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Occupational Pension Schemes

1.30 pm

Sandra Osborne (Ayr): I am pleased to have the opportunity to open today's debate. I shall raise the plight of more than 1,000 workers who were employed by United Engineering Forgings. The matter affects not only my constituents but those of numerous other hon. Members because UEF workers were employed in six manufacturing locations in the United Kingdom. Within the time available, I shall endeavour to accept interventions from hon. Members who want to contribute to the debate.

I recognise that my right hon. Friend the Minister for Pensions may have difficulty commenting on much of the detail of the case, although I know that he has received correspondence and is aware of the situation. The position in which the members of the UEF occupational pension scheme have found themselves illustrates inherent weaknesses in the current rules that must be urgently addressed. I therefore hope that his response will inform the Chamber of the Government's intention further to strengthen pensions legislation to ensure that workers can never again be deprived of their rightful entitlement for which they have paid all their working lives.

I intend to show that this case has been caused by the irresponsible and cynical actions of UEF's major shareholder, Prudential Portfolio Management Ventures Ltd., which is part of the Prudential Group—ironically, a leader in pension provision. UEF was the former British Steel forging division that was purchased by PPMV in 1997. In January 1997, the chief executive of the company informed the group's trade union representatives of his five-year plan for the business, the aim of which was to launch the company on the stock market at the end of those five years.

The UEF company pension scheme originated in 1974 under the ownership of Guest, Keen and Nettlefolds. It was designed for GKN by the Prudential and was introduced as part of the 1974 annual wage award. It was a final salary scheme, in which the employer contributed 10 per cent. and employees contributed 5 per cent. of their pensionable earnings. The scheme was well run under GKN, and from 1986 by a new company, United Engineering Steels and Forgings. Actuarial reviews were held regularly and surpluses were the norm. When it was realised that there was a deficit, the employer fully funded the shortfall to the scheme, thus ensuring that benefits were maintained.

Until UEF bought the company in 1997, early retirement benefits were usually allowed only when the employer was satisfied that an employee's health was in such a poor state that they could no longer work. When UEF took over, it transferred the scheme as a mirror image, but a change was made to ensure that new members joining the scheme would not be offered the generous early retirement benefits that existed for its present members, which is ironic when one considers what happened later. In August 1997, when the transfer value was agreed, the scheme had 1,953 active members, and a board of seven trustees that was chaired by the company's financial director.

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In September 1997, the first member of the pension scheme retired. However, the business was not going as well as the company had hoped, and it had started to make a loss. That fact is recognised by the employees, but it was the responsibility of the employer and the trustees to ensure that the pension scheme was funded properly. Some sites initiated voluntary redundancies in order to reduce their wages bill. The pension scheme, with its generous early retirement benefits allied to redundancy payments, certainly looked an attractive option to employees over the age of 55. Early retirement, however, required the company's consent. Former employees believe that the pension scheme was the carrot used by the company to ensure that many employees would volunteer for redundancy, with those of 55 years of age and over receiving their fully accrued pension. As I hope to show, scant regard was paid to the effect of this on the pension scheme and future pensioners.

To illustrate the effect of this redundancy policy on the pension scheme, an employee aged 55 years who had been a member of the pension scheme since 1974 would be entitled to a weekly pension of £100 per week plus a cash lump sum. If one assumes a life expectancy of 80 years, that person alone would cost the pension scheme £125,000 to £150,000.

In April 1998, the pension scheme had 47 pensioners and 27 deferred pensions. By September 1998, that had risen to 128 and 49 respectively. Some sites within UEF were employing new people, but they were temporary workers who were not allowed to join the scheme until they had been employed for a year. That did not help the situation, however, because fewer eligible members were paying into the pension scheme as more members were being taken out.

By April 1999, the pension scheme had 283 pensioners and 94 deferred pensions. The number of active members paying into the scheme had dropped to 1,712. In October 1999 the trustees, on the advice of Bacon and Woodrow, approached the board and asked it to increase its contributions, as the minimum funding requirement had dropped from the 120 per cent. funded in April 1998 to 100 per cent. in April 1999, and was still dropping. The advice was that the contributions required were now 19 per cent. The board refused to increase its contribution, and by March 2000 there were 373 pensioners and 139 deferred pensions, and the minimum funding requirement was down to 96 per cent. In April 2000, the board sold the Smith Clayton Aerospace division and the pension scheme then had 190 fewer paying active members.

