HC Deb 21 July 1986 vol 102 cc155-62

Motion made, and Question proposed, That this House do now adjourn.[Mr. Peter Lloyd.]

12.32 am
Mr. Tony Baldry (Banbury)

Hon. Members are not infrequently approached by constituents who seek assistance in resolving a matter that they feel to be unjust or unfair. Frequently help can be sought from a Government Department, they can be advised of possible legal remedies, or, on some occasions, assistance can even be sought from the parliamentary ombudsman.

From time to time one is approached by a constituent who has a case that is not so simple, where advice from all the relevant Government Departments has been given, where, on the face of it, there would appear to be nothing for which there could be legal address, but where, none the less, if all the facts were known, the man on the proverbial Clapham omnibus or the man in the Bicester high street would say, "Hey, that is not right; it is not fair. Something ought to be done about it."

In such circumstances it is right to draw the attention of the House to the matter, first, in the hope that a reexamination of the facts might act as a catalyst for a reexamination of, and, perhaps, a happy solution to the case, and, secondly, so that others can take note of the lessons to be learnt from the case. I am grateful that this debate enables me to raise one such case, that of the pension from the United Kingdom Atomic Energy Authority of Mr. Leslie Hedges, a constituent of mine. I am grateful to the Minister for the time and attention that he has already given to this case.

Mr. Hedges retired in 1980 after 40 years of employment in the public service, throughout which time he paid a full contribution towards his pension. From 1937 to 1948 he worked for the Oxfordshire county council; from 1948 to 1961 he worked for the National Health Service; and from 1961 he transferred his employment to the United Kingdom Atomic Energy Authority at Harwell.

Shortly after Mr. Hedges transferred to Harwell, the superannuation officer of the AEA wrote to him confirming that in respect of his earlier employment he had been credited 20 years and 88 days in the UKAEA nonindustrial superannuation scheme. Thus, in 1961 Mr. Hedges commenced his employment with the UKAEA with no fewer than 20 years of fully paid-up pension contributions already made. It is perhaps worth noting in passing that Mr. Hedges retained the letter sent to him in September 1962 by the UKAEA about his pension, which would seem to suggest a cautious, prudent man, rather than a man who might gamble with his future, as some came to suggest later.

If Mr. Hedges had stayed with the UKAEA until the age of 65, he would have received a full pension based on 40 years' service and his final salary. Furthermore, he would have received a tax-free lump sum of three times his annual pension. However, in 1970, after 10 years' service at UKAEA, and by now 30 years' service in the public sector, and at the age of 55 years, Mr. Hedges resigned his post as clerical officer at Harwell and took up employment at the University of Oxford. At this point matters go awry in respect of Mr. Hedges' pension.

The sensible thing would have been for Mr. Hedges to be able to transfer his 30 years' pensionable service from the UKAEA's non-industrial superannuation scheme to the pension scheme of the University of Oxford. The UKAEA pension scheme had a clear provision for the transfer of previous pension rights. Indeed, in 1961 Mr. Hedges had been able to transfer his accumulated pension rights from his local government and National Health Service employment to the UKAEA scheme. That, however, appeared not to be possible with the University of Oxford scheme.

Some years later, when, for reasons which I shall explain later, it became apparent that the value of Mr. Hedges' eventual pension was being substantially eroded, he made further inquiries of the university to ascertain whether it would take on his accumulated pension to date. The university was prepared to accept only the transfer of a cash sum from Mr. Hedges' previous employers. The cash sum that the UKAEA was prepared to make available to the university in respect of Mr. Hedges' pensionable service was only about £8,000. It should be remembered that that was for 30 years' fully reckonable pensionable service. Mr. Hedges had been paying about 6 per cent. of his salary while at UKAEA towards his pension.

