The Fairy Godmother of Pension Funds

Pensioners mugged by men in suits

Living Marxism issue 57, July 1993

'Your pension is safe with me', intoned the voice of Robert Maxwell in a Mirror Group in-house video in 1988. A month after his mysterious death on 5 November 1991, it emerged that £480m had been siphoned out of the pension funds of various companies in the Maxwell empire. More than 18 months later, 20 000 Maxwell pensioners are still in doubt as to whether their payments will continue. Employees and former employees under retirement age are equally unsure of their position.

'Pensions were supposed to be gilt-edged security', says Ivy Needham, a 67-year old partially blind widow and former canteen manager from Leeds. 'Now it is possible they will not be paid. I am receiving my pension but with great uncertainty, living in fear of a letter saying you'll get it this month but not the next.' She says that the stress of 'living from day to day, not knowing if you can afford a holiday or the mortgage payments' has led to serious, even fatal illness among Maxwell pensioners.

Meanwhile twin sisters Sylvia and Cynthia Hinton have been living on unemployment benefit. They worked at the Maxwell-owned Nuffield Press in Oxford for 38 years before being made redundant in February 1992. Their combined pensions contributions total £60 000 but they do not know if they will receive their pensions when they reach 60 in six years' time.

The Maxwell pension scandal prompted a flurry of parliamentary activity. A government-backed whip-round in the City raised £6m. But more than £400m is still missing, and Maxwell pensioners continue to face an uncertain future.

There had been previous odd cases of pension fund misuse (Aveling Barford in 1988, the Charmley Davies Group in 1991). But it was the Maxwell scandal that provoked widespread concern. News of Maxwell's theft coincided with a worsening recession. In an already apprehensive atmosphere created by the economic slump, millions of workers and pensioners became fearful that unscrupulous employers might 'do a Maxwell' and abuse their pension funds to make up for a shortfall in company profits.

'All dabbling'

Their fears are more than justified. Maverick tycoons are not the only ones hijacking pension funds. Among employers, taking advantage of members' contributions is regarded as sound business practice. As Ivy Needham explained, while they can get away with it, 'they'll all be dabbling'.

Occupational pension schemes have mushroomed since the seventies. British pension fund assets now total £400 billion. More than 11 million employees are paying into schemes covered by the National Association of Pension Funds. Among employees aged 25 to 44, only 20 per cent do not belong to a contributory pension scheme. More than five million people are currently receiving some income from an occupational pension.

A typical pension amounts to 1/60th of the employee's final salary, multiplied by the number of years worked. A standard contributions arrangement would mean the employee (member) paying five per cent of wages into the pension fund, with the employer contributing twice as much. Pension funds are usually managed by a board of trustees, independent in theory, but almost always company-dominated.

Largely as a result of sky-high investment returns in the eighties, most funds have tended to be in surplus; the money in the fund amounts to more than is required to meet its current liabilities. Fund members argue that pensions are deferred wages and that surplus pension funds should be used for the sole benefit of members. Corporate finance directors, however, have come to view pension funds as 'profit centres' at the disposal of the company.

The practice of dipping into funds is as old as occupational pensions. But in recent years it has been exacerbated by the slump. There are examples to be found in every sector of business.

£1m for them

Irregularities in the management of the Lewis' Group pension scheme have eroded a £12m surplus to the point where payment of pensions is now in doubt. When Qa Business Services collapsed in September 1991, the pension fund was found to be insufficient to cover liabilities. Three executives had taken early retirement payments totalling £1m; meanwhile 130 employees lost two-thirds of their pension entitlement.

Belling, the cooker manufacturers, went into liquidation in March 1992. A year earlier, £2.1m was paid from the fund to the company to secure a refinancing scheme which was never implemented. Belling also sold one of its own subsidiaries to the pension fund for £5.5m - a back-door device for raising cash known as 'self-investment'. The independent trustee appointed by the receiver is charging £250 an hour to sort out the mess.

Self-investment at a shoe firm, Burlington, stripped the fund of £7.7m before the company went into receivership in 1992. CTU, a London-based engineering services company, went under in 1991 after diverting £250 000 of pension contributions into the business. Like the Maxwell pensioners, 60 former employees face an uncertain future.

In an article entitled 'Keep a sharp eye on your pension', Sunday Times financial journalist Barbara Ellis concludes that 'there is increasing evidence of pension money missing from companies that have collapsed in the wake of the recession. A disturbing pattern is emerging of pension payments being - at best - delayed as businesses tried desperately to stay alive'.

Bankrupting the pension fund along with the company is frowned upon in the City. But as long as the firm stays afloat, and pension entitlements continue to be met, the law says the fund is there for management to play with. Anything goes, including complete disregard of the original terms of agreement between employees and their employer.