In June 2000, the company decided to take action. Employees were asked to contribute another 2 per cent. on top of their existing 5 per cent. to help fund the scheme. The company would also pay 2 per cent., making a total contribution of 19 per cent., as previously requested by the trustees but refused by the board the previous year when the need was first highlighted. The employees were told that if they did not agree to pay the extra 2 per cent., the pension scheme would cease. Also a pensions roadshow was held at each site to explain to the employees why management was asking for the extra funding when the trust deed decreed that the employer should fund any shortfall, as previous employers had done.

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The company went into administration on 12 June 2001 or shortly thereafter, and an independent trustee to the pension scheme was appointed by the court. He reported that the pension scheme was grossly underfunded and would have to be wound up immediately at a cost of £3 million, which would leave a shortfall of £12 million.

I am sure that my right hon. Friend the Minister and other hon. Members present will understand that the work force were devastated. They were always told what a good investment it was to pay into a company pension scheme and how it would provide them with a wage in their retirement.

John Robertson (Glasgow, Anniesland): I thank my hon. Friend for raising this subject. Does she agree that the Government must protect such occupational pensions? Many large companies have used and abused the early release schemes and the same could happen to them and their pension schemes as happened to the one mentioned by my hon. Friend.

Sandra Osborne : I thank my hon. Friend for that intervention. I hope to ask the Government later what action they intend to take.

Although such employees have taken the advice of Governments past and present and provided for their retirement by faithfully contributing for 20, 30 or even 40 years, so that they will not be a burden on the state, the expected pension from their fully accrued final salary scheme will not be there when they need it most—as they enter retirement and old age.

Miss Julie Kirkbride (Bromsgrove): I congratulate the hon. Lady on securing this debate; I, too, hope to secure such a debate. I am sad to say that her constituents' experience is mirrored by that of mine, but with one brutal difference. Mine appear to be losing not only their financial security in retirement but their jobs, and I hope that the Minister will say something about that.

Sandra Osborne : As the hon. Lady knows, receivership has had varied outcomes. I am pleased to say that a buyer has been found, but that will not diminish the serious impact on people's pension entitlement.

Such employees are now told that they must buy an annuity from whatever the reduced transfer value amounts to, but it will probably provide a pension far short of what they have paid for. Employees who are within one or two years of the normal retirement age must now live with the fact that, although they have no time to make up their pension deficit, younger employees who took advantage of the early retirement offers will reap 100 per cent. benefits for the rest of their lives.

I have permission to give the example—it is just one—of Mr. Willie Riggins, who has worked in what is known in Ayr as the Stampworks for 37 years, and has paid into the pension fund since 1976. In 1999, Willie received a quote for what he would be due—£29,500 in a lump sum and a pension of £137 a week—if he took early retirement. According to a recent quote for a

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stakeholder pension, however, he would get a lump sum of £12,500 and a pension of £40 a week. Those sums are based on the average transfer value in 1997, and would be even less now.

My right hon. Friend the Minister has stated in letters to colleagues that if a scheme is funded to at least the minimum funding requirement, it should provide fair value for the accrued rights of non-pensioners in the event of insolvency. However, what if, through the neglect of people who should know better, it is not funded to MFR levels? Again, to ensure that the scheme's funds are used for the intended purpose, there are restrictions on the amount that can be invested from the pension fund into the employer's business. However, what if misuse is not direct and monetary? What if the pension fund is used to cut the company's wage bills, and the fund is overburdened without taking account of future requirements?

Dr. Richard Taylor (Wyre Forest): Does the hon. Lady agree that the methods of complaint available to pensioners and future pensioners are weak and inadequate? First, they must go to the independent trustee, and then to the office of the Occupational Pension Schemes Advisory Service, which by its own admission has no teeth. Only then can they go to the ombudsman. Several of my constituents are trying such methods, but they are cumbersome and apparently useless.

Sandra Osborne : I agree with the hon. Gentleman. I must curtail my comments because of time constraints, but I should point out that the Government have themselves recognised that MFR levels lull people into a false sense of security about their pensions.

It is clear that the responsible course of action on the part of trustees and the board would have been to put in enough money to ensure that the scheme was fully funded, and to take account of the company's financial problems by freezing those funds. That did not happen timeously, however. What can the Government do to impose sanctions on such irresponsible behaviour? While advising employees to increase their contributions because of the underfunding problem, PPMV was trying to offload its shares to the company and was totally uncommunicative with the work force, and others, in the process. For example, they refused to meet me and, to my knowledge, other Members of Parliament, to discuss the situation. Ironically, Prudential was keen to discuss it with me yesterday, but unfortunately it was a wee bit too late in the day.

