February

2007

 

 
AESP NEWS            

The Council members look forward to your continued support and interest. We wish you all a very happy New Year.

For those members who pay their subscription by cheque a reminder that 2007 subs are now due is enclosed.  Why not complete the standing order?  This saves us time to concentrate on the important issues and not just admin.

 

 

Annual Increase from 1 April 2007

 

This Year’s pension increase for members whose pension has been in payment for a whole year is 3.6%.

 

 

In this issue:

·          Good News – The result of PAG judicial review

·          A New Year Reflection by Jack Andrews

·          A Disappointing Response – The companies’ view of the AGM Motion

·          Scheme Developments - MANWEB 

·          A Wide Disparity of Benefits – Spouses Benefits compared

·          Scheme Group Assets March 2006

·          Scheme Group Membership March 2006

·          Developments in the Pensions Industry

·          Oldest pensioners face the highest inflation

·          Why don’t we get the full annual increase?

·          Comment by Neville Wrench

·          The Association’s aims and objectives

 

 

 

 

 

 

 

 

 
Reflections on Scheme Developments

 

                                                 

 

 

 

 

 

 

 

 

 

 

 

 

 

Don’t forget our Web site www.aesp.org.uk 

 

If you are on the web why not sign the Downing Street petition regarding inheritance tax. http://petitions.pm.gov.uk/ihtcrusade/    For most, IHT is an immoral form of taxation that penalises hard work and thrift and taxes your main asset, the house, simply because property prices have risen.  It creates distress for families already suffering the pain of bereavement. Send the PM/Chancellor a message.


Good News!

 

FOUR members of the Pensions Action Group have won their High Court judicial review against the government.

The Court ruled in favour of the pensioners who sought review of the government’s decision to reject the findings of the report produced by the Parliamentary Ombudsman.

 

The Court ruled that the government was guilty of maladministration by providing inaccurate information about the security of final salary pensions which misled people into believing their pensions were safe when they weren’t. In addition, the Court agreed with the claimants that the government’s decision to reject the Parliamentary Ombudsman’s finding of maladministration was unlawful and that John Hutton, the Secretary of State for Work and Pensions', reasons for rejecting the findings were not reasonable or rational.

 

The Court decision does not mean that the government must compensate an estimated 125,000 people for their loss but the ruling will intensify pressure over the issue. The Court’s decision simply requires the government to reconsider its rejection of the Ombudsman’s recommendations to compensate people and restore their full pensions. 

The opposition parties see this as a David v Goliath victory but are not keen to confirm that they would pay out.  One of problems is the amount involved, variously put at as low £1.7bn by actuaries Mercer, to £15bn by the government.  However the DWP told a select committee that full compensation would cost no more than £3.9bn if it wrote a cheque today!

 

As we have experienced, legal proceedings can be long and arduous, particularly with the sums of money that are involved in this type pf pension issue.  It is both helpful, but at the same time dispiriting, to know that the government has agreed to pay all the costs of the case and also the costs of any future appeals.

 

Cynically I would say this story has a lot of mileage in it yet unless the Chancellor suddenly sees enormous electoral advantage in meeting the PAG demands before the next election.


A New Year Reflection

 

The New Year brings an opportunity to wish you all good health and good fortune in 2007.  It also heralds the chance to review our role in society, the present position of our individual Schemes, recent events affecting pensioners and the Association’s current and future aims and activities.

 

The national scene is not encouraging.  A recent widely published survey report by the Commission for Social Care Inspection has shown that 13 million out of 60 million of us will be over retirement age by 2031.    It states that 441,240 retired people were in residential care homes in 2005 of whom 174,000 were paying for a place in their homes.   The same Report says that 70,000 pensioners were forced to sell their homes last year to meet residential care costs and that two thirds of councils had now withdrawn free help from all but then most critically sick of pensioners.   This report comes on the back of a similar document produced nine months ago by Treasury trouble-shooter Sir Derek Wanless which recommended that massive efforts should be made to help pensioners stay in their own homes and that state spending on this should treble.  

 

These statistics should appal all pensioners.  We possess substantial political power, particularly close to election times, and it is up to us to use these powers to show our politicians, trustees and employers that we will not accept either inadequate pension indexation or pensioner care at a lower standard than already exists north of the Border.     

 

The current rate of inflation for pensioners is near 9%.  The RPI measured 2.7% increase that we received nationally last year and the 3.6% that we will receive from 1 April 2007 on our national pensions is totally inadequate.  How are we expected to keep maintain our standard of living against costs increases of this magnitude. 

