Reforms to guarantee pensions if firms go bankrupt

Millions of workers who pay into company pension schemes were told yesterday that their promised retirement incomes would be honoured.

The Government was forced to act after a series of scandals that left employees virtually empty-handed when their firms went bust and more companies closed down their pension schemes.

Andrew Smith, the Secretary of State for Work and Pensions, revealed a set of proposals yesterday aimed at banishing the spectre of Robert Maxwell once and for all. "This will ensure where that company pensions have been promised, pensions will be delivered. I want to end the scandal of workers being denied the pension they have built up over many years, or pensioners seeing their pension cut if their firm goes bust and their scheme winds up," Mr Smith said.

He set out the foundations for forming an insurance fund, paid for by companies, that would bail out pension schemes when a firm becomes bankrupt. The fund would guarantee to pay pensions based on a salary of up to £60,000.

But the plan was criticised by industry leaders as too costly and likely to force many more companies to close their schemes. Under the Government's proposals, companies that provide a defined benefit scheme would have to pay an annual levy in to the Pension Protection Fund, at a rate dependent on how likely it was to go under.

The Confederation of British Industry said the insurance fund could well do "more harm than good" if it pushed costs on employers too far. "Insurance could be one solution but the cost of providing occupational schemes has shot up hugely and anything that added to that could be extremely damaging. If we make pension schemes too costly employers will not be able to provide them," John Cridland, deputy director general at the CBI, said. He added that it would be difficult to persuade companies with strong schemes to fund those that were weak.

Many commentators are sceptical that the insurance fund could work and believe the Government is being unrealistic in its expectations. The fund is unlikely to come in to effect until 2005, and so the Government is trying to bring in more immediate measures to help workers hold on to their pensions if their scheme closed.

Should a fully solvent company decide to wind up its defined benefit schemes, the proposals announced yesterday would mean that an employer would have to pay the pension rights in full of every scheme members. The current rules mean that they do not have to guarantee the pensions they have promised.

The Government also set out measures to alleviate the risk of paying into a pension scheme for years only to find that if your employer goes bust, only those who have already retired get their pension in full. From now on, pension assets will have to be shared out more fairly between retirees and those who have not yet retired.

The insurance fund is expected to cost employers up to £340m a year and, to offset this, the Government announced plans yesterday to lower the rate of inflation against pension levels that are indexed. Pensions grow with inflation at up to 5 per cent, but the Government intends to cut this to a maximum of 2.5 per cent.

This may make pensions less expensive for companies to fund but it also means that the buying power of pensions in the future is vulnerable to rising inflation.

About 10 million people save in "defined benefit" schemes, where employees are guaranteed a level of income in their retirement, usually based on two thirds of their salary.

These have become more expensive for companies to offer and fewer than one in five employers still has a final salary-based pension scheme that is open to new members of staff. People are living longer, making the "for life" pension promise more costly.

Companies invest the majority of their pension funds in the stock market and have ended up losing billions of pounds in the past three years. BT and Royal Mail recently announced they had a combined shortfall on their pension liabilities of £10bn. The total deficit between what companies have promised in pensions and what they have to pay for them is estimated to be £300bn.

John Hayter: Engineer

The promises from the Government yesterday to protect pension rights are too late for John Hayter, an engineer at the defunct steel company Allied Steel & Wire (ASW). He was three years from retirement when the company went into receivership last summer with mounting debts. He had worked at its Sheerness site and contributed to the pension scheme for 28 years.

Now Mr Hayter can expect only 70 per cent of the £15,000 a year that he thought he was entitled to. Many of his colleagues are facing similar situations.

"I was forced to join the scheme when I started or ASW," Mr Hayter, of Whitstable, Kent, said. "[We] are decent, hard-working people, doing the right thing throughout our working lives by saving for our retirement. Now it has all been lost. It is a disgrace. I feel like I have been robbed. My wife would have been entitled to a spouse's pension if I died, but she won't get anything."

A week after ASW went under, its pension schemes were wound up. The scheme was fully funded on its legal requirements, but rules mean already retired employees get the first take on the pension fund assets and the former workers share the rest.

Andrew Smith, the Secretary of State for Work and Pensions, said although the plight of Mr Hayter and his colleagues was "awful", he could not make the legislation retroactive. Mr Hayter intends to campaign for government compensation for the lost ASW pensions.