Given this sum, the university was not prepared to credit Mr. Hedges with 30 years' pensionable service, nor 20 years, nor half, 15, but only 11 years and one month. When pensionable service is being transferred, the only consideration for the university is the cash value of the pensionable service offering the transfer payment. Put shortly, Mr. Hedges' new employer noted the value of what his former employers were prepared to transfer in respect of his pension contributions and, despite the fact that they represented 30 years' service, was able to offer only 11 years' credit within the rules of its own scheme. It was understandable that at 55 years Mr. Hedges did not accept that.

I make no criticism of the university for its superannuation scheme. It was simply applying the rules of the scheme to the situation with which it was presented. I am not in a position to comment on the fairness or otherwise of the transfer value of about £8,000 that was offered by UKAEA. But it must be a matter of general concern when someone who has spent the larger part of his working life in the public sector finds in transferring his pension that it is worth considerably less than he had anticipated.

What happened to Mr. Hedges' pension? Apparently, until 1972 staff who resigned from UKAEA had an option under the rules of its non-industrial superannuation scheme to arrange at the time of their resignation for their superannuation rights to be reserved by the purchase of a deferred annuity instead of having their pension benefits frozen in the UKAEA scheme until normal retirement age. Put briefly, Mr. Hedges was given a choice: he could leave his pension benefits frozen in the United Kingdom AEA scheme until the time he retired, at which point he would receive a percentage of the pension relevant to his years of service, or he could, in effect, use his pension contributions up to the time of his resignation to purchase a deferred annuity.

Sadly, Mr. Hedges was given no advice as to the respective merits of such options nor as to their potential dangers. It so happened that the benefits offered by the insurance company in 1970 for a deferred annuity provided potentially a much higher fixed income on paper than the United Kingdom AEA alternative. But what no one mentioned and made clear to Mr. Hedges, when he considered which option to take, was that the apparent advantage of the deferred annuity was always vulnerable to inflation, and the danger that, in time, it would become less favourable.

I do not suggest that there was any negligent misstatement on behalf of the AEA. As far as I can ascertain, there was no advice at all. No one endeavoured to explain to Mr. Hedges that he was, as the deputy general secretary of the CPSA — Mr. Hedges' trade union — observed, taking a gamble that the annuity option would hold its value. No one told Mr. Hedges, or even hinted, that he was engaged in a gamble. As Mr. Hedges says, he is not a gambling man, and he certainly would not have gambled with his pension. He was simply given two options and he took the option which, at the time, seemed to be to his advantage and the most attractive.

It was not long before the ravages of continuing high inflation seriously eroded the value of Mr. Hedges' pension. With inflation now around 3 per cent., it is all too easy to forget those years of the 1970s with inflation, on occasions, over 25 per cent. Inflation destroyed the value of people's savings and pensions.

It did not take Harwell long to realise that the option could be disastrous for its former employees. In fact, in 1972, just two years after Mr. Hedges transferred to the University of Oxford, it removed the option. But for Mr. Hedges it was too late.

When Mr. Hedges realised what was happening he asked the United Kingdom AEA to change his choice. However, the AEA made it clear that deferred annuity arrangements were specifically in lieu of the benefits that would otherwise have been provided under the authority's scheme. The UKAEA maintained that its liability was discharged absolutely when the capital sum was paid to the insurance company in respect of Mr. Hedges' deferred annuity, and that it was not responsible for augmenting funds provided by the insurance company.

Even with inflation running at only 3 per cent., Mr. Hedges is becoming steadily worse off every month and year that passes. His pension, in respect of his 30 years' employment in the public sector, until he left the UKAEA is a derisory sum. It is just £868 per annum.

Should not the AEA have appreciated that it was offering a choice, one option of which, in times of rising inflation, could have a dramatic and devastating effect on M r. Hedges' final pension?