 

The December figures show the current RPI figure to be 4.5% and rising.   This is too close to the ESPS 5% “cap” for comfort or complacency. The Treasury uses the lower Consumer Prices Index to measure inflation and, whilst this is politically convenient, it is hopelessly inaccurate.     

 

Yet another Report has indicated that pensioners who have saved towards their retirements are now being penalised by having to pay almost the total costs of home and residential care, whereas those who have not made any provision are getting it free!   In Scotland such care is free anyway and, as the majority of our senior politicians seem to be of Scottish origin, should we not be asking why this is so?        

 

What can we do about all this?  Well, we pensioners can individually and collectively badger our MPs, and ask them where they stand on these issues.   We can, and should, try to involve the national and local press by writing letters to the editors.  We can similarly ask our Scheme trustees, particularly those whom we elect, where they stand and what they are doing.   And, of course, you joined AESP partly for the purpose of representing your interests to the Government, the employers and trustees and we have consistently done this; however, your support is vital.  As the ESPS AGM resolution clearly demonstrates, support from less than 2% of our membership does not impress our employers!   Remember that, of the ESPS Scheme total membership of 200,000, only 40,000 are active contributors, the rest are pensioners, dependants and deferred pensioners.

 

One other matter which I might mention is that, during 2006, there seems to have been some attempt to interfere with the ESPS trustee election procedures and with the holding of individual Scheme AGMs.   Members should be careful when looking at individual trustee election addresses to note any adverse comments attached by trustees or employers.   The Association views such actions as wrong, misleading and unconstitutional.    Candidates for election must be free to criticise the previous and current actions of scheme trustees.  It is for you, the voter, to make a judgement of the information presented.  It is not for other vested interest parties to deflect such criticisms.  AESP has referred a current case to the Pensions Regulator and we are awaiting the outcome.

 

Also, one company has discontinued the holding of a members’ AGM after a survey which indicated that only 10% of members would be likely to attend.    The homes of our scheme members are widely dispersed and such meetings are the only opportunity for members to raise concerns and to meet their trustees face to face.   The Scheme concerned has £2bn of members’ assets and 10% represents some 2,000 members, admittedly not all of whom had attended past AGMs.  The Association feels that this decision was outrageously hasty and unnecessary.  Any public company with that sum of shareholders’ cash invested is required to hold a shareholders’ AGM so what is the difference between a pension scheme and any other investment organisation which holds members’ cash?  AESP is awaiting the outcome of representations made by members in this case and may take action when this is known; however, ESPS and AESP members should be aware of it as a possible increasing trend and of the need to resist any such moves.             

 

Obviously, the Association will continue by itself and through our affiliation to the Occupational Pensioners’ Alliance, to make all lawful approaches and representations to people, press, politicians and public bodies whenever the opportunity arises.  2007 is a year in which we must all make a stand if our voices are to be heard in the 2009/10 Government elections. 

A Disappointing Response

 

Its will come as no surprise that the Companies have given a disappointing, but perhaps not unexpected, response to Jack Andrews’ motion about the indexing of our pensions at last Octobers Scheme AGM.

 

Inflation, by whatever measurement we choose, is undoubtedly increasing.  It was for this reason that Jack proposed a resolution at the ESPS AGM in October that indexation of ESPS schemes should be transferred from the present Retailed Prices Index, which does not truly reflect the cost of living, to the national Wages Index, which is more favourable.    Similarly, he proposed that the existing “cap” of 5% on such increases within ESPS Schemes should be removed.

 

It is pleasing to report that some 3,726 of the ESPS’s 200,000 members either returned proxy votes or voted at the meeting to support these proposals with 26 against.   We would have hoped for more support in view of the importance of the cost of living to the Scheme’s pensioner members.

 

The companies’ response has been disappointing.   Unsurprisingly, EPL (the electricity employers involved in the ESPS schemes) decided to take no action.  They apparently fear that the cost may be between 3 and 4 billion pounds.  This has to be compared with a current ESPS total scheme value of £22bn at 31March 2006.

 

They have pointed out that, although the present Government had suggested that the national pension would be aligned to wages by 2010/12, this is now likely to be delayed until 2014/15 - or never! (Put not your faith in the promises of politicians!).  EPL also points out that the rate “cap” contained in the Pensions Act 2005 is 2.5%, whereas the Scheme “cap” is at 5%.  This is itself a significant comment as previously the companies have always been keen to point out that they the Scheme has always paid RPI.

