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28 Feb 2001 : Column 292WH

Basford Group Pension Scheme

1.30 pm

Mr. Desmond Browne (Kilmarnock and Loudoun): Thank you, Mr. Deputy Speaker, for your kind words. I am grateful for the opportunity to raise in the House of Commons this very important issue for my constituents. For the last quarter of a century, manufacturing industry in my constituency has undergone the most radical change. Thousands of jobs have been lost in what were often considered to be lifetime occupations. No sector has suffered more than textiles, which dominated employment in the Irvine valley. Over the years, we have lost more than 400 jobs. The collapse of Basford Home Textiles, a part of the Basford Group, that went into receivership in June 1999, was a severe enough blow for the 38 workers who were made redundant, but they consoled themselves to some degree with the thought that at least their accrued pension rights in the group pension scheme would contribute to their standard of living at the time of retirement. The 99 employees retained by the successor employer also thought that their position was safe. Consequential to the receivership, the pension scheme had to be wound up. That process has revealed to the employees just how misplaced even that small amount of optimism was.

Mrs. Margaret Dawson, of Darvel, worked for many years in the industry both for Basford and their predecessors. She planned to retire at 60 and had a fair idea of what her pension would be. In 1995, the scheme was altered to equalise the normal retirement age for all members at 65. She knew and understood that the change forced on the scheme by the European Court case of Barber v. Guardian Royal Exchange would have a detrimental effect on her benefits. However, before she retired on 2 July 1999, the Basford Group went into receivership. The immediate effect of the commencement of the winding-up of the scheme on 26 May 1999 was that the new trustees, acting on the advice of the scheme actuary and pending clarification of the funding position, took a decision not to consider any early retirement requests.

Mrs. Dawson, who is a formidable woman, persisted with her request for early retirement and eventually, on 30 March 2000, the trustees agreed to pay her the guaranteed minimum pension. That figure is significantly less than the benefits she expected from the scheme, as set out in the figures she was given when she made her initial inquiries about early retirement. Now, almost two years after the date of her retirement and three years after her 60th birthday, she has no clear idea of what her final pension will be, and will not know that until the funding position of the scheme is finally known. She survives on the basic state pension, supplemented by the guaranteed minimum pension. She is confused, feels betrayed and rightly has a burning sense of injustice.

Bobby Armour of Kilmarnock also worked for Basford, but left before the receivership. He has a deferred pension in the scheme, and is still in employment but is nearing retirement age. He is also a victim of the uncertainty, as he cannot work out what his accrued benefits are worth. Furthermore, he cannot transfer his Basford pension to another scheme, as the value of the scheme has not yet been quantified, and a true transfer value cannot be assessed. He is in an almost identical position to David Ralston, another Darvel

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resident who is still working in the industry--in the firm that took over from Basfords in Darvel. Like Mrs Dawson, Bobby Armour and David Ralston also feel betrayed and have a burning sense of injustice.

Those three cases are but examples of the circumstances of many of my constituents affected by the closure of the Basford plant. Over the past two years, there have been a series of comprehensive announcements from the independent trustee, Mitre Pensions Ltd., and the members' interests have been rigorously pursued by the General, Municipal, Boilermakers and Allied Trades Union, and in particular the regional organiser John Easdale and their shop stewards Eunice Callender, Paddy Quigley and Jim Raymond, who is now a local councillor.

Investigations by the independent trustee have uncovered a catalogue of actions in the last few months of the existence of the group that directly affected the pensions of all the employees, and which may leave some pensioners with as low as 48 per cent. of what they paid for. It appears that the trustees ignored advice from their actuary about the level of contributions necessary to maintain the funding requirement of the scheme and investment advice from their fund managers. Furthermore, the owner of Basford, Maurice Cresswell, who was also the chairman of the trustees of the pension fund, at a time when the only other trustees were directors of the company, persuaded the other trustees to buy two premises already owned by him, at a cost of some £560,000 to the fund--a figure that, not surprisingly, came in at about 5 per cent. of the fund's value.

Those actions, along with non-payment of employer contributions of at least £150,000 during 1998-99 and a delay in paying employee contributions during the same period, left the fund some 12.3 per cent. short of the value required to sustain the pensions of its members. Given that current pensioners are better protected than deferred pensioners on the winding-up, deferred pensioners will take a bigger loss, which is estimated at up to 28 per cent. by the new independent trustee, Mr. Iain Talman of Mitre.

Even those figures are still provisional, as the fund managers, Aon Consulting, have not yet been able to provide accurate figures on which to base decisions concerning the scheme. The winding-up of a pension scheme is not a simple process, but it is not helped by delays that are avoidable. The necessary actuarial valuation was promised within six months of the winding-up date. It took a full year, and even then it had to be redone. A second actuary was employed, but he resigned before he could report. A third actuary has been instructed, and his report is awaited, but the uncertainty for pensioners continues.

