interests of scheme members or trustees, and would not enable us to make best use of the funds available for the FAS."
The spokesperson continues: "The FAS will be topping up the pensions that trustees have secured for members. This gives trustees greater certainty about how they can best act in members' interests, and for individuals who qualify for assistance it means that they have a guaranteed pension through the security provided by a deferred annuity and will also get a top-up payment from the FAS. An individual whose accrued rights are 'pooled' cannot be sure of what he or she will get in return. For the majority of unfortunate scheme members who have already lost accrued rights, the security that an annuity offers, even at a price, must be the most important thing."
Award payment
Payments of FAS awards begin from the recipient's 65th birthday, but normally only after the qualifying scheme has completed wind up. If the individual is already 65 when payment starts, the award will be backdated to the 65th birthday, or 14 May 2004 (whichever is later). A revaluation based on the retail prices index takes place prior to payment.
If an eligible member has been suffering from a terminal illness, and is not expected to live for more than six months, he or she may be eligible for an early payment (ie before the age of 65). Where a scheme is still winding up, trustees can ask the FAS scheme manager to consider making initial payments to members who have reached the age of 65, or who are terminally ill.
In these circumstances, initial payments top up interim pensions being paid by the scheme to 60% of the expected pension, subject to the benefit cap and de minimis rule. When the scheme completes wind up, any initial payment would be recalculated at the 80% rate and arrears would be paid.
If trustees are aware of someone who may qualify for an initial payment, they should make a request on behalf of the member to the FAS OU, providing details of any payments they are making and the expected pension to which the member would have been entitled. The FAS OU says it will give careful consideration to requests for initial payments. In calculating the amount due, it would take into account:
- the best available information on the funding position of the member's reserve;
- the efforts made by trustees to make their own interim payments to pensioner members in the context of the overall funding position of the scheme; and
- the date by which it is estimated that wind up could be completed.
All FAS payments are taxed at source at the normal rate, and continue for the lifetime of the individual. They remain at the same rate throughout, thereby losing their real value with time. They are paid direct into a bank account on a monthly basis.
As with income from an occupational pension, FAS payments are taken into account when means-tested benefits are awarded (such as pension credit, jobseeker's allowance and housing benefit). When a recipient of FAS assistance dies, a husband, wife or civil partner would be entitled to payments valued at 50% of the original amount.
Reviews and appeals
The regulations provide for the internal review of certain determinations made by the FAS. Trustees and any potential beneficiary of the FAS, or their representative, can request a review of decisions made about scheme eligibility. An individual or their representative can request a review about their own eligibility or the amount of assistance payable by the FAS.
A request for a review of a determination regarding scheme notification or scheme eligibility must be made within two months of the date the determination was made. All review requests must be made in writing to the FAS OU and must include specified information. If a trustee or potential beneficiary is unhappy with a review decision, they may be able to lodge an appeal with the PPF Ombudsman, if it is done within two months of the date the disputed decision is made.
Looking forward
The six-month period for schemes to be notified to the FAS started on 1 September 2005, and the FAS OU is processing the first schemes. Details of which schemes have qualified for assistance are being logged on its website. The FAS plans to prioritise the taking on of schemes based on the date of notification, and funds will be paid as soon as is "practicable".
The DWP has indicated that the operation of the FAS will be reviewed after three years. Although the department has indicated that it would welcome (and encourage) additional funding from the pensions industry, as yet no assistance from that quarter has been forthcoming. Further, the legislation does not allow a levy or charge to be imposed for the purpose of funding the FAS, so the future of the remaining wind-up victims rests on the government's shoulders.
The thousands of individuals who have not yet been told that they will receive assistance for their lost pension benefits are unlikely to wait quietly to find out when and if they will receive assistance. One strand of hope for them that remains outstanding is the pending legal action launched by ISTC, the community union, and Amicus, which awaits a hearing at the European Court of Justice (OP, December 2004). This claim seeks to maintain that the government has failed to properly implement the EU Insolvency Directive, which requires it to protect workers' pensions when their employers are declared insolvent. If this eventually succeeds, the government would have to think again about how it deals with the younger scheme members who are currently without a promise of assistance.
1 Information on the Pensions Action Group is available at www.pensionstheft.org.
2 "The Financial Assistance Scheme - An In-depth Guide for Trustees and Pension Professionals", available from the DWP website (at www.dwp.gov.uk/lifeevent/penret/penreform/fas) via "Information products".
3 Details of qualifying schemes are available on the DWP website (see footnote 2) via "Notified and Qualifying Schemes".
4 Information for members is available on the DWP website (see footnote 2).
5 "The FAS Regulation 2005 - Government Response to the Consultation", on the DWP website (see footnote 2) via "Legislation".
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Our research This article is based on a reading of the Pensions Act 2004, Part 6, and the explanatory memoranda of the related Regulations. We have also drawn on the information provided by the DWP on its dedicated FAS website, in its press releases and in its consultation documents. Reference has also been made to information provided by the Pensions Action Group and Dr Ros Altmann. Our research has been aided by the Lovells Pensions Monthly Update. |
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The following regulations have been made under powers in s.286 of the Pensions Act 2004.
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