Occupational Pension Schemes

I am pleased to have the opportunity to open today's debate. I shall raise the plight of more than 1,000 workers who were employed by United Engineering Forgings. The matter affects not only my constituents but those of numerous other hon. Members because UEF workers were employed in six manufacturing locations in the United Kingdom. Within the time available, I shall endeavour to accept interventions from hon. Members who want to contribute to the debate.

I recognise that my right hon. Friend the Minister for Pensions may have difficulty commenting on much of the detail of the case, although I know that he has received correspondence and is aware of the situation. The position in which the members of the UEF occupational pension scheme have found themselves illustrates inherent weaknesses in the current rules that must be urgently addressed. I therefore hope that his response will inform the Chamber of the Government's intention further to strengthen pensions legislation to ensure that workers can never again be deprived of their rightful entitlement for which they have paid all their working lives.

I intend to show that this case has been caused by the irresponsible and cynical actions of UEF's major shareholder, Prudential Portfolio Management Ventures Ltd., which is part of the Prudential Group--ironically, a leader in pension provision. UEF was the former British Steel forging division that was purchased by PPMV in 1997. In January 1997, the chief executive of the company informed the group's trade union representatives of his five-year plan for the business, the aim of which was to launch the company on the stock market at the end of those five years.The UEF company pension scheme originated in 1974 under the ownership of Guest, Keen and Nettlefolds. It was designed for GKN by the Prudential and was introduced as part of the 1974 annual wage award. It was a final salary scheme, in which the employer contributed 10 per cent. and employees contributed 5 per cent. of their pensionable earnings. The scheme was well run under GKN, and from 1986 by a new company, United Engineering Steels and Forgings. Actuarial reviews were held regularly and surpluses were the norm. When it was realised that there was a deficit, the employer fully funded the shortfall to the scheme, thus ensuring that benefits were maintained.

Until UEF bought the company in 1997, early retirement benefits were usually allowed only when the employer was satisfied that an employee's health was in such a poor state that they could no longer work. When UEF took over, it transferred the scheme as a mirror image, but a change was made to ensure that new members joining the scheme would not be offered the generous early retirement benefits that existed for its present members, which is ironic when one considers what happened later. In August 1997, when the transfer value was agreed, the scheme had 1,953 active members, and a board of seven trustees that was chaired by the company's financial director.

In September 1997 the first member of the pension scheme retired. However, the business was not going as well as the company had hoped, and it had started to make a loss. That fact is recognised by the employees, but it was the responsibility of the employer and the trustees to ensure that the pension scheme was funded properly. Some sites initiated voluntary redundancies in order to reduce their wages bill. The pension scheme, with its generous early retirement benefits allied to redundancy payments, certainly looked an attractive option to employees over the age of 55. Early retirement, however, required the company's consent. Former employees believe that the pension scheme was the carrot used by the company to ensure that many employees would volunteer for redundancy, with those of 55 years of age and over receiving their fully accrued pension. As I hope to show, scant regard was paid to the effect of this on the pension scheme and future pensioners.

To illustrate the effect of this redundancy policy on the pension scheme, an employee aged 55 years who had been a member of the pension scheme since 1974 would be entitled to a weekly pension of £100 per week plus a cash lump sum. If one assumes a life expectancy of 80 years, that person alone would cost the pension scheme £125,000 to £150,000.

In April 1998 the pension scheme had 47 pensioners and 27 deferred pensions. By September 1998, that had risen to 128 and 49 respectively. Some sites within UEF were employing new people, but they were temporary workers who were not allowed to join the scheme until they had been employed for a year. That did not help the situation, however, because fewer eligible members were paying into the pension scheme as more members were being taken out.

By April 1999, the pension scheme had 283 pensioners and 94 deferred pensions. The number of active members paying into the scheme had dropped to 1,712. In October 1999 the trustees, on the advice of Bacon and Woodrow, approached the board and asked it to increase its contributions, as the minimum funding requirement had dropped from the 120 per cent. funded in April 1998 to 100 per cent. in April 1999, and was still dropping. The advice was that the contributions required were now 19 per cent. The board refused to increase its contribution and, by March 2000, there were 373 pensioners and 139 deferred pensions, and the minimum funding requirement was down to 96 per cent. In April 2000 the board sold the Smith Clayton Aerospace Division and the pension scheme then had 190 fewer paying active members.

