About Your Scheme

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 Secretary of State for Trade and Industry.

In addition to ensuring benefits earned up to privatisation and benefit improvements from surpluses before 31 October 1994 will always be paid and keep their real value, the Guarantee provides some protection for Bonus Augmentations which are not fully guaranteed.

Although the wording of the Guarantee refers to the Clauses of the Scheme and the Coal Industry Act, the Guarantee is a separate document, which places obligations on both the Secretary of State and the Trustees. The existence of the Guarantee as a separate document is an important safeguard. Because it is neither in legislation nor in the Rules of the Scheme it cannot be altered by the Government without the agreement of the Trustees. As a contractual commitment it is enforceable through the courts if necessary. This provides an extra layer of protection for the members of the Scheme. The way in which the Guarantee works is written into the Rules of the Scheme.

How does the Guarantee work?

If the Scheme’s Actuary finds that the assets of the Guaranteed Fund (the Guaranteed Fund is that part of the Scheme’s assets from which all benefits except Bonus Augmentations are paid) are not sufficient to meet the liabilities for Guaranteed Benefits, action will be taken to increase the assets of that Fund so that the benefit payments can be met. This is called "correcting a shortfall."

The way in which a shortfall is corrected is:

• First by transfer of assets from the Investment Reserve;
• Second by equal transfers of assets from the Guarantor’s Fund and the Bonus Augmentation Fund;
• Third by payments from the Government under the terms of the Guarantee. Any liability on the Government would be paid to the Scheme in 10 equal instalments matching the way in which Government receives its share of any valuation surplus.

What does the Guarantee Cover?

The Guarantee ensures that the benefits earned by Scheme members during their employment with British Coal, and any benefit improvements from surpluses which were awarded prior to 31 October 1994, will always be paid and will be increased each year in line with the Retail Prices Index (RPI).

Bonus Augmentations from surpluses after October 1994 are not fully guaranteed but they are subject to the secondary, standstill guarantee which makes sure that pensions will not reduce even if there are not enough assets in the Bonus Augmentation Fund to cover its liabilities. The worst that will happen is that pensions would stand still for a while as RPI increases on guaranteed benefits were offset by a corresponding reduction in bonuses. Bonuses would, therefore, be eroded over time either until they reduced to zero or the Scheme’s financial position, as assessed by a future actuarial valuation, improved. If bonuses did get down to zero, then the remaining benefit, all of the pension from the Guaranteed Fund, would once again increase in line with RPI.

The detailed provisions of the Rules enable the Trustees to shield members from the full effect of standstill in some circumstances, depending on the size of the shortfall.