Select Committee on Foreign Affairs Eleventh Report

The legality and morality of the Household Cost Allowance

74. The Household Cost Allowance certainly looks like a device adopted by the Gibraltar Government as a way of increasing payments to people of pensionable age who are resident in Gibraltar without increasing the pensions payable to non-resident (mainly Spanish) pensioners and (hopefully) without breaching EU law.

75. It is arguable, however, that the allowance would be found illegal under EU law. The Gibraltar Government claims that Spanish pensioners are only interested in having their own pensions uprated, and that they are not interested in Community Care payments to Gibraltar residents. This is true only up to a certain point. If Community Care payments are social assistance payments, rather than social security payments, then they are of no proper interest to the Spanish pensioners. If, on the other hand, Community Care payments are considered legally to be social security payments, the fact that Gibraltar residents had received these payments while Spanish pensioners had not would give the Spanish pensioners an additional and arguably much stronger case to take to the courts. Without taking Community Care payments into consideration, the Spanish pensioners can only argue that all old age pensions should be uprated regularly in line with inflation, not that they have suffered additional discrimination.[74]

76. If Community Care payments are to be considered as equivalent to pension payments, however, then the fact that these have not been paid to Spanish pensioners could amount to discrimination, and would affect not only Spanish pensioners who contributed prior to 1969, but also Spanish pensioners who have worked in Gibraltar since 1985. We conclude that the legality of Community Care payments has yet to be established under European law. We recommend that a resolution of this issue be sought as soon as possible, without the British Government taking a view on the merits of the case which might prejudice its outcome.

77. An entirely separate question is whether the establishment of Community Care payments was immoral. European Union law seems in this case to be operating in a blatantly unjust manner, by requiring full pensions to be paid to nationals of another country who have been prevented from working and contributing to a pension fund by their own Government. Moreover, this was an eventuality which the Gibraltar Government foresaw, which it brought to the attention of the British Government some ten years before Spanish accession to the EC, and which the British Government failed to resolve during the Spanish accession negotiations, before the potential liability became an actual one. It was as a result of this failure that Gibraltar pension payments were frozen, again at the insistence of the British Government. The effect of freezing these payments has been that the value of pensions in Gibraltar has gradually decreased.

78. It is unclear what the British Government expected the Gibraltar Government to do in the circumstances. The option of merely paying pensions at frozen rates to Gibraltar pensioners was considered unsustainable by a joint study group of British and Gibraltar officials in 1988, but the pension rate has now been frozen for nearly fifteen years.[75] Did the British Government really expect old people in Gibraltar to survive on a pension of indefinitely decreasing value? Did it really expect the Gibraltar Government to take no steps to ensure that people of pensionable age in Gibraltar received a reasonable level of financial support? We conclude that the status quo established by the freezing of Gibraltar pensions was unsustainable, and that it would have been politically precarious, and potentially immoral, had the Gibraltar Government not taken steps to ensure that Gibraltar residents of a pensionable age were adequately provided for.

The liability for pension payments to Spanish pensioners

79. In June 2002, the Foreign Secretary assessed the potential liability to Spanish pensioners, should their case be successful, at £80 million. He presumably believes that the Gibraltar Government should meet this liability rather than the British Government because of the payments made by Community Care, as we have seen no evidence to indicate that the Gibraltar Government was in any way at fault prior to the establishment of the Household Cost Allowance. Indeed, initially it seemed to be generally accepted that the liability should be borne by the British Government, rather than the Gibraltar Government. Hence as of 1986, payments to the Spanish pensioners have been made from a fund controlled by the British Government, rather than from the Gibraltar Pension Fund. If, however, an additional liability above that incurred by paying the frozen pensions is incurred directly by the existence of Community Care,[76] it might be reasonable for the British Government to seek to pass some of that liability onto the Gibraltar Government. We recommend that the British Government should continue to meet the original liability to pay pensions at frozen 1988 rates to Spanish pensioners, although we believe it unjust that this liability should exist at all.

