Ministers face pensions backlash after rejecting Ombudsman ruling

The Government faced another rebellion from its backbenches last night after it disappointed MPs and unions by dismissing a scathing report from the chief parliamentary watchdog. The study accuses it of maladministration in its regulation of occupational pensions over the past 10 years.

The damning report, which is published today, finds the Government guilty on three counts of maladministration, recommending that it provide full compensation to 85,000 people who lost all or most of their pensions when their companies became insolvent.

Although the Government pledged £400m two years ago to help some of those affected, it dismissed the findings of the Parliamentary Ombudsman report yesterday, saying it would not pay a penny of additional compensation.

Its dismissal of the findings is believed to be the first time the Government has completely disregarded the conclusions of an ombudsman report. It led to outrage from unions, consumer groups and its MPs.

Derek Wyatt, one Labour backbencher, said: "It's totally unacceptable to have an ombudsman that is not listened to. It's a complete waste of everyone's time and taxpayers' money.

"It's the Government's moral responsibility to pay compensation. It's bitterly disappointing that my own Government has decided to ignore these recommendations."

Frank Field, another Labour backbencher and a former social security minister, said: "If [the Government] is serious about restoring confidence [in saving for retirement] - a first step to any lasting pension reform - it will implement the letter and the spirit of the report. Failure to do so will entrench the widespread cynicism among voters that governments cannot be trusted."

But Stephen Timms, the Pensions Reform minister, said while he "felt a great deal of sympathy" for those who had lost pensions, there was nothing in the report which had persuaded him it was the Government's responsibility to pay compensation. "I think the report makes a huge and implausible leap - first of all saying a few leaflets could have been better worded and then recommending that the taxpayer should bear the burden of compensation."

He stressed that the Government had set up a £400m Financial Assistance Scheme which would "help the worst affected", in spite of it having no liability to do so.

Specifically, the report accuses the Government of misinforming consumers about the security of final-salary schemes between 1994 and 2005, and ignoring advice from the actuarial profession to provide more explicit warnings over the risks of such schemes to members. It also claims there was insufficient evidence to support changes which the Government made to minimum-funding rules for pensions in 2002.

The Minimum Funding Requirement (MFR) rules were scrapped after it was found that many schemes were nursing large deficits in spite of abiding by the MFR regulations.

In the conclusion to her report, Ann Abraham, the Parliamentary Ombudsman, recommends the Government should not only provide funds to fully restore the pensions to the 85,000 affected, but also pay compensation to the victims for the stress caused by the episode. It is thought the Government would need to provide £5bn-£10bn over the next 40 years to fully compensate those affected.

Ms Abraham said she had seen nothing in the Government's response which had made her change her conclusions, but warned she had no confidence that the Government would take any notice of her recommendations.

Ros Altmann, a former Downing Street pensions adviser who took the initial complaint to the ombudsman, called on MPs to hold the Government to account over the report's findings.

"If the Chancellor decides to continue to defy Parliament's own ombudsman, then we hope the House of Commons and all duly elected MPs will hold the Government to account for its actions. If our parliamentary democracy is to mean anything, justice must be done here."

Dr Altmann said she believed a select committee was likely to conduct an investigation on the back of the ombudsman report, which she hoped would put further pressure on the Government. Opposition MPs are also believed to be planning amendments to the forthcoming Pensions Bill, which would force the Government to pay compensation.

Dozens of the affected pensioners gathered outside the Treasury yesterday to demonstrate against the Government's response. Several posed naked for photographers, holding a banner reading "2006 and still stripped of our pensions".

This has to be put right

Marlene Cheshire. Widow

Marlene Cheshire is the widow of Dave, who worked for the shelving company Dexion for 32 years and paid into the company's final-salary scheme for 31 years. After agreeing to the company's request that he work on past his retirement date, he was still working when the company went bust in 2003, and lost his pension as a result.

If he'd taken his retirement at the regular time, his pension would have been safe.

Dave spent the last few years of his life fighting for justice over his and his colleagues' pensions, but died from cancer last year, just months after being diagnosed.

In the days before he died, Marlene told him that the Government had finally agreed to restore his pension, as she knew he was broken-hearted that he was leaving her without any retirement income.

"I told him on his deathbed that his pension had been restored, so he could die in peace," she said. "There are eight of us widows now, and this has got to be put right."

I feel betrayed by Government

John Benson. Pensioner

John Benson, 59, worked for Allied Steel & Wire for 41 years, contributing to the company's final-salary pension scheme for 38 of them. After being made redundant in 2002, when the company became insolvent, his worst fears were realised when he was told that the company's pension scheme was heavily in deficit, and that he was unlikely to receive anything back after a lifetime of saving.

As his scheme was contracted out of the Second State Pension, he has even lost the £40 a week which he would have received if he'd stayed contracted in. Unless the Government decides to pay compensation, he will have to rely on state benefits in retirement.

He has spent the past few years stacking shelves at Marks & Spencer, and says the stress of losing his pension has left him on the verge of a nervous breakdown. Still struggling to make ends meet, he fears he may now have to sell his home. "I feel I have been betrayed by Gordon Brown and this Government," he says. "Our families have suffered enough."