How many others are there in the same position as Mr. Hedges? How many others resigning from the United Kingdom Atomic Energy Authority prior to retirement age took that option? Why did the AEA not give Mr. Hedges some impartial advice as to the merits of the options available to him? After all, as Mr. Hedges has said to me, he could not believe that the UKAEA was acting other than in his best interests. He trusted the authority as an employer in the public sector. If the UKAEA realised in 1972 that this was an unsound option, should it not have appreciated that fact by 1970?

In 1980, the chairman of the UKAEA, Mr. Hill, said that he had sympathy with the problems caused by inflation for those who took deferred annuities rather than the United Kingdom Atomic Energy Authority's superannuation scheme pension and that UKAEA had looked most anxiously and carefully into the possibility of doing something to improve their pension position, but apparently the authority concluded that no remedy was available. However, I have no doubt that the proverbial man on the Clapham omnibus or the man in Bicester High street, if aware of the facts of the case, would say that it is unfair that someone who has given a lifetime of work in various ways to the community should find himself in this position.

Mr. Hedges simply and understandably wants a pension that reflects his many years of public service. I believe that this case merits re-examination. There may be similar cases. I ask my hon. Friend the Under-Secretary of State simply to undertake that his Department will look into Mr. Hedges, case to ascertain whether, even at this late stage, there is some discretion to enable him to receive a reasonable pension in respect of his years of service and substantial contribution, and not one the value of which is eroded day by day and month and month.

12.46 am
The Parliamentary Under-Secretary of State for Energy (Mr. Alastair Goodlad)

My hon. Friend the Member for Banbury (Mr. Baldry) has raised with meticulous care an important issue on behalf of his constituent, Mr. Hedges. I have listened with close attention to what he has said, but, for reasons which I shall explain, I fear that there is nothing that the United Kingdom Atomic Energy Authority or the Department of Energy can do to improve the position of Mr. Hedges or of other pensioners in respect of the matters raised by my hon. Friend.

As my hon. Friend has told the House, Mr. Hedges joined the United Kingdom Atomic Energy Authority on 8 August 1961 as a clerical officer, having previously worked for a local authority and for the National Fleali:h Service. By means of the payment of a "transfer value" from the NHS pension scheme, he was able to make his previous local authority and NHS service superannuable in the authority's principal non-industrial superannuation scheme. The credit in the authority's scheme for previous service was 20 years and 88 days.

Mr. Hedges resigned from the authority on 14 August 1970 to take an administrative post with Oxford university. He had at that stage 29 years and 95 days in the authority's scheme, including the 20 years and 88 days of back service. At that time, Oxford university's pension scheme could not accept in transfers of pension rights earned with other employers. Mr. Hedges had the choice of two methods of preserving his accrued pension rights under the rules of the authority's pension scheme. First, he could have had his pension benefits "frozen" in the scheme until his contractual retirement age with the authority—65. Alternatively, he was able to purchase a "deferred annuity" — a policy with an insurance company which provided a lump sum and a fixed annual pension from age 65. It was the authority's principle and practice to leave individuals to choose the method of preservation they judged to be in their best interest.

The deferred annuity option had the primary purpose of providing a form of preserved pension provision for early leavers with less than 10 years' service who would otherwise, under the then rules of the scheme, have been entitled only to a refund of their own contribution, plus a small amount of interest, but less a deduction for tax. To improve the available benefits members were given an entitlement, if they wished, to transfer their pension benefits into an annuity policy to make some provision for retirement.

In addition, the deferred annuity option also gave those scheme leavers who had 10 or more years' service, and who therefore had a right to benefits to be preserved under the scheme, a degree of choice in how their benefits should be preserved. This extension was made at a time when the authority was having to run down staff numbers rapidly, and it was desirable to be able to offer maximum flexibility in pension provision for those who left to take up other employment. Contrary to the impression that I think was given by my hon. Friend, the authority transferred a proportion recommended by the actuary of its own, as well as Mr. Hedges' contributions.