80. It is much more difficult to apportion any additional liability. How much of that burden the Gibraltar Government should bear depends on a range of circumstances, which we discuss below.

81. The British Government could also be partly at fault, if in its public statements it has made it more likely that the European Commission and courts will judge the current pension arrangements to be illegal. For example, the Foreign Secretary has told us that "Gibraltarians who are in receipt of these pensions get a bigger pension than those in Spain",[77] a statement which prejudges any decision by the European courts as to whether the HCA does in fact constitute a pension payment. The Gibraltar Government believes that in its communications with the Commission, the British Government has included "gratuitous, unbalanced" references to the HCA,[78] and Peter Caruana has claimed that Peter Hain's reference to a 'scam' "has in effect, converted a potential liability into a certain one".[79]

82. Gibraltar has no locus standi in the European courts, and therefore it must rely on the British Government to put its case. If the British Government, rightly or wrongly, is unhappy with the current arrangements in Gibraltar, and if it believes that any additional liability will be met by the Gibraltar Government, it may have little incentive to make a strong case. We recommend that in the event that additional liability relating to pensions is incurred directly as a result of the existence of the Household Cost Allowance, this liability should be apportioned between the British and Gibraltar Governments on an agreed basis if possible and failing that by some form of arbitration, but that any additional liability which would have been incurred regardless of the existence of that allowance should be met in its entirety by the British Government.

Is the Household Cost Allowance a 'scam'?

83. Peter Hain's description of "a pensions scam which is down to the government of Gibraltar" is a serious allegation to have made publicly. According to Peter Caruana, the use of the word 'scam' is "wholly unjustified, indefensible and improper".[80] Whether it is accurate depends on how the word is interpreted. The Foreign Secretary understands a "scam" to be "opaque, not transparent and also potentially unlawful". Peter Caruana believes that the word implies dishonesty as well.

84. In a different historical context, a scheme such as the HCA might well be regarded a scam. It is hardly normal practice for a government to give money to a private trust in order that the trust can make payments which ought ordinarily to be made by the government. But the context in Gibraltar, as we have explained above, is particular. Presumably, the HCA was set up as it was because for the money to have been disbursed by the Government would have been more probably illegal under European law than for it to be disbursed by a private organisation. The lack of transparency in the way the money is managed and spent is a direct consequence of the absurdity of EU law in this area, and of the indefinite freeze in pension levels. While it would have been a scam had Community Care been set up, for example, to divert public funds to private purposes, we find the term inappropriate in the context of a government doing its best to ensure that elderly people are properly provided for. We agree with Peter Caruana that to describe something as a scam implies dishonest intent: we have seen no evidence to suggest that the Gibraltar Government acted other than out of well-intentioned motives in wishing for Community Care to be established. In our view, the introduction of HCA with the approval of the Gibraltar Government may have been a device, but it was not a scam. We conclude that it was deplorable for a Government minister to have described the pensions situation in Gibraltar as a 'scam'.

The Gibraltar Government's handling of the pensions issue

85. In his evidence to us, the Foreign Secretary said: "My officials have been backwards and forwards to the Government of Gibraltar trying to get them to be transparent with us and so far the Government of Gibraltar have failed to be so."[81] Later he wrote to us, making a less sweeping complaint: "we still need clarification on several points".[82] In his memorandum, the Gibraltar Government's Chief Secretary sets out in detail the consultation and information exchanged between the British and Gibraltar Governments relating to Community Care.[83] Without knowing the detail of what information the British Government has sought that the Gibraltar Government has failed to provide, it is hard to assess the accuracy of the Foreign Secretary's allegations. On the other hand, we have no reason to dispute the Chief Minister's claim that "the suggestion that the Gibraltar Government has withheld information from HMG or that HMG is not aware (and has been for several years) of what the arrangements are, or how they work, is simply incorrect".[84]

86. What may be problematic is that while the British Government treats Community Care as if it were a responsibility of the Gibraltar Government, the Gibraltar Government insists—perhaps disingenuously—that Community Care is a private trust over which it has at most influence, but no direct power. Paradoxically, if the Gibraltar Government, rather than Community Care, were to deliver what the British Government requests, this might strengthen the case that the HCA is a government benefit to which Spanish pensioners would be entitled. If, on the other hand, the Gibraltar Government is withholding information that the British Government has requested access to, or failing to assist the British Government unreasonably, we would regard this as a serious matter.