 

With the enormous inflationary price increases implemented by the electricity and gas employers in 2006, what kind of profits are they likely to make when their accounts are produced later in 2007?   Are they and their Directors salary increases likely to be “capped” at 2.5 or 5%?    Our Scheme trustees must ensure that at least some of this profit is devoted to the companies’ past servants without whom the industry would not exist to make such profits today.

 

You may not realise it, but 2007 is the year in the triennial cycle when our Scheme trustees are obliged to re-value each individual Scheme at 31 March.  The Pensions Act 2005 has given trustees greater power to negotiate the schemes’ budgets than previously and this can include looking again at indexation and reviewing the cover provided by the Protected Persons Regulations, which will both need to re-examined in these valuations.   It is to be hoped that our trustees will take full advantage of these new provisions, since the Act now allows them to refer any non-agreement to the Pensions Regulator.   

 

 

Scottish Power and Manweb

 

As our Manweb members may be aware Scottish Power the parent company of Manweb is subject of a takeover by Iberdrola SA of Spain.

 

The deal is almost done and the Manweb trustees will have been working hard to make sure that the Group is on a firm footing in terms of making good the deficit prior to the deal going through.

 

One major concern for all Scottish Power employees and pensioners must be the limited protection offered in the takeover deal.  The offer documents simply says:

 

“ On completion of the Offer Iberdrola has given assurances to Scottish Power that it will honour the contractual terms and conditions, benefits and existing severance policy of Scottish Power’s employees (including pension rights) for at least two years.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

 

Scottish Power trade union representatives recently visited Iberdrola to speak with management and the Spanish trades unions. Because of the complexities of international company takeover rules they were unable to come away with any firm promises.

 


Wide Disparity of Benefits

 

This table shows the wide disparity of spouses benefits which are paid by the Groups.

 

This data are based on 2006 information.  Your annual pension statement should show the current value of your spouses benefit.

 

 

Alfred McAlpine

55.0%

British Energy Combined

56.0%

British Energy Generation

66.7%

Drax Power

56.0%

EA Technology

61.0%

Electricity Association Services

65.0%

EDF Energy

55.0%, 57.5%, 60.0%, 66.7%

E.ON

50.0%, 57.1%, 57.5%, 61.7%, 66.7%

First Hydro Company

66.7%

International Power

58.0%

Magnox Electric

54.3%

Manweb

66.7%

National Grid Electricity

66.7%

Northern Electric

66.7%

Powerhouse Retail

50.0%

RWE npower

50.0%, 58.0%, 66.7%

Southern Electric

50.0%, 60.0%, 66 .7%

United Utilities

50.0%

Western Power Distribution

54.3%

 


Scheme Group Assets March 2006

 

Fund Value

£millions

Maturity

%

Return

%

Equities %

Gilts

%

Other %

Alfred McAlpine

60

82

27

75

24

1

Areva

13

n/a

---

---

---

---

British Energy Combined

49

15

28.3

90

10

0

British Energy Generation

2,424

67

23.1

54

25

21

DRAX

68

26

22.6

95

5

0

EA Technology

54

84

18.4

76

22

2

Electricity Association Services

186

99

18.7

41

46

13

EDF Energy Group #

2,289

78

24.4

70

26

4

E.ON UK

4,905

84

17.7

25

67

8

First Hydro Company

43

41

23.0

61

14

25

International Power

79

11

27.1

81

9

10

Keadby (Formerly AEP)*

---

---

---

---

---

---

Magnox Electric Group

1,631

69

22.2

38

50

12

Manweb

683

79

20.7

65

35

0

National Grid Electricity

1,340

79

22.0

61

30

9

Northern Electric

869

73

22.2

52

37

11

Powerhouse Retail

140

100

14.6

30

69

1

RWE npower

3,641

86

15.5

28

61

11

Southern Electric

1,037

78

22.2

0

0

9

United Utilities

1,192

86

22.9

60

40

0

Western Power Distribution

1,206

82

24.0

75

22

3

ESPS Total

21,909

80

20.2

 

 

 

 

*    merged to Southern Electric Group 1 February 2006

#    Merger of London Electricity and Seaboard Groups 1 September 2005

 

 

Scheme Group Membership March 2006

 

 