There has been an unexplained delay in claiming the outstanding employer contributions from the national insurance fund. Despite the fund managers having been aware of the valuation, and therefore the level of the missing funds, since last summer, it would seem that they only began the process of recovery before Christmas. That has further delayed the final valuation of the fund. Indeed, it has been difficult for anyone to find out anything from Aon Consulting. In his earlier announcements, the independent trustee encouraged

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members with questions about their specific entitlement to consult the fund managers as the first point of contact. I am repeatedly told that requests for information have been fruitless. I wrote to them on 20 December last year asking a number of questions relating to the scheme. On 7 February this year, I wrote again seeking a reply. I had not even had the courtesy of an acknowledgement. To be fair to them, that omission was corrected by a holding letter of 13 February, but I am still awaiting answers. If the Member of Parliament cannot get answers from people who manage the pension funds when there is a clear, direct, constituency interest, it does not augur well for ordinary members of the public.

The whole process has been one of delay after delay, and all this time more and more charges are being made on the scheme, lessening its value again and again. In his latest announcement, the independent trustee said that

The buildings that were purchased from Cresswell were the subject of a series of transactions of labyrinthine complexity. There may also have been a deliberate attempt to make them not resaleable, because access to one of the buildings was retained by the owner, who is also the chairman of the trustees and the man who owned the company. To date, only one of the buildings has been sold. Until the second building is sold, no assessment can be made of the loss or, more unlikely, the gain to the scheme from the property transactions alone. At the same time, some assessment has to be made of the likely rental income that should have accrued to the scheme from the buildings, but which did not. For some inexplicable reason, the trustees allowed the company to get out of a notional leasing deal for one of the buildings, which was due to last for 10 years, without penalty after two years. Alternatively, an assessment should be made of whether other investment of the £560,000 purchase price would have been more beneficial to the scheme, and whether that is what the trustees should have done with the money in the first place.

Another cause of uncertainty is the fact that now, almost two years after the company went into receivership, no assessment is yet possible of whether legal action may help to recover part of the deficit. Mitre is properly taking legal advice on this matter, but in a letter to me of 9 February, it stated that

None of the members of this scheme has benefited in any way from the changes implemented by the Pensions Act 1995, never mind the protections legislated for in the Child Support, Pensions and Social Security Act 2000.

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Undoubtedly, had those members had the benefit of that legislation, the history of this scheme would have been different. However, that does not mean that there are not legitimate questions that the members are entitled to ask of the Government. There are lessons still to be learned from their appalling experiences.

Will my right hon. Friend consider setting up a pensions safety net fund, similar to the redundancy payments fund, to protect the investment of ordinary people whose pensions have been damaged through no fault of their own? This proposal has been put to me forcefully by the GMB, and on the face of it seems a much-needed reform. I am aware that the Government continually review the level of protection needed for vulnerable pension scheme members such as the Basford employees. I know that, as part of the consultation on security for occupational pensions, the Government are in dialogue with the industry, and that the Institute of Actuaries and the Faculty of Actuaries have proposed that solvency insurance could have a role to play in protecting members of underfunded schemes in the event of the insolvency of the sponsoring employer. Can my right hon. Friend say whether the Government intend to follow that recommendation? If they do, it may come too late for the Basford pensioners, but it would go a long way to giving some protection to others who may find themselves in a similar position in future.

The winding-up of this pension scheme has taken almost two years now, and the end of that process is not yet in sight. I am told by some of my colleagues that it is not unknown for the winding-up process to take significantly longer than that. One of my hon. Friends told me that, after seven years, a pension scheme in his constituency is no nearer being wound up. The process itself is a significant drain on the resources of the scheme. The powers given to the Occupational Pensions Regulatory Authority to direct schemes on winding up may provide a less complicated and less expensive method of getting answers than the courts presently provide. When will those powers be brought into force, and what steps can the Government take to assess the performance of pension fund managers such as Aon, who hold themselves out as independent experts, both in their stewardship of the schemes, and in their performance when things goes wrong and delays are caused?

What is happening about the reform of the minimum funding requirement? If the minimum funding requirement ensured that there were sufficient assets to meet the liabilities of a fund, it would solve many of these problems. However, evidence suggests that it does not. Are the Government any nearer to determining their priority in relation to the minimum funding requirement? Is it to be greater security for the public's occupational pensions or greater investment freedom for schemes and investment fund managers in line with the Paul Myners review?