Pensions: conclusion

87. We conclude that the root cause of the current pensions issue in Gibraltar is a weakness in EU legislation, exploited by the Spanish Government, which requires the Gibraltar Government to pay full pensions to a large class of people (who happen to be Spanish) who have barely contributed to the Gibraltar pension fund, through no fault at all of the Gibraltar Government. It may be that this is the law, and that nothing can be done to change it. But the current arguments between the British and Gibraltar Governments as to liability, and about the rather opaque activities of Community Care, are a direct result of this unfair legal circumstance. The current pensions situation, with or without Community Care, is highly unsatisfactory. The British and Gibraltar Governments should be co-operating to try to find a workable long-term solution to the issue, rather than wrangling about who is to blame and who should pay for the current situation, for which neither of them is to blame, and for which, in an ideal world, neither of them should have to pay.


88. On 19 April 2002 the Foreign Secretary wrote to the Chief Minister making, in the Chief Minister's words, "certain allegations about statistics and alluding to transparency and probity of government".[85] Mr Caruana replied on 30 May, stating that the Foreign Secretary had been "misinformed", that "none of those issues has ever been raised with me by the Governor or the FCO" and that "the transparency and probity of my Government is self-evident, and ... compares favourably with other Governments in Europe, including HMG in the UK".[86] On 31 May the Chief Secretary to the Gibraltar Government sent a more detailed letter to the Deputy Governor.[87] In this, he remarked on the substantial and widely acknowledged work carried out by Mr Caruana's Government to improve the transparency of public finances in Gibraltar. He noted:

  (i)  that National Income Accounts had never been published in Gibraltar; that the Chief Minister had decided that this situation was unacceptable on coming to office; that work to allow the Government to produce accurate National Income Accounts had been delayed by a number of factors, but that the Gibraltar Government was at last in a firmer position to prepare such accounts;

  (ii)  that no Annual Abstract of Statistics had been published since 1998, but that almost all of the information for subsequent years was available elsewhere; that the failure to publish resulted from a decision to await the results of the study which had also delayed production of National Income Accounts; and that the Chief Minister had announced publicly in November 2001 that the delay had become unacceptable and that a new Annual Abstract would be prepared forthwith.

89. On 3 June 2002, an article appeared in The Guardian, claiming that the Foreign Secretary had "asked the Gibraltar government to explain why it has failed to publish key accounts and economic statistics amid growing concern in Whitehall that the colony is being used as a centre for money laundering".[88] Similar articles followed in other British newspapers over the following days.[89] In evidence to us on 19 June, the Foreign Secretary said:

    "I am interested in official statistics, always have been, I have a Statesman's Year Book on my desk and I wanted to look up GDP and other figures for Gibraltar and I discovered that the most recent figures in the up-to-date version of the Statesman's Year Book were 1995. Then I started to ask questions. I said 'Could someone go and get me the annual abstract of statistics' like you can get them from any other country, OECD, EU country, not forthcoming. Then I raised this by polite letter to Mr Caruana, still nothing forthcoming. I raised it with him when I saw him on my visit. I am afraid to say I got a bombastic reply from him. Now I have had a lengthy explanation with a promise that this will be forthcoming in due course. The answer is it is the clearest responsibility on governments which subscribe to standards of transparency to provide proper abstracts of statistics that make them public."[90]

90. The Foreign Secretary also described the fact that national income accounts had never been published as "a dereliction of duty by successive governments of Gibraltar". The Foreign Secretary claims that he raised this issue "in the spirit genuinely of an enquiry. Nobody, as it were, put me up to it, I just wanted to know where the figures were".

