Select Committee on Foreign Affairs Appendices to the Minutes of Evidence


Memorandum from The Hon J J Bossano, Leader of the Opposition, Gibraltar


July 2002

  1.  As requested by the Committee I am producing a detailed brief on the Spanish Pensions issue and as suggested by Andrew McKinlay, I am quite happy that this should be passed on to the Foreign and Commonwealth Office for their comments. There might be some slight inaccuracies of detail eg dates etc, since I am relying on my memory and not on access to documents. I am going over the ground I already covered on the Committee's visit to Gibraltar and bringing the record up to date.

  2.  Social Insurance was started in Gibraltar in 1954 for employment injuries and extended in 1955 to Old Age Pension, Widows Benefit etc. At the time there was a large Spanish workforce commuting daily from the Campo area which outnumbered Gibraltarians by a factor of some three to one. The workforce was needed to meet the labour demand of the very large MOD presence, which could not be met from resident labour.

  3.  As a result of a Royal visit in 1954 by Her Majesty the Queen, the Franco Government imposed its first restrictions on the Gibraltar economy by refusing new permits to its own nationals to enter Gibraltar to obtain employment. This meant that only Spanish workers who were already in Gibraltar in 1955 joined the Social Insurance Scheme and contributed to the fund. The workforce started to decline from 1954 as a result of natural wastage but at the closure of the frontier in 1969 they had contributed 14 years.

  4.  The total amount contributed by each worker was of the order of £38 (thirty eight pounds) in the fourteen years. The global amount was some £250,000 for the whole cross border workforce with another £250,000 paid by employers making the total of £500,000 at the time of the withdrawal of the Spanish workers by the Franco Government. This accumulated fund was the amount they had contributed to finance the liability to their future entitlement to pension. Based on their contributions they had an entitlement of a maximum weekly pension of around £1 (one pound) a week for a single person and something like £1.50 (one pound fifty) for a married pensioner. These were the benefits also payable to Gibraltarians at the time.


  5.  In 1973 the Social Insurance Ordinance was amended to give annual pension increases for those contributors who continued to do work in Gibraltar and pay Social Insurance. The contribution rates and the pension payable for this second category was raised every year. The Spanish workers did not contribute because they had been withdrawn by the Franco Government.

  6.  The Government of Sir Robert Peliza offered to transfer the accumulated fund of the Spanish workforce and their accrued rights to the Spanish Government but this offer was rejected by Franco.

  7.  The 1973 amendment however, provided for pension increases for residents of Gibraltar who had not contributed to the pension fund at the new increased rates post 1969 and this was the offending clause that permitted Spain to claim higher pensions in 1986. The number of Gibraltarian pensioners in this category claiming on the basis of residence rather than contributions was minute.

  8.  In 1985 the Frontier was re-opened following implementations of the Brussels Agreement. The Spanish Government informed Spanish pensioners at the time that they would be able to collect their Social Insurance Pensions at 1969 rates from February 1985 and that this would be re-valued to the level payable to resident pensioners in January 1986.

  9.  The GSLP in Opposition proposed that the Social Insurance Ordinance be restructured to avoid the liability that would arise and which the fund was incapable of meeting. It needs to be pointed out that Social Insurance Pensions were and are fully funded by contributions from employers and employees and receive no subvention from general revenues. The number of Spanish Pensioners vastly out-numbered Gibraltarian Pensioners and they had not made higher level contributions payable after the Frontier closure.

  10.  The Gibraltar Government under Sir Joshua Hassan rejected the solution on the advice of Sir David Hanney who said it was contrary to EU Law. This advice was incorrect.

  11.  In December 1985 at the Brussels Negotiating sessions in Madrid Sir Geoffrey Howe agreed with his Spanish counterpart to pay re-valued pensions to former Spanish workers from 1 January 1986. This had not been previously cleared with Sir Joshua Hassan who was present at the negotiations and who issued a public statement refusing to accept this liability.

