What is the Government Guarantee?
The Government Guarantee was put in place on 31 October 1994, the day the Scheme was changed to reflect the impact of the privatisation of the coal industry. It is a legally binding contract between the Trustees and the Government.
In addition to ensuring benefits earned up to privatisation, and benefit improvements from surpluses before 1994 will always be paid and keep their real value, the Guarantee provides protection to ensure that the total pension is not reduced in cash terms each year.
How does the Guarantee work?
If a future valuation of the Scheme shows there is not enough money in the Guaranteed Fund to pay benefits, funds will be drawn from the Investment Reserve to make up the shortfall. Should the funds in the Investment Reserve be insufficient to achieve this, the funds in the Guarantor’s Fund and the Bonus Augmentation Fund would be used to make good the remaining shortfall.
If this happens, the ‘standstill’ arrangement ensures that combined pension payments from the Guaranteed Fund and the Bonus Augmentation Fund do not decrease (although the total may stand still for a period). If the combined assets of the Guarantor’s Fund and the Bonus Augmentation Fund are not enough to achieve this, the Government will have to put new money into the Scheme to fund the Guarantee.
Summary of the Guarantee arrangements:
- 50% of any surplus after 1994 is made available to provide Bonuses for Scheme members. The remaining 50% is payable, in equal instalments over 10 years, to the Guarantor;
- an unconditional guarantee that the level of pensions in payment will never be less than the level earned up to 1994 indexed in line with the RPI since then regardless of whether the Scheme has sufficient funding itself to meet the cost; and
- an unconditional guarantee that the total amount of a member’s pension in payment will not be reduced in cash terms, even if there is insufficient money in the Scheme.
If there is a deficit, payment of any remaining sums to the Guarantor is reviewed and, if appropriate, revised.