When pension funds are in surplus, companies regularly award themselves a refund. To them, the only disadvantage is that tax is payable at 40 per cent.

Bossman's holiday

In April, Courtaulds announced it was to recover £83m surplus from the pension fund. Lucas Industries pensioners issued a writ for the return of £150m transferred from their fund to the company in November 1991. Self-investment helped to create a £30m deficit in the Courage pension fund. Portals Group took £7.5m from its fund, despite the fact that the trust deed said that surplus monies should only be used to increase reserves, reduce contributions, or increase benefits. The proposal for a refund was notified to the trustees only after the publication of the accounts. Contributors to the Express Newspapers fund were concerned about a £25m fall in surplus. When they protested in 1990 they learned they had been relegated from member to beneficiary status in 1988.

While employees carry on paying in, employers can take a contributions holiday whenever the fund is in surplus. British Telecom enjoyed a contributions holiday from 1988 to March 1993. The company recently began contributing again, but only after it had spent £800m of a £913m surplus on last year's mass redundancy package, Release '92. London Regional Transport has been criticised by a high court judge for cutting its contributions by £93m.

Combined Actuarial Performance Surveys indicated that only 30 per cent of pension funds had a positive cash flow in 1991. The Guardian reported that 'employers have taken more than £1 billion out of UK pension funds in the last seven years'. In addition, the 1992 National Association of Pension Funds survey showed that more than half of British employers are using fund surpluses to reduce or eliminate their contributions. 'Financial directors have become addicted to pension fund holidays', says Bryn Davies, actuary and author of the Institute of Public Policy Research report on fund ownership and control.

Other scams include using privatisation or takeover as an opportunity to scrap existing pension schemes and set up an inferior version (Travellers' Fare, City Link, Cleveland Guest Engineering, TI-Dowty Engineering, various privatised bus companies and electricity producers). Some companies do not need an excuse. National Westminster Bank recently closed their existing pension scheme to new members. There is a replacement, but new employees must wait five years to join it. Standard Chartered announced that with effect from 1 June 1992, employees joining the bank's permanent staff will not be allowed to become members of the pension fund until they reach the age of 25.

Some employers (APV Food Engineering, Appledore Shipyard, Portals Group) have pre-empted the government's deliberations on raising the retirement age for women. Female employees who expected to retire aged 60 on a full company pension must now work another five years or face a reduction in their pension entitlement of up to 25 per cent.

'Good eggs'

In the wake of the recession, many smaller companies are ripping up traditional final salary schemes, in which the employer is expected to cover any deficit, and replacing them with money purchase schemes, in which the employer's contribution is fixed and the employees' contributions must increase to make up a shortfall. Money purchase pensions are not inflation-proof and the members' final entitlement depends on the success or failure of the fund's investment managers.

The furore over Maxwell led to the setting up of the Pension Law Review Committee, headed by Professor Roy Goode and due to report on 30 September 1993. The National Association of Pension Funds submitted evidence to the inquiry. It called for a compensation scheme but believes that the existing trustee system is basically sound, although 'it does rely on all the trustees being "good eggs"'. The union-backed Campaign for Pension Fund Democracy has argued for a majority of trustees to be elected from the workforce, but union officials are resigned to 'not getting anything like what we want'.

Almost everyone is appealing to the Tory government to prevent pension fund rip-offs. But cabinet ministers have an appetite for pension contributions which makes Maxwell look anorexic.

After a contributions holiday, British Coal owes the white collar staff superannuation scheme £481m. But the Treasury and the Department of Trade and Industry have instructed British Coal to make up that difference by diverting £471m out of the pension fund surplus. The £471m refund is roughly equivalent to the £500m temporary pit subsidy recommended by the house of commons trade and industry select committee.

What's the difference?

Trustees from the National Union of Mineworkers are taking legal action to demand repayment of £800m to the mineworkers' pension fund (the cost of another BC contributions holiday). Union president Arthur Scargill said in The Miner: 'there is little difference in principle between this method of withholding money, or creaming off surpluses, and the plundering in which Robert Maxwell was involved.'

Getting its hands on the pension funds is one reason why the government wants to privatise the coal industry. In his column in Pensions World, Anthony Hilton, managing editor of the London Evening Standard, wrote: 'I expect the government to take over the fund and use the £13 billion assets to help meet the budget deficit.'

In March, transport secretary John MacGregor withdrew plans to take funds from the £8 billion British Rail pension fund and use them to reduce the government's public sector borrowing requirement by £4 billion. However, similar plans are likely to be implemented when the railways are privatised. The Post Office pension fund may also be plundered.

'What's the difference between Robert Maxwell and the government?', asks a retired miner from Annesley pit in the Nottinghamshire coalfield: 'The difference is that the government won't be getting a visit from the fraud squad.'

Additional reporting by Ian Purdy, Andrew Morrison and Hilary Salt