  12.  An agreement was reached with UK under which consultants were engaged to produce a report to examine how the Gibraltar Social Insurance Scheme could be re-financed to meet the liability and the ODA contributed some £15 million to meet the payments for the period 1986 to 1988. The Spanish sub fund which was half a million pounds in 1969 had grown to £5 million by 1986 as a result of re invested income and no expenditure. The £20 million of the total of this fund plus the ODA contribution was expected to last three years.


  13.  The GSLP included a Manifesto commitment that it would not contribute one penny of Gibraltar's money to finance Spanish re-valued pensions in the 1988 elections and won on this basis.

  14.  The Consultants Report commissioned by the UK simply came up with the self-evident conclusion that the liability running at £8 million a year could be met by large increases in Income Tax or Social Insurance contributions or a combination of both raised from the existing workforce in 1988 to pay those who had worked prior to 1969 but had been unable to contribute because of the Frontier closure and the fact that they had lost their jobs in Gibraltar as a result of a decision by their Government.

  15.  Immediately after the election I held meetings with Baroness Chalker the minister responsible for Gibraltar and this was the first policy conflict with the UK Government. The Spanish sub-fund including ODA contribution and the accumulated £5 million of Spanish workers pre 1969 contributions was exhausted by July 1988. UK diverted ODA funds allocated by Parliament in 1984 to assist Gibraltar's infra-structure projects, which remained unspent and used it to avoid the ending of payment to Spanish Pensioners in August 1988. This was done without the agreement of the GSLP Government. After difficult and lengthy negotiations UK agreed to provide further grants to finance Spanish Pensions from 1 January 1989 to December 1993. This five-year transition was intended to give ample warning to Spanish Pensioners that payments were not for life. A contribution of the order of £40 million to the Spanish sub-fund was made by the UK in November 1988.

  16.  The UK attached two conditions:

    (1) Pension levels would be frozen at January 1989 levels for all pensioners, including all local pensioners who had made vastly larger contributions than the Spanish Pensioners.

    (2) The Social Security System would be dissolved and the balance accumulated in the fund distributed to contributors with the UK paying pro-rata lump sum payments to Spanish pensioners when this happened post December 1993.

  17.  UK informed the Spanish Government and the EU Commission of these arrangements.


  18.  The GSLP Government implemented the agreement as required by the UK. This meant having to freeze not only Old Age Pensions but also all other Social Security and Social Assistance means tested benefits, as the levels of all of these were inter-linked. The revaluation of benefits in line with wage or price inflation had to be ended and the policy of reducing the male age of entitlement to Old Age Pension from 65 to 60 years had to be abandoned. All this had to be implemented in 1989 for the five year period when the United Kingdom was paying Spanish Pensions, but was due to end in 1994 when the scheme was to be replaced by alternative arrangements.

  19.  In 1989 the Government established a Social Assistance Fund which was entirely funded from the proceeds of import duty. This was done under the provisions of the existing law, the Public Finance (Control and Audit Ordinance).

  20.  The Fund's objectives included the making of grants to charitable organisations. The United Kingdom Government was fully aware of this since the Social Assistance Fund created was gazetted and made public. The power to create this special Fund in the Constitution and the Law is held by the Financial and Development Secretary who, as part of his duty, informs the Governor's office and London. Moreover the accounts of this fund are prepared by the Accountant General and audited by the Principal Auditor and included in the audited Annual Accounts of the Government. These were and are submitted to His Excellency the Governor prior to presentation in the House of Assembly and publication.

  21.  I will fax a copy of the relevant accounts for 1990-91.[67]

  Also in 1989 a Charitable Institution, Gibraltar Community Care Limited was set up by a number of individuals as a Company Limited by Guarantee. The Company gave employment to male unemployed persons aged over 60 on community work on a part time basis paying them a social wage in exchange for 80 hours a month of social work. It also introduced a Household Cost Allowance for assisting persons living in Gibraltar whose cost of living was and is much higher than those across the border. The HCA was paid in December 1989 at the rate of £26 (twenty six) pounds per quarter for a single pensioner and £39 (thirty nine) pounds per quarter for a pensioner couple, irrespective of the existing level of pensions from the Frozen Social Security System. That is to say that those getting the maximum pension and those getting a minimum pension were paid the Household Cost Allowance and there was no pro-rata relationship between one thing and the other. These arrangements by a private entity were public knowledge in Gibraltar. Furthermore since the charity obtained grants from the Social Assistance Funds its accounts were audited by the Principal Auditor and tabled in the House of Assembly and made public. The Annual Grants from the Social Assistance Fund, funded from the proceeds of import duty, were also public since they were reflected in the publication of the Audited Accounts of the Government. All these arrangements operated and all this information was in the public domain until the Financial Year ending March 1996.

