AEA Technology Pension Scheme

Lord Benyon Excerpts

Wednesday 18th March 2015 Westminster Hall

[Geoffrey Clifton-Brown]

My hon. Friend makes a really potent point, which I will come on to later in my speech.

People had not been warned of the risks by the official leaflets that they received. The AEA Technology pension scheme received an initial injection of cash from its mother scheme, the UKAEA scheme, based on the accrued service and pension entitlements of the transferred members. The mother scheme was operating with a notional surplus at the time, but none of that surplus was passed to the new scheme, giving the Treasury an increased windfall. Since the AEA Technology pension scheme ran into deficit because of changes in actuarial valuations, it has now become apparent that insufficient funds were transferred into it when it was set up. Moreover, no written agreements appear to have been made to cover such an eventuality. In other words, either the Government have a continuing moral, and possibly legal, duty to those transferred members or they cannot have fully discharged their responsibility under the Atomic Energy Authority Act.

The Department for Work and Pensions has suggested the requirements of the Act may have been fulfilled because when it was launched the benefits from the new scheme matched those of the mother scheme. However, none of the transferring scheme members—my hon. Friend has made the very good point that they were extremely bright and able people—were eligible to draw benefits at the time, because none of them were retired, so the DWP’s claim cannot be true. The Act’s intention must have been that the new pension scheme would not change in future years if the UKAEA one did not, meaning the benefits were secure.

It is now proposed that the AEA Technology pension scheme be transferred to the Pension Protection Fund, where index-linking of benefits would be removed and replaced by an inflationary allowance, capped at a maximum of 2.5% for service from April 1997 onwards. That covers almost all post-privatisation service. It would further mean that all index-linking would be removed from service prior to that date—that is, from all service transferred from the Government sector, which the scheme members were told was secure. In addition, all members below retirement age would suffer a further 10% drop in their pension. The overall effect is a greatly diminished pension that is far less than the benefits that would have been due from the UKAEA scheme. It would not be equivalent, as was specified in the Atomic Energy Authority Act.

[Richard Benyon (Newbury) (Con)]

My hon. Friend is making a good point. The key point to which we want the Minister to respond is that, as a public sector pension, the AEA Technology scheme had full protection linked to the retail price index. That has now been lost, on the basis of wrong advice that was given at the time.

[Geoffrey Clifton-Brown]

As I will explain in a minute, it was partly wrong advice at the time and partly the fact that the subsequent company went into a pre-pack.

As I was saying, the proposed transfer to the PPF means that the scheme would not be equivalent to the UKAEA scheme, as was specified in the 1995 Act. I would be grateful to hear the Minister’s views on whether the AEA Technology pension scheme should present a special case because it was formed as a result of privatisation, as my hon. Friend the Member for Newbury said. Additionally, does the Minister believe that the Government should have a duty of care to those staff who were transferred into the AEA Technology scheme? Do the Government have a moral and legal duty to act to protect the pension scheme members against loss, given the assurances that, as my hon. Friend said, were made to staff as part of the privatisation process both in Parliament and in the printed materials provided to scheme members by an arm of the Government at the time?

I understand that in 2010 AEA Technology made an unsuccessful acquisition of the US firm Eastern Research Group by issuing a large number of shares. Problems arose with ERG the following year because of late payments and delays in the US Government’s awarding of contracts. AEA Technology issued a statement in November 2011, which played down the prospects of the UK-based part of the company and highlighted ERG’s problems. That drove the company share price down to virtually zero. Notwithstanding that, the long-term prospects for ERG appeared good, as it had recently won a £100 million contract, and AEA Technology’s successful UK-based business, which had originated from the privatisation exercise, was profitable and actively recruiting at the time.

Given its financial situation and low share price, AEA Technology ran into cash-flow problems. Therefore, in November 2011, it began negotiating with various parties, including its bank, the scheme trustees, the PPF and the Pensions Regulator. The aim of the negotiations was to improve its financial position, and the plan that was agreed involved arranging a pre-pack administration to allow it to default on its pensions obligations and to start afresh under new, improved trading conditions—AEA’s original pensioners were about to suffer a serious double whammy.

The company’s share price was driven down so low—to about 0.05p, following a peak of almost £10 soon after flotation—that the company’s market capitalisation was less than £l million, which was less than the annual profit from the UK-based business alone. Given the low share price, investors would face no great financial loss from entering administration. The idea was for the PPF to take over the pension scheme and its assets. However, the PPF has fixed rates of compensation and, in particular, limitations on its rates for inflationary allowances. The net effect on scheme members, therefore, would be to reduce their pension pots to less than half of what they might originally have expected. That drop is greater than that explained by the scheme deficit. To add insult to injury, the scheme is contracted out, which means that its members will not be eligible for an additional state pension.

The pension scheme trustees initiated the pre-pack administration of AEA Technology by electing to wind up the pension scheme and to invoice AEA Technology for the full buy-out costs. Such action would be enough to make almost any company insolvent. The argument for entering a pre-pack administration was that it would maximise—that is pretty unrealistic—the company’s value, which would, in turn, maximise the scheme’s value for its members. Of course, that later turned out to be totally false. The money put into the scheme from the sale of the company was negligible by comparison with the losses caused by winding the scheme up. Scheme members could never have benefited from that; the beneficiaries could only ever have been the bank and the PPF.

AEA Technology was profitable and expanding, and it had a healthy order book, when it elected to enter pre-pack administration. The surviving parts of the company have continued to prosper. An air of secrecy shrouds the pre-pack negotiations, with everyone stating they are someone else’s responsibility or that information is commercially sensitive. Who it is who is commercially vulnerable is a big secret. That has also been the disingenuous response of the relevant Departments, while the various ombudsmen have thus far refused to get involved. What is the purpose of an ombudsman if, the moment they encounter a really difficult case, they fold and refuse to investigate?

Pre-pack administrations were set up with the intention of being for the benefit of creditors. The PPF was set up as a safety net for company pension schemes that run into trouble. The Pensions Regulator has a duty to protect pension scheme members’ best interests, as have the trustees. Yet in the case of AEA Technology, it appears that all those parties got together to help the company financially, at the expense, yet again, of those they were supposed to protect—the pension scheme members.

The AEA Technology case is special because the company was formed through privatisation. Many of its pension scheme members are ex-Government employees, who are extremely well qualified and extremely intelligent, and the Government have a continuing duty of care towards them. For that reason alone, the pre-pack administration needs careful investigation.

The case has highlighted other important issues. For example, there is the question whether pre-pack administrations are being abused. Additionally, the implications of defaulting on pensions for commercial reasons need to be understood and controlled if the Government are to be successful in promoting saving for retirement and in introducing a unified, simplified pension system into which transfers are the norm.

Sadly, in this case, it is all too clear that a large number of very bright people were misled by the information issued by a Department. Some of the information—the drafting was heavily influenced to minimise any reference to risk—may also amount to a misleading prospectus, and it needs to be thoroughly examined by the Government regulator.

I end by saying that the pre-pack administration of the AEA Technology pension fund and the information on which members transferred their entitlements need proper and thorough investigation, and scheme members need compensating accordingly. I look forward very much to what my right hon. Friend the Minister has to say, and I thank him for listening.