I call on Prudential, even at this late stage, to sort things out. The shortfall is a drop in the ocean to it, but would make a huge difference to the lives of my constituents and of others. If it wants to retain its reputation, it should get round a table with the employees' representatives and live up to its responsibility for the whole sorry tale.

I am aware that the Government have been considering various aspects of occupational pension schemes and have recognised their importance. They have consulted on aspects that could lead to improvements, such as insurance and a central contribution fund, but have rejected them. I would like to hear about any proposals that will improve the

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situation that the Government have accepted. Will the proposals prevent what my constituents and those of other hon. Members experienced?

1.46 pm

The Minister for Pensions (Mr. Ian McCartney) : Good afternoon, Mr. Gale. I thank my hon. Friend the Member for Ayr (Sandra Osborne) for bringing this matter to the attention of the Chamber and for eloquently giving voice to the concerns of not only her constituents but those of a significant number of hon. Members across the House. They have directly suffered from the collapse of this company through the loss of pension entitlements and, in some instances, jobs, careers and the financial security in which they had been investing for future years.

I will attempt to answer as many of the questions as possible in the time available. I can offer a number of things to my hon. Friend the Member for Ayr and hon. Members who have not been able to attend today. I offer a further meeting to discuss the issue in more detail and consider improvements to the private pensions industry. A half-hour debate does not do justice to my hon. Friend's case or the general issues that the Government must address. If, by the end of the debate, I have not answered some questions, I will send a detailed letter to my hon. Friend that can be circulated to other hon. Members, who will then be fully aware of the response that would have been given had the debate lasted for an hour.

My hon. Friend said that she was extremely disappointed about the fate of the company. She greatly contained her anger. As a former trade union shop steward, I heard alarm bells and wondered whether we had heard this all before. A company has been bought out, or there has been a management buy-out, even though it has a good market record and order book, seems to have a product with added value in the marketplace, has substantial potential for development, and has a base in the UK economy and an order book for elsewhere. For a reason unknown to my hon. Friend and the work force, there is a venture capital company involved that may take a short-term, rather than long-term, view on the other company and its capacity to expand and improve its market share. I cannot comment on that, other than to say that we are in the ironic position that a venture capital company owned by a major insurance company is involved in the pensions industry. It is a further irony that Prudential was involved in the establishment of the original scheme.

The company has been led into taking short-term attitudes as a result of the pressure of investing in other pension funds. My hon. Friend the Member for Ayr is right to pursue a meeting with Prudential to ask it about the decision-making process behind the way in which, ultimately, that company has been unbundled as it has. Parts of it have been completely closed off, others have been sold to competitors and parts of its assets, including land, have been sold off by those put in charge during the winding-up process.

My hon. Friend asked a number of questions, and I will try to respond to some. My hon. Friend the Member for Aberdeen, Central (Mr. Doran) was not able to catch your eye, Mr. Gale, but I think that he had a point to make about the minimum funding requirement. The

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Government consulted on the future of MFR and, in the light of the responses to that consultation, have decided that most recommendations must be implemented by primary legislation. We cannot undertake them simply by regulation.

We decided that if we were to develop our legislative proposals and introduce a Bill as soon as parliamentary time was available there should be further consultation. We have set up a consultation panel of representatives from the pensions industry and other interested parties including representatives of pensioners and trade unions. It will meet on a regular basis during the coming months to assist us in developing legislation.

Mr. Frank Doran (Aberdeen, Central): Following my right hon. Friend the Minister's invitation, I could not resist intervening. Does he accept that MFR, as presently constituted, is a double-edged sword? It is a protection for pensioners, but in my own constituency, just this weekend, my major non-oil private employer, Richards plc, was advised by its trustees to close down its pension fund simply because the fund was falling into deficit. The major reason that the trustees cited for that was the effect of MFR in the present economic climate. The anticipated returns were unachievable by a company in a hard-pressed manufacturing sector.

Mr. McCartney : I cannot comment directly as my hon. Friend invites me to. If he wants to write to me, I shall certainly comment, but let us remember why MFR is there. Whatever propositions come up later, certain principles are involved. One of those is, in all circumstances, the capacity to ensure that the employer makes good a deficit. The question is what is the most appropriate way of doing that, and we have decided that it is not the MFR regime as it currently stands. The review of MFR is not to get rid of, undermine or reduce an employer's obligation to make good funding requirements, but to find the most appropriate way of doing that on a consensual basis. If my hon. Friend writes to me, I shall send him more details about the review and what has come out of it.

