‘I’m 93 but my pension has been decimated after my old employer went bust

Write to Pensions Doctor with your pension problem: pensionsdoctor@telegraph.co.uk. Columns are published weekly.

Dear Becky,

I am 93-years-old, and in March 1972 I joined the international construction group John Mowlem. In doing so I became a member of their final salary pension scheme, which included a clause covering payouts rising by RPI inflation or 5pc, whichever was the lesser. In doing so I opted out of part of the Government scheme, which meant I paid slightly less each month into that scheme.

In 1995 the Government passed a Pensions Act, and in section 51 stated that company occupational pensions built up after April 6 1997 should be increased annually by the RPI or 5pc, whichever was the lessor. This was already covered by the Mowlem scheme and no action was needed. In January 1994 I retired and enjoyed their pension, which was increased each year by the RPI or 5pc, and also the state pension – which was reduced due to the opting out element.

In February 2006 Carillion took over John Mowlem and I continued to receive my pension as before. In January 2018 Carillion went into liquidation with the pension fund in deficit. (The pension regulator had done nothing about the shortfall despite profit warnings, the Government was still awarding them contracts despite profit warnings, and finally KPMG was signing off their annual accounts).

Outside accountants then started checking the financial state of the company. On February 5 2020 they completed their investigation and the Carillion pension fund, which included the Mowlem one, was passed over to the Pension Protection Fund (PPF), which had been set up by the government in 2004. At that point of time my pension was frozen and no further increases would be forthcoming as I had retired before April 6 1997.

What is more, my state pension continues to be reduced each month even though the benefits have ceased from the compensation (no longer called pension) I get from the PPF. Yet again the old are being victimised. The Government should amend the 1995 Act so that the old declining population receiving compensation from the PPF should receive payment to part-cover the current high rates of inflation.

I appreciate that this may not be quite your field, but you may know who would take this up.

Thanks,

Norman

Dear Norman,

Your circumstances will feel horribly familiar to many others who, in years gone by, “contracted out” of the Additional State Pension (no longer a thing) in return for higher benefits from their workplace defined benefit scheme – only to see that scheme eventually collapse – leaving them not only with less workplace pension income, but also less state pension income.

Your case also highlights the incredibly long sting in the tail that decisions made years ago can have – in this case, a decision you made in good faith and presumably with encouragement, to contract out.

The formation of the Pension Protection Fund (PPF) was designed to prevent people in your situation losing absolutely everything from the collapse of pension funds. But since it took over the Carillion pension scheme three years ago, you have not benefited from any index-linking or 5pc uplift. Given what’s happened to inflation during that time, I’m not surprised you are feeling it.

The PPF works by paying compensation to members when their eligible pension scheme’s sponsoring employer becomes insolvent and is no longer able to stand behind the scheme. The PPF rules on indexation are standardised and they do not necessarily replicate individual scheme rules or promises.

As a PPF spokesman said when I contacted it, the PPF “was never intended to replicate full scheme benefits, however those who have already reached normal retirement age, retired through ill health, or are the beneficiary of a deceased member when the scheme becomes insolvent can be reassured that their compensation will be paid at 100pc of their scheme pension on the insolvency date.”

In its response, the PPF defers the matter of pre-1997 indexation (or lack thereof) back to the Government: “Our approach to compensation is set in legislation (including pre-1997 indexation) and as such is a matter for Government.”

The date of April 1997 for indexation came out of a 1993 review by Roy Goode on pension law reform, which lead to the Pensions Act 1995 and brought in the mandatory requirements for indexation from 1997. But this didn’t apply to you once your scheme entered the PPF because you had already retired before this date, in 1994. Indexation was subsequently reduced to the current level of 2.5pc anyway, by the Pensions Act 2004, so even if it hadn’t been frozen for you in 2020, it would only have risen by 2.5pc in the last three years – not enough to keep up with current inflation.

I can’t help but sympathise with your conclusion that after opting out of extra state pension payments, in good faith, that you and others in a similar position have reason to claim further increases to the reduced amount of state pension you are currently receiving, given that there are no increases to the work pension benefits coming from the PPF and also because inflation is currently so high.

At the time you made that original decision to contract out and to put everything in your Mowlem pension basket, so to speak, there was encouragement from big employers and the Government for staff to make this choice. Contracting out saved employers from having to pay National Insurance and it also saved the Government some of the future liability of having to pay you a higher state pension. The Government is still benefiting from your decision, while you are not.

If the future risks had been spelled out to the many hundreds of thousands of employees who made this choice, by either their employer or the Government; if fewer pie-crust promises had been made in the first place, if contracting out in favour of an employer-sponsored defined benefit scheme hadn’t been made a completely normal thing to do, retirement outcomes could have been improved for so many people.

I contacted the Department for Work and Pensions (DWP) with your case and a spokesman said: “The Pension Protection Fund continues to play a crucial role protecting people with a defined benefit pension when an employer becomes insolvent.

Without it, many people would receive vastly reduced benefits from schemes in financial difficulty and sometimes nothing at all, irrespective of the contributions they have made. But, it is a compensation scheme and as such was never intended to replicate the benefits of schemes which were unable to secure their liabilities.”

The subtext of the message again here seems to be “be grateful for something rather than nothing”. But, given that the terms for contracting out arrangements were agreed by the Government in the first place, there is an argument that the Government should take more of the responsibility for the losses that you and others have suffered since your employers’ schemes have collapsed, and should then set you back to where you would be had you received what you were promised.

In terms of recourse for someone to take up this matter for you, and anyone else similarly affected, it is worth contacting your local MP. There is also at least one voluntary campaign group focused on this issue, and it will no doubt be interested to hear your case.

Currently, the best course of action for your personal finances is to make sure you are receiving absolutely all the benefits you are entitled to, including the £300 Pensioner Cost of Living Payment and the Winter Fuel Allowance, by contacting the Pensions Service. The phone number is 0800 731 0469 and the address: Pension Service, Post Handling Site A, Wolverhampton, WV98 1AF.

As well as getting more information about entitlement to things like Pension Credit, The Pensions Service can help people find out how to claim extra payments from a deceased husband, wife or civil partner’s State Pension and in general, whether someone is likely to be entitled to more than they are currently receiving.

Write to Pensions Doctor with your pension problem: pensionsdoctor@telegraph.co.uk Columns are published weekly.