What proposals does my right hon. Friend have for improving the level of communication to scheme members when an occupational pension scheme winds up? The Department of Social Security undertook a research project into this issue prior to the implementation of the Pensions Act 1995. In the Basford case, the frequency and comprehensive nature of the announcements of the independent trustee is admirable, but his correspondence is still remarkably

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complex and difficult to understand. Yesterday, I had to read through the announcements two or three times before I could understand even the basics, and from my experience they are examples of good communication in such a situation.

Many other questions require to be asked in this particular case, but they can be posed only when the work of the administrator in winding up the scheme, and of the independent trustee in assessing culpability, is completed. In the meantime, any steps that the Government can take to ensure that other pension scheme members do not suffer the fate of my constituents, the Basford pensioners, will be warmly welcomed by them and by all other pension scheme members across the country.

1.44 pm

The Minister of State, Department of Social Security (Mr. Jeff Rooker ): I agree with your initial comments, Mr. Deputy Speaker, about the seating position of my hon. Friend the Member for Kilmarnock and Loudoun (Mr. Browne). I did not like the former arrangement in this Room, and greatly prefer the present one.

I congratulate my hon. Friend on introducing his case. I am sorry to hear about what happened, and I recognise that scheme members must be beside themselves with worry. Many hundreds of people--pensioners, payers or deferred members--are involved.

It may not be parliamentary or ministerial to say so, but the case that my hon. Friend described stinks. I hope that my hon. Friend will appreciate that because many of the issues are on-going, what I am able to say is limited. I shall do my best to explain the system currently in place to protect pension schemes. Some aspects are under review and some changes have already been made. I also want to respond to as many specific points about the Basford case as I can.

The vast majority of UK pension schemes are set up under trust law. The basic duty to run a pension scheme lies with the trustees, not the company or the Government. The trustees must ensure that the rules of the scheme are followed and comply with the law.

The framework of trust law was reinforced by the Pensions Act 1995, which resulted from the Maxwell scandal. It introduced a series of measures to protect members of pension schemes, placed extra duties on trustees and set up the Occupational Pensions Regulatory Authority. We are actively monitoring and reviewing the Act's provisions in order to build on existing measures.

OPRA is the independent pensions regulator that investigates complaints when occupational pension schemes do not comply with the Pensions Act 1995. Anyone can report a pension scheme to OPRA if they believe that it is not being run properly. The scheme auditor and the actuary have a statutory duty to blow the whistle when they have reasonable cause to believe that the 1995 Act is not being complied with.

I have not checked the latest figure, but the last time I looked into it, there were about 120,000 pension schemes in this country. It is certainly a huge number. OPRA operates as a reactive regulator when people make complaints. We have examined and strengthened some of OPRA's operations through legislation that has not yet come fully into force.

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My hon. Friend raised concerns about the actions of the trustees and the actuaries involved in the Basford Group case. When Basford Textiles became insolvent, the insolvency practitioner appointed a statutory independent trustee. The previous trustee no longer acts as a trustee in relation to the scheme. The last actuarial valuation of the Batsford Group scheme was in 1996 and the next was due on 1 May 1999. The trustees sought 25 extra days as the wind-up of the scheme was due to commence on 26 May 1999. That valuation was completed on time by 26 May 2000.

When I started to get to grips with the minimum funding requirement, I mistook it as a solvency test. It may appear that way to a lay person, but there is no doubt that it is not. Pension schemes must be adequately funded to cover their liabilities. The 1995 Act introduced the MFR, which requires defined benefit schemes--schemes based on final salary--to hold a minimum level of assets to meet their liabilities.

We recognise that matters have changed since the minimum funding requirement was introduced. It came into force in 1997. As my hon. Friend acknowledged, many of the issues that affected his constituents are not covered by the 1995 Act, which had not come fully into force at that time. The Government consulted on the future of the minimum funding requirement and are currently studying the responses.

Coupled with that was the Myner review set up by my right hon. Friend the Chancellor of the Exchequer. Given that he is about to make a major speech in the House in the not too distant future, he may or may not have something to say about that. The report has been received, and the consultation on the minimum funding regulation concluded at the end of January. We have been considering the responses to that consultation, because we must make an early statement about whether we will do nothing or do something, so that people know what is happening.

Pension contributions should be paid promptly and at the right level. In 1996, the actuary of the Basford Group scheme recommended a rise in employer contributions from 8.7 per cent. to 10.2 per cent., to take effect from April 1997. The trustees decided not to take the actuary's advice and did not increase the employer contributions. That may seem a small rise, but it represents a 20 per cent. increase. Under the minimum funding regulations, which have come in since the 1995 Act, a schedule of contributions must be set out clearly. That schedule must be certified by an actuary. If those regulations had been in force when the Basford trustees took the decision, it is unlikely that the actuary would have been able to certify that level of contributions. The actuary would have been obliged by law to report the situation to OPRA. A real problem has arisen, which predates the change in the law, by refusing to increase employer contributions by 20 per cent.