The first meeting of the panel took place on 16 November, and agreed a work programme for activities with me. Hopefully, I will be able to report on that later in the year. Again, in a letter to my hon. Friend, I shall set out the work that has been done so far.

My hon. Friend the Member for Ayr asked about the discontinuance fund and rightly said that my predecessor consulted on it and found little or no support for the proposal. That was mainly because other defined benefit schemes made it clear that they did not want their members to help pay the deficit of members in other occupational funds. The Government are not in the business, and cannot be, of being a financial guarantor to every defined benefit scheme in the country. That is not feasible. Therefore, there is no consensus on well-run fund schemes being part of a fund to meet the needs and shortfalls of others.

Another issue raised was insurance to meet solvency concerns. Again, a consultation on that took place under my predecessor, and again there was no consensus on the system of safeguards for funders. It was thought feasible to have insurance on the terms that my hon. Friend talked about, but it was argued that the scheme would be even more complex than MFR. I am prepared

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to examine insurance and will write to my hon. Friend about it. There is an issue there about finding ways and means for the scheme under difficult circumstances: because of the way in which the company has been wound up, it is outside the capacity of the members to use MFR or any other means. I am prepared to look at that matter again and give my hon. Friend a more detailed answer.

As to the question on employment that the hon. Member for Bromsgrove (Miss Kirkbride) asked, perhaps she could write to me with the details. The Department for Work and Pensions has a complete and professional Employment Service that works in local labour markets. I shall be more than happy to make the connection between the company and the Employment Service, if they have not already met, and to sit down with them to discuss the services that can be provided for those who will get redundancy notices. I will deal with the matter appropriately with my ministerial colleague at the Department responsible for employment services.

Despite what my hon. Friend the Member for Ayr said, I assure hon. Members that the vast majority of schemes have important safeguards that continue to protect members. A few weeks ago, I announced that I am carrying out a quinquennial review of the operation of the Occupational Pensions Regulatory Authority, and I shall report back on that later this year. I hope that by the end of the year we will have recommendations on the future of OPRA in relation to its effect on the regulatory regime, whether it should be more proactive, rather than reactive, whether it has enough resources to do the job and, five years after its establishment, what more we can do to make it more effective.

OPRA investigated this case. It has powers to impose financial penalties, to bring criminal prosecutions, to disqualify a scheme's trustees and to refer cases to the police or the special fraud office. However, it does not generally supervise the actions of trustees. Where there is wrongdoing, it has powers to act on behalf of those who made the complaint. OPRA first had inquiries about United Engineering's pension scheme in June 2001. The information that it obtained established that there was no breach of rules on which further action could be taken. Specifically, there was no evidence of theft or fraud having taken place. My hon. Friend is

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concerned about whether the company acted appropriately in carrying out its fiduciary duties. That has been taken up with the Occupational Pensions Schemes Advisory Service and the ombudsman.

If the hon. Member for Wyre Forest (Dr. Taylor) will write to me with details, I will investigate the reasons for the delay. I cannot comment on why it is taking so long, but I will look into the matter on his behalf.

Mr. Dennis Skinner (Bolsover): I hope that when my right hon. Friend finally receives the report he will err on the side of more regulation, not less. This goes way back to 1988, when the Tories were in power talking about regulation being a bad thing that should be got rid of. They are still at it. We should be able to regulate those private firms to ensure that they carry out the wishes not only of my hon. Friend the Member for Ayr (Sandra Osborne), but of all the others involved. I urge my right hon. Friend, when he gets the report and takes action to introduce the Bill, to err on the side of more regulation, and let us hope that Conservative Members do not come to the House of Commons bawling about it.

Mr. McCartney : I thank my hon. Friend for that comment. However, it is a matter not of more regulation but of effective regulation. In my old position as a Minister at the Department of Trade and Industry, I was probably responsible for about 80 per cent. of Government regulation in the last Parliament, whether for the minimum wage or employment relations. I am not averse to using regulation, but it must be effective.

In the past we had layer upon layer of regulation going on for decades, mounting to the point where the books of case law are extremely thick, but there are still areas where it has been ineffective. That is the reason for the simplification review. We must strip out all the regulations that are doing nothing to support and develop pension schemes, to protect members' interests or to help and encourage companies to continue to fund them. We cannot force companies to have defined benefits schemes. It is therefore important that the regulatory regime should meet the balance of requirements in terms of the schemes that are established. I give my hon. Friend the Member for Ayr the absolute assurance that any regulations that are introduced will be effective.

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