As he requested in advance of resigning, Mr. Hedges was given details of, first, the value of his benefits if frozen in the authority's scheme and, secondly, the proceeds of a deferred annuity based on the then current rates. The amounts in round pounds were as follows. First, if he chose to stay "frozen" in the authority scheme, he would receive a lump sum of £710 and a pension of £398, though with a possibility that these amounts would be augmented by pensions increases.

Secondly, if he chose a deferred annuity, Mr. Hedges could have either a fixed lump sum of £1,883 or £2,153 with the benefit of estimated bonus — plus a fixed pension of £672 or £769 with estimated bonus — or alternatively a fixed pension of £896 or £1,024.19 with estimated bonus but no lump sum.

It was made clear that the estimated bonus was simply an estimate and in no way guaranteed. Assuming no pensions increases in the occupational scheme, the figures presented to Mr. Hedges indicated a relative attraction for the deferred annuity option, though of course, on the assumption that scheme pensions would be increased, this altered the relative attractiveness of the options. It was authority policy not to press employees to select one route rather than another, as the authority was in no position to predict future events.

On 13 July 1970, Mr. Hedges applied for a deferred annuity—making in effect the assumption that pensions increases would not catch up with the annuity—and on 17 August accepted the version of the deferred annuity "cash lump sum" plan.

I should explain here the authority's relationship with the insurance company involved. For all employees who wanted the deferred annuity option at that time, the authority entered into a master policy with the Guardian Assurance Company Ltd. It was this company's estimated rates that were quoted to the individuals concerned. The authority fully discharged to the Guardian all liability for pension provision for those individuals on whose behalf the authority paid over to the Guardian a capital sum to secure a deferred annuity policy. The authority had no powers of discretion concerning the proceeds of the policies.

When Mr. Hedges reached the age of 65 in 1980, proceeds of the annuity policy provided benefits of a lump sum of £2,479 and a fixed annuity of £868. Had he elected instead for the "maximum annuity" variant, he would have received an annuity of £1,157, but no lump sum. If Mr. Hedges' benefits had been preserved in the authority's own scheme, they would have been worth in 1980 with the benefit of pensions increases a £2,300 lump sum and £1,288 pension, and his pension now would be £2,141 a year. The particularly high levels of inflation experienced in the 1970s were difficult to foresee when Mr. Hedges resigned from the authority in 1970. The period of high inflation which eroded the value of fixed benefits has in retrospect shown that deferred annuities were a relatively poor choice to have made. But the judgment is made with the benefit of hindsight.

It would also have been impossible to foresee the introduction by the Government in 1971 of index-linked pensions. At the time Mr. Hodges made his decision in 1970, authority pensions were reviewed from time to time along with other public service pensions which were increased by individual Pensions Increase Acts. These increases were not regular and were not kept up with inflation, although they mitigated its effects. Subsequently, the Pensions (Increase) Act 1971 introduced updating every other year, and the Superannuation Act 1972 made updating mandatory on an annual basis. Such annual index-linking protects pensions from the eroding effects of inflation by increasing their value in line with rises in the retail price index.

In 1972, in view of the potential effect of inflation on the real value of deferred annuities, the authority decided to remove the annuity option from its pension scheme. I understand that that was done by administrative action, since the staff trade union side would not agree to the change. Until the annuity option was removed, some 786 employees had taken it.

I should like now to explain the attempts that have been made by the authority to alleviate the position of deferred annuitants, such as Mr. Hedges, both in general and in his particular case. A number of avenues have been pursued.

First, there have been discussions with the Department of Energy and its predecessors as to whether a way could be found of supplementing and index-linking deferred annuities ex gratia, on a par with public service schemes. But it was judged by the Department and the Civil Service Department that this would not be a proper use of public funds, given that those concerned had exercised a free choice in the knowledge that they were forfeiting all benefits under the authority scheme.

