MPS surplus share uplift would not be 'transformational', say trustees

The government has received £4.4bn from its arrangement with the Mineworkers' Pension Scheme since the privatisation of British Coal in 1994. In return for half of the fund's surplus being diverted to the public purse, the government provides a guarantee protecting the benefits built up before privatisation from ever being reduced, regardless of investment returns.

The campaign for a review of this arrangement led to a petition signed by more than 100,000 people and has also caught the eye of MPs.

When you look at it in a pound, pence per year amount for each person, it doesn’t feel like a lot

Kirsty Bartlett, Squire Patton Boggs

“Since 1987 the government have not paid in a single penny, and instead claim their undertaking as guarantor makes this a fair price worth paying. In return, the average retired miner must get by on about £84 a week, while some are forced to settle for much less,” Labour MP Stephanie Peacock said in a Backbench Business Committee debate on the topic last month.

However, while trustees of the circa £12bn fund said this month they would welcome a change to the surplus share agreement, they have highlighted that any resulting increase to their pension may not be very impressive at all. 

A July 2019 letter to members from the trustees stressed that in the absence of robust investment returns and a big surplus, the impact on members’ pensions would be far from remarkable – perhaps as little as pennies a week for an average member.

'Incremental not transformational'

Members’ pensions in the MPS include a guaranteed pension – which increases by inflation every year – and a bonus pension, which is the extra pension provided from good investment returns on the scheme’s assets and can go up or down. 

The trustee letter noted that an average pension is about £84 per week, with £65 from the guaranteed pension and £19 from the bonus pension.

If the scheme is in surplus at the actuarial valuation, half of that surplus goes towards new bonus pensions and the other half is put into a guarantor’s fund and paid to the government over the following decade. 

While the guarantee shelters against poor returns, if the scheme is in deficit members' pensions would effectively go into 'standstill', with the guaranteed element rising in line with inflation but offset by a decrease in the bonus pension.

In this situation, if investment returns are low for a long time, the trustee noted that “members may experience a prolonged period during which their pension does not increase, so that they lose purchasing power, and eventually the current bonus pension could be lost entirely”.

Changes to the surplus sharing arrangement may not deliver life-changing benefits, however. The trustee letter pointed out that with the current 50/50 surplus sharing arrangement a surplus in the guaranteed fund of £500m “would enable the Trustees to award a new bonus worth around £1.09 per week, to a member with an average pension, over each of the next three years”.

If the share of surplus rose to 75 per cent in favour of members, the trustees could increase this by around an extra 54p a week, and about £1.08 a week if the surplus was £1bn.

“While a change in the surplus share would of course be very welcome, this simple example illustrates clearly that in the absence of strong investment returns and a large surplus, the impact on member pensions would be incremental not transformational,” the trustee letter highlighted. 

Furthermore, it pointed out that targeting a large surplus necessitates adopting an investment strategy “which involves risks which could, in some circumstances, lead to deficits and ‘standstill’”.

Trustees guard guarantee

The letter stressed the importance of the government guarantee, adding that the trustees “would not contemplate changes to the Scheme rules that compromised the guarantee in any way”.

The trustees have argued that, while they would welcome a change to the surplus share, it would still leave current bonuses exposed to risk. 

Therefore, they want current bonuses to be protected. For example, with the average weekly pension, the £19 a week bonus pension could never be reduced. 

The trustee letter explained that they have met with business minister and MP Andrew Stephenson, who confirmed that “he is supportive of our proposals”.

However it added that this does not mean the government has agreed to implement the proposals, or that it will do so. 

Keep comms balanced 

Kirsty Bartlett, a partner at law firm Squire Patton Boggs, said the letter had done a good job of translating the changes into real-world outcomes to the scheme's 135,301 pensioner members and 16,881 deferred members.

“I think it’s fair to say there is probably still a general lack of understanding amongst many members about the true costs of providing a pension,” she noted.

While the headline amounts look significant, some members may not have been aware that the actual uplift to their pension as a result of a change to the surplus share may not be as big as they thought, she said. 

Ms Bartlett said the trustee letter “was a very good and balanced communication, and hopefully it will help members of this scheme to feel confident that the trustees are acting in their best interest”.

It should also help members understand the financial dynamics of the complicated scheme, she added. 

Jane Kola, a partner at Arc Pensions Law, agreed it is crucial that scheme communications explain these sorts of issues clearly and in a balanced way, “so that members are not misled in anyway”. 

She said that generally, “very few people who work outside of the pensions industry have any idea how much their pension is really worth and how much it costs to provide for retirement despite many education campaigns over many years”. 

With regard to the mineworkers’ scheme: “£4.4bn sounds like an immense amount of money but the scheme has a huge number of members which means the costs of improvements is also very high”, she said.

Principle rather than pounds

Alice Honeywill, partner at law firm Burges Salmon, said: “For many, the issue will be as much about principle as about actual pounds.” 

She added: “Being such a large scheme, the total figure and therefore impact on the state appears significant compared to the figures at individual member level.” 

The average pension is not large, so even a small boost would be welcome to members, “particularly if compounded over time”, Ms Honeywill noted.

Under the current government guarantee, the total pension paid cannot be decreased, even if there are poor investment returns. 

Removing the guarantee would require a lower-risk investment strategy, leading to lower returns, meaning surpluses are less likely and new bonuses would not be possible. 

Ms Honeywill said: “As with pension schemes generally, the Trustees’ first concern will rightly be to protect the promised benefits including inflation protection, rather than maximising possible additional benefits (even though the surplus element is an important part of the pension structure in this scheme).”