  22.  After the raising of benefits, long and protracted negotiations began with UK as to the structure that was to replace Gibraltar's Social Security System post 1993.

  23.  At first UK experts insisted that there could not be a State run social insurance successor based on Social Security legislation as this would be caught by EU regulations and be seen to be a devise to discriminate against Spanish Pensioners by ending their Pension entitlement but re-instating them for Gibraltar Pensioners. They insisted that each pensioner and each worker contributing to the scheme up to December 1993 would receive a lump sum after the dissolution of the Gibraltar Social Security System. This lump sum would be transferred to an occupational private sector Pension Scheme which would be a money purchase scheme. The Gibraltar government could not top up the level of benefits that would become payable if the lump sum proved to be too low.

  24.  After innumerable meetings and considerable work to try and meet UK's demands the advice was reversed. The UK experts then decided that a private sector Occupational Scheme would not do as it would be in breach of UK requirements which require the aggregation and apportionment of Social Insurance Pension rights based on contributions made in different Member States and the Gibraltar Government was told it had to replace the existing system with a State Run public sector successor scheme which would operate only on the basis of contributions made from January 1994 without any credits for persons who had not retired but had been contributing under the scheme up to 1993. In December 1993 the Social Security Funds were dissolved as required by UK and transitional payments was put in place to tide persons over until the new scheme was functioning and to ensure no gaps in contribution records of the existing workforce. On the suspension of the Pension payments the Spanish Pensioners were informed that in accordance with the 1989 UK-Gibraltar agreement accepted by the Spanish Government at the time they would receive lump sum payments. On instructions from the Junta de Andalucia, the Spanish regional government, the bulk of these pensioners refused their payments and the existing level of pensions were provided to them by the Spanish Andalucian Government as loans in anticipation of forcing UK to resume Pension payments.

  25.  UK argued that there was no obligation under EU Law to keep paying Social Insurance pensions for life or at any given level. Spanish pensioners argued that there was a legitimate expectation of life payments. The Gibraltar Government maintained substitute payments equivalent to the previous Social Insurance Pensions to Gibraltarian and Moroccan pensioners from the money transferred to a temporary fund from the suspended Social Insurance Fund. These were called Transitional Interim Payments and featured as loans at the existing level of previous pension payments for each individual. The arrangements were the same as the Andalucian Government was carrying out for Spanish pensioners. For those reaching retirement age after 1 January 1994 the payments were called pre-occupational loan payments in anticipation of the eventual occupational pension scheme which UK at the time that this was introduced was demanding should be the successor scheme. The source of the money to make these payments was a pre-occupational payments levy collected in place of the Social Insurance Contributions which had disappeared because of the dissolution and repeal of the relevant Social Insurance provisions in the Ordinance.

  26.  The Spanish Pensioners commenced legal action against the Gibraltar Government funded by the Andalucian Government using the Chambers of Messrs Triay and Triay, which at the time had Mr Peter Caruana as partner. The Gibraltar Government was alleged to be discriminating against the Spanish workers on the grounds that Community Care Limited was continuing to pay Social Security pensions which had been suspended in the case of Spanish workers. The case never went to hearing, but the matter was aired in the House of Assembly in a Motion in which the Government made clear that there was absolutely no substance in this allegation since the Pension had been suspended for both Gibraltarian and Spanish Pensioners and Community Care Limited had been making Household Cost Allowance Payments from 1989 and not from January 1994, the time of the suspension of the Pensions.