Contributors

Pensioners

Dependants

Deferred Pensioners

Total

Alfred McAlpine

98

98

8

351

555

Areva

61

14

---

46

121

British Energy Combined

260

18

7

22

307

British Energy Generation

5,277

6,050

2,281

2,335

15,943

Drax Power

455

97

8

51

611

EA Technology

59

184

10

109

362

Electricity Association Services

7

653

178

396

1234

EDF Energy

4,646

8,952

3,351

4,289

21,238

E.ON UK

7,784

22,612

7,914

10,864

49,174

First Hydro Company

179

76

4

44

303

International Power

399

8

---

40

447

Magnox Electric

3,252

4,710

1,047

1,519

10,528

Manweb

1,543

3,176

1,099

1,681

7,499

National Grid Electricity

2,346

4,852

1,727

2,203

11,128

Northern Electric

1,967

3,275

991

1,166

7399

Powerhouse Retail

---

1,411

75

723

2,209

RWE npower

5,272

18,095

6,829

7,278

37,474

Southern Electric

2,666

5,269

1,867

2,272

12,074

United Utilities

1,550

5,551

1,835

2,228

11,164

Western Power Distribution

2,426

6,553

2,365

2,112

13,456

ESPS Total

40,247

91,654

31,596

39,729

203,226

 

The above data relate to defined benefit members only.
Developments in the Pensions Industry

 

Nationally pensions issues are never far from the headlines, certainly on the financial pages.  The Pensions Protection Fund is turning out to be expensive and perhaps not the panacea that the government suggested it would be.

 

It is all too easy to see changes in the pensions industry as passing us by.  We still like to see our pension scheme as stable, enduring and secure.  However it is worth considering what is happening in the pensions industry generally and whether or not there is likely to be a major impact on us.

 

What has happened in our scheme since privatisation?  Part of bargaining that went into the privatisation package was the need to split our once single electricity supply pension scheme into a number of parts.  On 1 April 1990 there were sixteen principal employers each with its own pension group plus a central service company also with a pension group. Today, as you can see from the table, there are twenty pension groups.  The number has been as high as twenty six. 

 

There are national rules made by an employers’ group called Electricity Pensions Limited (EPL).  Changes of the rules at this level require the unanimous consent of all principal employers. A company called Electricity Pensions Trustee Limited (EPTL) is responsible for the safe custody and administrative control of all the Groups’ assets.

 

Within this framework each group is essentially independent, can make additional rules and its trustees are responsible for the investment policy of its own funds and can decide the benefit structure. No group can subsidise another group.

 

The results of this independence are clearly visible from our table of spouses/partner benefits.  Here we can see how widely this benefit has diverged as a result of independent decisions by trustees regarding the use of the surpluses which were available during the 1990s.

 

One of the other major changes has been the in the nature of the companies.  Their business plans rapidly diverged from what many of us would recognise as the electricity business to become energy companies.   Ownership of assets has also changed and we now have international energy companies responsible for a high proportion of the UK electricity business. 

 

With every takeover each new employer finds itself responsible for a section of a two tier pension scheme over which it does not have sole control because of the need to act unanimously in certain areas.  In addition a substantial proportion of the pension benefits of its pension group pensioners are protected by legislation.   This can be a bit of a culture shock for directors used to ‘absolute’ control of pension decisions in other countries.  In the past it has led to some comments of dubious legal standing.

 

There are signs that some employers are getting restless and they would wish for even greater, if not total, independence.  One reason is obvious to see companies which have billions of pension assets do not wish to be beholden to companies with millions. 

 

Where could this leave the smaller groups?  Depending on your point of view there are new possibilities for the future of our pension funds.  For many years only two or three insurance companies would negotiate bulk annuity purchases.  In any event the size of the ESPS precluded contemplating a pension buyout.  The deficits which emerged at the turn of the century, thanks in large part to the Chancellor’s raid on pension funds, also made such buyouts unlikely.

 

Over the last two years the situation has changed.  As can be seen many are becoming of our groups are becoming increasingly mature.  There could be a number of attractions to companies to wind up a group and purchase annuities.  This could be facilitated by the new companies who have emerged in the bulk annuity buyout market.

 

Buyouts would solve a number of management issues for the electricity company including transferring administration costs, eliminating trustee elections and appointments, and removing any risk of future deficits. At the moment the national rules only allow small groups of less than twenty five members to be closed by the purchase of annuities.  This rule has only been exploited once to close down the ESN group.

 

A rule change by EPL would be necessary and could be attractive to the large multinationals who would buyouts as a way of breaking down the ESPS and getting control of their own groups pension assets. 

 

One issue of course is that these companies have no track records.  Initially they are taking a risk but their expectation is that the assets that they acquire will appreciate at a greater rate than the value of the annuities they need to pay out.  That will be their dividend.

Another issue for trustees contemplating such a route is there are no formal rules regarding the process.  The success of the new companies is being widely trumpeted but ther