Secondly, on behalf of annuitants, the authority has asked the Guardian Assurance company whether it could increase the level of annuities in the light of interest rates and high inflation. However, the company has insisted that when it issued the policies the premiums were invested in a form so as to ensure that policy benefits were met, irrespective of future financial conditions. That meant that it had to invest the premiums in safe investments. It therefore said that it was not in a position to grant an increase in benefits provided by this means. The following is the relevant extract from its letter of 26 March 1982: .… when an Insurance Company issues a policy, the premium is invested in a form which will ensure that policy benefits are met irrespective of future financial conditions. In the specific case of annuity contracts, investment would normally be in gilt-edged securities. This ensures that a regular series of cash payments is provided. Should interest rates rise, the value of the investment will fall but the income from the investment is unaffected. To invest money on short-term deposit would leave the Company vulnerable to a fall in market rates of interest, the expected income from the investment would be insufficient to meet the required payments. The annuitants would be unprepared to accept a reduction in benefits if interest rates had fallen. The investment policy, therefore, avoids loss due to a fall in interest rates but (unfortunately) precludes profit on an increase. The Guardian is not therefore in a position to grant an increase in respect of benefits already purchased. Thirdly, from 1 April 1978 the Oxford university scheme was able to accept in transfers of accrued pension rights earned with other organisations. The authority accordingly asked Guardian Assurance if the annuity could be cancelled and a transfer value offered. The insurance company agreed to that and the transfer value offered by the insurance company was £8,250. I stress that that sum was determined by the insurance company and not the authority. That sum would have produced only 11 years of pension credit in the Oxford university scheme as calculated by that scheme's actuary, compared with some 29 years which were originally converted into the annuity. Mr. Hedges declined the offer and retained his annuity which came into payment in 1980 when he was 65. A substantial proportion of deferred annuitants have likewise declined offers to unscramble their pension position through transfer values to an occupational pension scheme.

Fourthly, the authority considered the option of providing payments from authority funds, but concluded that it was not able to do that since, as already explained, it surrendered all liability for such individuals' pension position to the Guardian Assurance Company. Any payments would, therefore, be ex-gratia and had already been deemed to be an improper use of public funds.

Fifthly, the authority considered whether assistance could be made available from the authority's benevolent fund. The benevolent fund is an independent registered charity which has as its purpose under its constitution the relief of poverty among the authority's past and present non-industrial staff. It is managed by its own committee of management and is to all intents and purposes independent of the authority, which cannot give it directions on the use of its funds. I understand that Mr. Hedges did not meet the criteria necessary to benefit from the benevolent fund.

I am advised that in 1981 the authority board itself looked most carefully into the question whether any further steps could be taken to improve the pension position of its deferred annuitants. For the reasons I mentioned above it was forced to conclude that there were no further steps that could be taken.

I gather that Mr. Hedges wrote a letter of protest to my hon. Friend's predecessor in 1980 when his annuity came into payment. The then authority chairman, Sir John Hill, replied to the hon. Member expressing his concern and regret about the deferred annuitants' position but explaining that their decision on the means of preservation had been freely taken and that they were left in no doubt at the time that their decision on the means of preservation was in lieu of any continuing benefit from the authority's pension scheme. Sir John Hill pointed out that the apparent advantage of the deferred annuity [had always been] vulnerable to inflation and to the danger that it would become less favourable at some point in time.

There appear to be no avenues left unexhausted by the authority to enable it to do anything towards alleviating the position of Mr. Hedges and his fellow annuitants. Other public sector bodies, including the CEGB, have been forced to a similar conclusion about their own position. I think that the House will agree that the authority has gone to very considerable lengths to try to alleviate the problem and that Mr. Hedges was not misled about his pension position.

Mr. Hedges' experience, and that of others like him, demonstrates clearly the damaging effects of high inflation on people's lives. It is a further reason, if such were necessary, why the Government's determination to ensure that inflation is kept under control is very important indeed.

Question put and agreed to.

Adjourned accordingly at one minute past One o'clock.