In June 2000 the company decided to take action. Employees were asked to contribute another 2 per cent. on top of their existing 5 per cent. to help fund the scheme. The company would also pay 2 per cent., making a total contribution of 19 per cent., as previously requested by the trustees but refused by the board the previous year when the need was first highlighted. The employees were told that if they did not agree to pay the extra 2 per cent., the pension scheme would cease. Also a pensions roadshow was held at each site to explain to the employees why management was asking for the extra funding when the trust deed decreed that the employer should fund any shortfall, as previous employers had done.

The company went into administration on 12 June 2001 or shortly thereafter, and an independent trustee to the pension scheme was appointed by the court. He reported that the pension scheme was grossly underfunded and would have to be wound up immediately at a cost of £3 million, which would leave a shortfall of £12 million.

I am sure that my right hon. Friend the Minister and other hon. Members present will understand that the work force were devastated. They were always told what a good investment it was to pay into a company pension scheme and how it would provide them with a wage in their retirement.

Although such employees have taken the advice of Governments past and present and provided for their retirement by faithfully contributing for 20, 30 or even 40 years, so that they will not be a burden on the state, the expected pension from their fully accrued final salary scheme will not be there when they need it most--as they enter retirement and old age.

Such employees are now told that they must buy an annuity from whatever the reduced transfer value amounts to, but it will probably provide a pension far short of what they have paid for. Employees who are within one or two years of the normal retirement age must now live with the fact that, although they have no time to make up their pension deficit, younger employees who took advantage of the early retirement offers will reap 100 per cent. benefits for the rest of their lives.

I have permission to give the example--it is just one--of Mr. Willie Riggins, who has worked in what is known in Ayr as the Stampworks for 37 years, and has paid into the pension fund since 1976. In 1999, Willie received a quote for what he would be due--£29,500 in a lump sum and a pension of £137 a week--if he took early retirement. According to a recent quote for astakeholder pension, however, he would get a lump sum of £12,500 and a pension of £40 a week. Those sums are based on the average transfer value in 1997, and would be even less now.My right hon. Friend the Minister has stated in letters to colleagues that if a scheme is funded to at least the minimum funding requirement, it should provide fair value for the accrued rights of non-pensioners in the event of insolvency. However, what if, through the neglect of people who should know better, it is not funded to MFR levels? Again, to ensure that the scheme's funds are used for the intended purpose, there are restrictions on the amount that can be invested from the pension fund into the employer's business. However, what if misuse is not direct and monetary? What if the pension fund is used to cut the company's wage bills, and the fund is overburdened without taking account of future requirements?

It is clear that the responsible course of action on the part of trustees and the board would have been to put in enough money to ensure that the scheme was fully funded, and to take account of the company's financial problems by freezing those funds. That did not happen timeously, however. What can the Government do to impose sanctions on such irresponsible behaviour? While advising employees to increase their contributions because of the underfunding problem, PPMV was trying to offload its shares to the company and was totally uncommunicative with the work force, and others, in the process. For example, they refused to meet me and, to my knowledge, other Members of Parliament, to discuss the situation. Ironically, Prudential was keen to discuss it with me yesterday but, unfortunately, it was a wee bit too late in the day.

I call on Prudential, even at this late stage, to sort things out. The shortfall is a drop in the ocean to it, but would make a huge difference to the lives of my constituents and of others. If it wants to retain its reputation, it should get round a table with the employees' representatives and live up to its responsibility for the whole sorry tale.

I am aware that the Government have been considering various aspects of occupational pension schemes and have recognised their importance. They have consulted on aspects that could lead to improvements, such as insurance and a central contribution fund, but have rejected them. I would like to hear about any proposals that will improve the situation that the Government have accepted. Will the proposals prevent what my constituents and those of other hon. Members experienced?