Government in pension misselling scandal
So says the Parliamentary Ombudsman, Ann Abraham. It is rare to find government departments guilty of ‘maladministration’: it’s a hard charge to stick. It did not stick with Equitable, even though the DTI clearly was not up to the task of assessing the life company’s reserving adequacy, because the fault lay with Parliament’s mandate to the DTI not the DTI’s execution of its mandate. But in the case of the 80,000 people who lost their pension rights when their employer failed, there was no such excuse. In its desire to encourage pension scheme membership, the Government has repeatedly claimed that occupational pension scheme benefits were guaranteed. ‘Guaranteed’ is a term unscrupulous financial sales staff have played fast and furious with and lies behind all of the misselling scandals of recent memory.
Ann Abraham was right to stick this one on the Government. The Government is hypocritical to deny responsibility where its own regulators, the FSA, have been unforgiving of private firms who did the same. It suggest there is one rule for the private sector and another for government departments.
How can pension funds fail to have enough money in the kitty when there are government funding rules supposed to ensure solvency? The answer lies in the distinction I regularly feel compelled to make because it is so widely misunderstood. There is a world of difference between adequately funding financial liabilities that mature in the distant future and funding adequately at every step of the way.
Based on expected outcomes, as the pension promises were expected to fall due, occupational pension schemes were regulated to ensure the adequacy of the funds in the kitty. But they were not funded to meet the unlikely possibility that the scheme would wind up prematurely. For the 80,000 members of several high profile schems that failed in recent years, this small probability event with massive consequences just happened. They fail to see the difference between government-regulated solvency on a going concern basis and solvency on a wind up. After all, isn’t that exactly what solvency implies?
The turn of the millenium has also been the turning point for ideas about funding guarantees, confronting the critical distinction between paths and outcomes. The rules have since changed for life insurance companies and occupational pension schemes, both of whom take on a liability to the public in the form of a promise to pay – in the future. We may come to regret the impact these changes have on the ability of these stewards of the nation’s savings to take risks (more in Accountants v Actuaries as well as in Pensions in the Topical Index at right) but it does at least bring some much-needed clarity to the language of finance.
It is a pity the Government appears so unwilling to accept that its use of language contributed directly to a false sense of confidence in the safety of occuaptional pension schemes. As a financial adviser, had I suggested that an endowment policy, for instance, was guaranteed to meet its objective of paying off the mortgage, I would have been rightly criticised and heavily fined. On the boundary between proper representation and misselling, language is everything.