  27.  In all this period between 1989 and 1994 the UK Government was fully aware of all these issues both because it was debated in the public domain and reported in the Gibraltar Media which is monitored by the United Kingdom through its presence here and because it was reflected in the Audited accounts of the Government and the audited accounts of the charitable institution which were tabled in the House of Assembly, published and copies of which were available to the Foreign Office through the Convent. At no stage in this period was the position of Gibraltar Community Care or the Household Cost Allowance challenged by the United Kingdom Government. In all the arguments with London post the dissolution of the fund in December 1993, what the UK was objecting to was the fact that the delay in agreeing a successor scheme meant that the transition interim payments which were being made through the Gibraltar Development Corporation from the balance of the dissolved Social Insurance Fund and the pre-occupational payments which were being made to persons reaching pensionable age from 1 January 1994, meant that as far as London was concerned, the position of frozen payments was being perpetuated and could be extended indefinitely. The fact that all that the Gibraltar Government was doing for local pensioners was giving them anticipatory loans on exactly the same terms ie the subsequent repayment when a final agreement on the successor scheme was reached, as the Junta de Andalucia was doing for Spanish Pensioners, was not an argument that people in the Foreign and Commonwealth Office accepted. They simply said that they were not concerned with what the Spanish Government was doing, only with what the Gibraltar Government was doing, even though it would have been discriminatory in the reverse direction, to have allowed a position where Gibraltarian Pensioners were left destitute, while the Spanish Government provided temporary support to their own.


  28.  In 1994 the EU Commission took up the question of the dissolution of the Social Insurance Fund with the UK Government as a result of receiving complaints from Spanish Pensioners who at the time were in receipt of temporary loan payments from the Junta de Andalucia. The UK Government refused to provide the Gibraltar Government with details of its exchanges with the Commission and copies of the correspondence claiming that these matters were confidential. By October 1995 the Commission issued a Reasoned Opinion against UK on the grounds that the decision to dissolve the Social Insurance Fund was in breach of EU law. The initial position of UK on the replacement being an Occupational Private Sector Pension System was also considered by the Commission to be against EU Law. This information was provided by Spanish sources to the GSLP Government.

  29.  UK's position at first was that they would defend the decision before the European Court of Justice on the basis that there was no obligation to have a state ran statutory Social Insurance Pension System or to have a given level of Pension Rates, that this was up to each member state. However, early in 1996 the UK capitulated when faced with imminent infraction proceedings and decided to restore the frozen pension system which had been terminated in 1993 and which had operated since 1989. The Gibraltar Government was told then that although UK still considered they were legally right, a political decision had been taken not to test the issue in court because of other considerations unrelated to Gibraltar. These were general considerations of the extent to which EU decisions would dictate to member states on Policy matters which they did not particularly want aired in the European Court of Justice.

  30.  In the course of meetings with officials I was asked to agree to restore the Frozen Social Security Pensions back-dated to 1 January 1994 (it should be noted that the UK decision to limit the Scheme to five years, 1988 to 1993 was to contain the cost to £50 (fifty) million as opposed to the estimated £250 (two hundred and fifty) million for keeping the system going for the lifetime of all Spanish Pensioners.) Given that this requirement was for pensions continuing frozen, for perhaps another twenty years, I was asked to agree that no additional payments would be introduced for Gibraltar residents other than means tested Social Assistance, which already applied. The access to the Social Assistance System for pensioners was that pensioners with deficient contribution records, whose pension payments fell from the £48 (forty eight) weekly maximum pension to below £38 (thirty eight) pounds, had the gap met from non-contributory discretionary social assistance, a system operated by the Government, up to the £38 (thirty eight) pound level. I agreed that we would not alter these arrangements. I also took the opportunity of reminding officials that Gibraltar Community Care Limited, an independent charity, had since 1989 been paying Household Cost Allowance, which was up-rated annually and that this would continue as the Charity had substantial cash resources.

  31.  When this was reported back to London I was called in by the Governor Sir Hugo White. He told me that UK Ministers were very upset because they had just learnt of the existence of Household Cost Allowance and that they considered it was politically challengeable. I was in fact accused of having introduced this at the last minute. My position was that the existence of Community Care had been debated at great length in public, that it had never been questioned previously the UK and that the accounts were audited and public and provided to them.

