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The fight over the Parliamentary Ombudsman's findings regarding the Government's misleading advice to pensioners is set to continue - and Europe is the next battleground. David Gallagher reports
On 14 March this year, the Parliamentary Ombudsman Ann Abraham delivered her report 'Trusting the Pensions Promise' on her investigations into allegations that the Government and government-sponsored bodies committed maladministration between 1995 and 2005.
The focus of the allegations was the minimum funding requirement (MFR) laws for defined benefit schemes, with the complaints arising after a number of schemes collapsed without sufficient funds to pay for the pensions of the scheme members. In simple terms, a scheme funded at 100 per cent on the MFR basis did not have sufficient assets to pay for members' pensions in the case of a winding up. In many cases, the sponsoring employer had become insolvent, but in some cases the employers used a process permitted by legislation to withdraw support from such schemes without paying any further money in to ensure that the pensions could be paid. Pensions legislation has since been changed to remove that possibility.
The ombudsman upheld some of the allegations and recommended that the Government pay compensation to those who had lost out as a result of the maladministration. The cost of such compensation was estimated by the Government to be £15bn.
However, the Government rejected this conclusion because, as Pensions Minister Stephen Timms said: "It could not be the responsibility of taxpayers to bail out failed corporate pension schemes."
Meanwhile, Tony Blair told Parliament that paying compensation would "set a precedent of extraordinary financial proportions… We simply cannot do that in circumstances where the reason for the loss is the collapse of those pension schemes themselves."
The Ombudsman had received more than 200 separate complaints, which she collated into distinct allegations relating to the content of legislation, policy decisions underlying the legislation and public information about the law.
She did not make a maladministration judgment on the content of the law. It would have been an extraordinary constitutional position if she had, as legislation passed by Parliament represents the democratic will of the people. But she found a distinction that misrepresenting the effects of legislation in official publications could be maladministration.
The Ombudsman concluded that the Government saw itself as acting to promote membership of pension schemes. It had accepted that it had a duty, where it gave out information, that such information was accurate and complete. Yet the Ombudsman claimed that official statements about MFR were "vague, incomplete or misleading". That was the maladministration.
The main defence of those who had produced the literature in question was that basic public leaflets and guides were not designed to be comprehensive statements of the law or advice to individuals. However, this was rejected by the Ombudsman.
Furthermore, the Ombudsman decided that, in taking policy decisions in 2002 to amend MFR laws, ministers had not obtained sufficient actuarial advice. That was, in her opinion, maladministration.
This raises some significant constitutional issues. Parliament passed the legislation in question; examining the level or quality of advice received by the minister proposing the legislation is dangerous ground for the Ombudsman. Can the effect of secondary legislation be undermined because the Ombudsman feels the minister should have received more advice? Perhaps the true problem is that, if we need technically complex legislation (a debatable point in itself), then we need a technical committee to advise Parliament, not ministers.
The expected outcome
The Ombudsman's report does not bind the Government - the complainants have no direct claim in the courts and maladministration is not in itself grounds for compensation. It has been reported that affected pensioners will seek judicial review of the Government's rejection of the report's recommendations. It is difficult to see grounds for a successful challenge at this stage.
Separately, compensation may be available for a different claim arising out of the collapse of some pension schemes. This is based on an allegation that the Government has failed to implement the European Commission Insolvency Directive, which in article eight requires that we have laws protecting workers' pensions in the event of employer insolvency.
A claim to the European Court of Justice on this basis, backed by trade unions involved in one particular high-profile collapse, Allied Steel & Wire, will be heard on 1 June. The claim appears to have some merit. In a 1989 case against Italy, the Advocate General's opinion was: "Of primary importance in my view is that article eight clearly requires measures to protect [pension fund rights]&helip; Protection which… is not concerned with the adequacy of payments into such funds is obviously insufficient."
A successful claim would probably produce a right to compensation and would be binding on the UK Government, which prides itself on its high success rate at implementing EU law. Strangely, this would put members who lost their pensions because of employer insolvency in a better position under the Insolvency Directive than those whose pensions were lost when solvent companies used UK legislation to withdraw from MFR-funded schemes.
David Gallagher is a pensions partner at Field Fisher Waterhouse