91. On 5 June 2002, the Gibraltar Government issued a press release in which it stated: "The allegations concerning the finances of the Gibraltar Government are totally fabricated and completely untrue ... The fact that several UK newspapers carry the same story at the same time, containing the same mistakes of fact and confusion of issues, proves beyond doubt that this is an orchestrated smear campaign".[91] In his memorandum, the Chief Minister adds that "before the first of these articles appeared ... , we had been alerted by members of the UK press that these issues were being briefed out to them by 'Foreign Office sources'"[92] and that "it is entirely unprecedented for any issue between HMG and GOG [Government of Gibraltar] to be raised at Secretary of State level in writing directly to the Chief Minister without it having previously been raised and discussed with the Chief Minister by the Governor or FCO officials".[93]

92. An abstract of statistics was published late in June 2002, including information up to and including 2001 for most categories, although not for national income. The abstract contains national income figures for 1979/80 to 1995/96 and provisional gross domestic product figures for 1999/2000, but figures for 1996/97 to 1998/99 were still in the process of being recalculated when the abstract was published.[94]

93. The Foreign Secretary is correct that an annual abstract of statistics and national income accounts had not been published in Gibraltar for some time (or, in the case of national income accounts, ever). In our view, there was nothing wrong in him raising these specific issues with the Gibraltar Government. The question of why the Foreign Secretary wrote only to Gibraltar, given Peter Caruana's point that "Gibraltar's entry [in the Statesman's Year Book] is not dissimilar to that of the majority of UK Overseas Territories", can be explained by the fact that Gibraltar, unlike other Overseas Territories, has obligations relating to its membership of the EU.[95]

94. It was surely unnecessary, however, for the Foreign Secretary to raise these issues in such a public manner, and to link them to wider issues of transparency and probity in government. The Chief Minister's reply may well have been "bombastic", but this does not change the fact that his letter and the one from the Chief Secretary to the Deputy Governor did in our view explain and put into context the failure of the Gibraltar Government to publish these figures. It was very soon after these letters had been received by the FCO that negative and inaccurate reports about financial transparency in Gibraltar began to appear in the British press. The Chief Minister's claim that these reports were being "briefed out" to the press by FCO sources is highly plausible, given that the articles appeared at about the same time and seemed to have been written with some knowledge of private correspondence between the Foreign Secretary and Chief Minister.

95. We conclude that it would have been entirely right for the British Government to raise discreetly with the Gibraltar Government and/or the Financial Secretary, at an official level, its failure to publish certain statistics. We further conclude, however, that this failure in no way compromised the generally very good record of the Gibraltar Government in probity and transparency, contrary to what the British Government has suggested in evidence to us, and apparently in briefings to the press.

96. We also note that the Financial Secretary, who has indicated both his irritation and his dismay at the public criticism of the Gibraltar Government in relation to the abstract of statistics issue, is in fact appointed by the United Kingdom Government; a factor which the Foreign Secretary appears to ignore.

74   Ev 45, para 33. Back

75   Ev 44, para 23. Back

76   As Peter Hain claims. See Appendix 7, Ev 16. Back

77   Q 29 [Jack Straw]. Back

78   Ev 44, para 21. Back

79   Ev 29, para 40. Back

80   Ev 29, para 40. Back

81   Q 29 [Jack Straw]. Back

82   Ev 17, paragraph on Pensions. Back

83   Ev 45-48, paras 34-45. Back

84   Ev 30, para 45. Back

85   Ev 31, para 55. Back

86   Ev 56, Annex 9(b). Back

87   Ev 53-55, Annex 9(a). Back

88   'Straw questions Gibraltar over finances', The Guardian, 3 June 2002. Back

89   Eg. Financial Times and The Scotsman, 4 June 2002. Back

90   Q 30 [Jack Straw]. Back

91   Government of Gibraltar Press Release No. 107/2002, 5th June 2002. Back

92   Ev 31, para 89. Back

93   Ev 32, para 68. Back

94   Gibraltar Statistics Office, Abstract of Statistics 2001, p 36. Back

95   Ev 32, para 64. Back

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