  32.  I was told UK would not proceed with restoring the frozen pension arrangements and pick up the extra £200 (two hundred) million bill unless I gave a commitment that Community Care Payments would be terminated at the latest by June. The General Election was due in May. Given the electoral consequences of this action which UK recognised, I was asked to give a written undertaking that payment by Community Care Limited would cease and that the Gibraltar Government would indemnify the United Kingdom for any claims rising from past or future payments. This undertaking would be a secret agreement, which I was supposed to withhold from the electorate in the election campaign. Naturally I refused to give any such undertaking. The United Kingdom position was that they would not proceed with paying for the restoration of Frozen Pension payments until this matter was cleared up. I had agreed to a text of a letter provided by them as to the commitments that they required prior to this question of the Household Cost Allowance being raised, but would not accept that the letter should be amended to include any reference to the payments by Community Care. My position was that since they were saying there was no legal obligation to continue with the frozen pensions they should go ahead and let the Commission commence infraction proceedings and defend themselves in the European Court of Justice using the arguments they had used to persuade me in 1988 to agree to the dissolution of our Social Insurance system in 1993. Following the General Election, in the Official Opening of the House of Assembly, in my statements as Leader of the Opposition, I made this public. (I am faxing separately the relevant part of my speech.)

  33.  When later in 1996 the new government brought legislation to the House of Assembly to restore the Frozen Pensions backdated to 1 January 1994, it claimed that they had not had any negotiations on this matter with the British Government and that they were simply giving effect to what had been agreed with me. As far as I am concerned I took that to mean that what had been agreed with me which made no reference whatsoever to discontinuing Community Care ie the position that I took early in 1996, had post the election been accepted by the United Kingdom Government who had nonetheless given up their demands on the Household Cost Allowance and decided to proceed with funding the restoration payments to Spanish Nationals. I have to admit that it struck me that this shift in position by the UK Government before and after the election seemed to indicate that the stance on the Household Cost Allowance was designed to create difficulties for my administration given my unwillingness to go along with their plans for negotiations with Spain under the Brussels process. It will be recalled that Mr Caruana's election in 1996 was hailed as a shift towards a more conciliatory attitude to Spain, that the electorate on polling day were being urged by a Times editorial not to support the GSLP and that the loss of the election by the GSLP was labelled by the national press in the United Kingdom as the emergence of the most pro-Spanish Government in Gibraltar's history. Given all these factors, which were generally thought to have increased the possibilities of striking a deal with Spain, and made it more likely in the perception of those sitting in London, could conceivably have been reflected in the UK dropping its demands on the Household Cost Allowance at the time of Mr Caruana's election in 1996 in the expectation that he might prove to be a better ally in future dealings with Spain. I need to point out that this is simply a speculation on my part given the dramatic change before and after the election on the part of the UK Government which was saying that unless an undertaking was given to provide an indemnity they would not be proceeding with funding the restored fund and that in fact what they said they would not do, is exactly what they did after the General Election.

  34.  Since 1996 Community Care Limited has continued paying Household Cost Allowance and increased their value annually, but as accounts have not been produced I cannot say what is the present financial situation. But they had assets of around £62.5 (sixty two point five) million as at the end of June 1996 with some £60 (sixty) million in cash. It was considered by Mr Caruana to be so well provided with resources that a £3 (three) million pound payment from the Social Assistance Fund authorised by the GSLP Government before the General Election, but which had not actually been physically paid over by June 1996, was not proceeded with by the incoming government on these grounds. I have limited this brief, except for the above paragraph, where I speculate as to why the United Kingdom gave up their demands on Household Cost Allowance after the May 96 Elections, to my recollection of the facts, and I have no knowledge of what has happened between May 1996 and June 2002 in terms of the respective positions of the United Kingdom Government and the Gibraltar Government regarding this issue.

Joe Bossano

July 2002

67   Ev 74-75 Back

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