Safety net already at full stretch

Help is limited for those who have lost their pensions, says James Daley

New laws to protect members of pension schemes from losing their savings were finally introduced this week, as a new pensions regulator began work. David Norgrove, a former chief of Marks & Spencer's pension fund, will be responsible for protecting the savings of workers with guaranteed final salary pensions - he will work alongside a new compensation fund that will provide a safety net.

New laws to protect members of pension schemes from losing their savings were finally introduced this week, as a new pensions regulator began work. David Norgrove, a former chief of Marks & Spencer's pension fund, will be responsible for protecting the savings of workers with guaranteed final salary pensions - he will work alongside a new compensation fund that will provide a safety net.

However, for thousands of final salary pension scheme members, the new rules have come too late. Their schemes have already gone bust and are in the process of winding up.

An estimated 80,000 people, some of whom have been saving for more than 35 years, have lost some or all of their pensions, as neglectful employers have turned their backs on their pension liabilities.

Most of the victims of the crisis were told their pensions were guaranteed, when in fact there was no cast-iron obligation for their employers to pay up, even if they had forced their employees to join the pension scheme. After pressure from backbench MPs, last May the government finally agreed to make £400m available through the Financial Assistance Scheme (FAS) to help compensate this group of pension losers. But experts say this is nowhere near enough - they estimate £3bn will be needed over the next 40 years to compensate all those who have lost out.

For older workers who have little time to recover their losses, retirement plans have been blown apart with many forced to continue working.

Under the Government's current plans, those who were within three years of retirement on 14 May last year - when the FAS came into existence - have been guaranteed a payout of at least 80 per cent of their expected pension. But this is subject to a cap of just £12,000.

Many of those involved had built up an entitlement to receive around two-thirds of their final salary. Under the scheme, anyone who finished their working life on pay of more than £18,000 - the vast majority - will still get a significant amount less than they had expected.

Worse, for those who were more than three years from retirement on 14 May 2004, there is still uncertainty about whether they will get anything at all. While the Government has acknowledged some 80,000 people are affected - including 65,000 who are more than three years from retirement - it has so far failed to allocate any funds for these younger victims. Although the Secretary of State for Work and Pensions, Alan Johnson, is believed to want to offer a similar deal to younger victims, the Chancellor, Gordon Brown, has repeatedly refused to put up more money.

The biggest hope for victims being fully compensated still lies with Ann Abrahams, the Parliamentary Ombudsman, who is conducting an investigation into the scandal.

Ros Altmann, a pensions campaigner and government adviser, helped compile a submission for the Ombudsman. She says that evidence shows the Government mis-advised workers in final salary schemes about the security of their pensions.

If the Ombudsman is convinced by Ms Altmann's analysis, it has the power to force the Government to fully compensate the 80,000 victims. Her report is expected in the summer.

The Department for Work and Pensions is trying to ensure workers can't lose out this way in the future. From this week, pension schemes that are left under-funded when their employer becomes insolvent will be covered by a new safety net - the Pensions Protection Fund (PPF). Unlike the FAS, this will be funded by a levy paid by all final salary schemes, and will pay much higher levels of benefits to those who qualify for compensation. Those already in retirement when their scheme winds up will be guaranteed 100 per cent of their expected pension, while everyone else can expect to get 90 per cent.

Like the FAS, there will be a cap on benefits. But at £24,000 a year, it is twice as generous as the government-funded scheme, and will ensure many more people receive most of what they had expected.

Several large schemes are already lining up to collapse on the PPF, before it has had an opportunity to build up any significant reserves.

Turner & Newall, the car parts manufacturer, which has an estimated 40,000 scheme members, is the most notable. Its £1.9bn fund is estimated to have a deficit of around £875m. Allders and Courts, the retailers, are two other high-profile cases which look set to knock on the PPF's doors.

Although Lawrence Churchill, the PPF chairman, insists that his fund will be capable of coping with an early surge in claims - any further large pension casualties could send the PPF into deep trouble.

One of the main jobs of the new pensions regulator will be to ensure this does not happen. However the regulator believes it will take two years before it has a comprehensive database of which pension funds are most at risk.

A second problem faced by the new regulator is that although it has the power to force UK companies to take responsibility for their pension funds, it has no such powers over companies which are domiciled outside the UK and have UK-based subsidiaries.

While the regulator has insisted that there will be ways to pursue offenders overseas, many observers remain unconvinced. That could leave some members of final salary schemes vulnerable.

By contrast, workers in a defined contribution or money purchase pension scheme - where pensions are based on the contributions made by you and your employer, plus any investment growth - are not affected by the new regime. Most money purchase schemes now give the employee the choice of where they want to invest their savings, but for those that don't, the regulator will have powers to ensure their funds are being invested responsibly.

'I planned to retire to Cornwall. That's gone'

John Botfield, 57, from Hemel Hempstead, worked for Dexion, the storage company, for 35 years, joining its final salary pension scheme in 1969. Under his contract, John had no choice but to join the scheme; but he always believed his pension would be guaranteed.

In May 2003, after Dexion had run into financial difficulties, its Norwegian owner, Aker, put the firm into administration, with no provision for the £31m black hole in the pension scheme.

Although Aker remains solvent, there were no laws - and there are still none - to force overseas companies to honour pension commitments of their UK arms.

"I had plans of selling up and retiring to Cornwall - but that's all gone now," says John. "I'm literally going to work until I die, and with a disabled wife to look after, that's not too clever."

While John potentially qualifies for compensation from the Government's Financial Assistance Scheme, he was just months outside the time limit that would have guaranteed him 80 per cent of his expected pension.

He must wait until the Government's next spending review to find out whether more money will be made available. Even if he is offered the same as those nearer retirement, his payout is likely to be capped at £12,000 - less than half what he should have received.