The trustees monitor the payment of contributions on the scheme's payments schedule and must tell OPRA and scheme members when contributions have been paid late or not paid at all. There is a firm rule about that. As my hon. Friend knows, there was a failure on the part of the employer to pay the contributions in the Basford case. I understand that a notice went out from

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the independent trustee to all members of the Basford Group scheme in July 2000 stating that all employee contributions had been recovered.

At present, there is no legal requirement for trustees to include members of pension schemes. Legislation went through the House last year, which will come into force later this year or early next year, whereby a minimum of a third of the trustees of a pension scheme must be members of the scheme. They may be pensioners, active members or deferred members, but they must be members of the scheme. In future, a group of trustees cannot be employer dominated.

The Pensions Act 1995 introduced restrictions on employer-related investments, such as shares in the company, land or property owned by the company. Clearly, that was the result of the Maxwell scandal. In May 1999, the independent trustee of the Basford scheme voiced doubts to OPRA about the appropriateness of several actions of the previous trustee in connection with the purchase and use of properties in 1996--a point that my hon. Friend raised in some detail. Those property dealings may have constituted a breach under the 1995 Act. Unfortunately for the scheme members, that Act did not come fully into force until 1997.

When things go wrong, it is only right that measures are in place to protect members of a scheme. I regret that many of the problems of the Basford scheme occurred before the 1995 Act came into effect. My hon. Friend realises that his constituents have a hell of a problem. Hopefully, it is being sorted out with the trustees. I note the delays that he listed, and I shall make it my business to ensure that I follow them up through OPRA and my officials. It is unacceptable if Members of Parliament do not receive replies. There is almost an implied threat that, if inquiries are made, the scheme will be charged. The only people making any money out of the situation are the professonals who are examining the problem, whereas the members of the scheme feel that their pensions are under threat, and they contributed to those pensions.

Measures are in place for redundancy payments schemes when a firm has become insolvent. If, on winding-up, the scheme is not fully funded under the minimum funding requirement, the amount outstanding becomes a debt on the employer, and the trustee must pursue that amount. Of course, the Pensions Compensation Board was also set up under the 1995 Act. It has not made many payments to date--I declare an interest, because one recent payment was in respect of a company in Birmingham that employed some of my constituents and those of my hon. Friend the Member for Birmingham, Northfield (Mr. Burden).

Members must be protected from fraud and dishonesty. Provisions for compensation were introduced in the 1995 Act. The Pensions Compensation Board pays compensation to an occupational pensions scheme if it suffers a reduction in its assets because of dishonesty when the sponsoring employer is insolvent. Improvements to the pensions compensation scheme were contained in the Welfare Reform and Pensions Act 1999, which is due to come into effect shortly.

My hon. Friend the Member for Kilmarnock and Loudoun asked about consultation on the minimum funding requirement. As I said, we hope to make an

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early announcement about suggestions that have been made for mutual insurance for the industry. There are pluses and minuses, but we are actively considering that option, because since the 1995 Act was passed, gaps have been clearly identified that we want to close. The time that has been taken to finalise the case is an issue, and I give my hon. Friend my personal assurance that I will follow that up myself. The Child Support, Pensions and Social Security Act 2000 introduced a package of measures for schemes in wind-up, which are intended to introduce more accountability into such schemes and to extend OPRA's powers in that regard. Again, the Act will come into force early next year--I know that these things are always later this year or early next year, but we are dealing with a huge industry. Millions of people are in pension schemes--there are about 120,000 pension schemes--so we must be careful about changes, and take time to consult even after the House has passed the main legislation.

Most pension schemes are extremely well run. The best run schemes from my experience are those in which members are involved as trustees and there is a free share of information, in which they watch with eagle eyes

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what happens to investments, especially if it appears that the company concerned is using some of the funds. We cannot legislate initially for every eventuality, so sometimes we legislate as we go along, filling the gaps, which is why we constantly review the framework.

I have great sympathy with the issue raised by my hon. Friend, and I am glad that he has given me the opportunity to put on the record some of the measures we have already taken and to signal future announcements. I understand that OPRA is at present satisfied that the independent trustee is doing everything in his power to rectify the situation by collecting as much money as possible for the scheme, which was clearly underfunded when it refused to increase employer contributions by the recommended 20 per cent. There is a major problem with underfunding, but OPRA will continue to monitor the scheme until it is fully wound up. I will ensure that if I can open a door or kick a door open, I will certainly do so in the interests of my hon. Friend's constituents.

Question put and agreed to.

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