A big wind-up

The Government has changed the way pensions’ assets are distributed when a
scheme is wound-up in the hope that it will make things fairer for
non-pensioners. But will pensioners be the only ones to lose out? Compiled by Phil

John Wilson
Head of pensions research, actuaries and consultants, HSBC

I am less than impressed with the changes for a number of reasons. First,
there is no tidying up of the existing regulations so the problems of
interpreting the language still exist. And as a major priority there is a big
debate about whether the word ‘pensioners’ includes early retirees who have
chosen to defer their pension. Do they account as the top of the priority or
are they lower down the list?

I have also observed that the regulations have introduced some new problems
as they are based on length of pensionable service, but do not explain how this
is defined. For example, do you include service where the scheme is closed and
accrual ceased but benefits are still linked to future earnings? The imprecision
of the language makes it impossible to tell. And would the Inland Revenue
consider this to be pensionable service?

A deferred member with 40 years’ service in one scheme is much better
protected than a deferred member who has been in four schemes with 10 years’
service under each. Similarly, a 59-year-old with 10 years’ scheme service gets
less protection than a 45-year-old with 20 years.

The only fair way to distribute a pension fund is to treat all classes of
member equally.

But one of the most worrying things is that the changes are potentially
discriminatory against women, because people on short service are not going to
get the same protection as those on long service. This is likely to affect
part-time and casual workers more than most and, as previous sex discrimination
cases demonstrate, these are predominately female.

Is there scope for a legal challenge for breaching the Equal Pay for Equal
Work provisions that are held under the EC treaty?

To cope with this situation, the word ‘pensioners’ should be restricted to
those who have retired at normal retirement age or on the grounds of
incapacity. This is because a 50-year-old pensioner does not need any more
protection than a 59- year-old deferred – the latter arguably having less
chance of rebuilding benefits than the former.

The priority order given to pension increases should be consolidated because
it is unnecessarily complex to give different priority orders to different
category of increases. The regulations do not do anything to simplify pensions
legislation and will not be of any help to existing pension scheme wind-ups.
Does the Department for Work and Pension’s view on securing guaranteed minimum
pension first still applies? This is because there may be assets left over
after valuing the GMP on the statutory basis.

The problem is not going to go away because the Government is too reliant on
the grey vote. It will not want to take away the priority because it does not
want to see pensioners marching through the streets.

David Yeandle
Deputy director of employment policy, EEF

The Government should review the winding-up process as it seems
unfair that pensioners can scoop the pool and leave non-pensioners with next to

When you reallocate a sum of money it means you are taking from
one to pay another. It looks as though it is going to be taken from the
increases that pensioners are expecting. The increases have been moved down the
order of priority. And in its place between pensions, actual pensions and
future increase they have inserted non-pension members.

Those with the longest service closer to retirement will be
better off and have more of their pension protected. However, pensioners will
be marginally disadvantaged.

Stuart Stephen
Group pensions and benefit director, Barclays Group

I think the principle behind the changes is right as it
provides greater security on a wind-up. But the idea of re-spreading a limited
amount of money does not solve the problem.

I do not think it will force people into winding-up their schemes
early. If anyone is thinking of doing this then it will be because of more
important reasons than the introduction of a priority order.

It is active members who are most vulnerable and it will be
interesting to see if it causes them to lose their inflation proofing. The
problem is that there is no new money coming in so there is no extra money to
draw from. I do not think this is positive enough, and although it has got the
right intentions, you have to question whether it has enough substance to work.

Charles Cotton
Reward adviser, CIPD

In anything like this you are always going to have winners and
losers. And if you are dealing with employees who have been with a company for
a few years you have to make sure they get something out of it.

From an HR point of view, you should explain precisely what you
think will happen if the scheme is to be wound-up. But HR should be more
concerned with the Pensions Protection Fund and the age of compulsory
retirement, than the technical issue of ordering the preference of who gets
their reward.

HR should be looking at pensions as a strategic issue for the
organisation and asking if compulsory retirement is coming to an end. If so,
then HR should be focusing on the issue of flexible retirement rather than the
more technical, legislative aspects of pensions.

Jay Sheth
Pensions policy adviser, CBI

The CBI is concerned when an individual receives less than
their pension entitlement after years of pensions saving. We support the
Government’s decision to ensure a fairer distribution of scheme assets. It is
possible to suggest that if the priority order was changed earlier, there would
have been a much fairer distribution of funds in company insolvencies.

We recognise it is a difficult issue and that when a company is
facing insolvency and a scheme is wound-up, it is inevitable that some people
are going to lose out. In this case it is pensioners, and the key is to ensure
the distribution is handled fairly.

If the PPF is designed carefully and made workable, that should
increase member security in the future.

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