The government’s decision to grant a “Crown guarantee” for the Atomic Weapons Establishment Defined Benefit Pension Scheme has been criticised by one trade union for being too late to help its members.
The AWE, which maintains the UK’s nuclear weapons deterrent, was established as a public sector organisation. In 1993, responsibility for the AWE’s day-to-day operations moved into private hands, being subsequently operated by companies including Serco and Lockheed Martin, although the government maintained ownership of AWE’s sites and had a golden share in the company.
Staff lost their access to the Civil Service Pension Scheme as a result, and were enrolled into the AWE DB Pension Scheme from April 1 1993 onwards.
In June 2021, the government triggered a break point in the contract for the management of the AWE’s operations and returned these to public ownership. The government, however, did not allow staff to rejoin public sector pension schemes.
The pension rights will be written into the contract and thus guaranteed, so that everyone’s pension will be at least as good as the pension that he can expect now
Kenneth Carlisle, former parliamentary under-secretary of state for defence procurement
In July 2022, the minister for defence procurement, Jeremy Quin, told parliament that the government would grant a Crown guarantee for a liability worth £150mn in the Ministry of Defence’s accounts, bringing the AWE scheme’s assets and liabilities into central government control.
The government had previously rejected calls to create a Crown guarantee, which the Prospect Union argued would have allowed it to keep the defined benefit scheme open.
“Only now, after the AWE [DB] Pension scheme has closed to future accrual and AWE employees have moved to a defined contribution scheme, has the government accepted that giving a Crown guarantee makes sense,” said Prospect assistant secretary Bob King.
“This has come too late to be of any practical help.”
‘No one will be made to suffer detriment to their pension arrangements’
The closure of the AWE scheme prompted strike action in 2016 and 2017, with the Unite union blaming “broken promises” that had been made over pensions to workers.
In 1991, then-parliamentary undersecretary for defence procurement Kenneth Carlisle said: “Following contractorisation, a single new scheme will be established for AWE staff; it will match as closely as possible the schemes as they are at vesting day.
“No one will be made to suffer detriment to their pension arrangements as a result of contractorisation,” he continued.
“The pension rights will be written into the contract and thus guaranteed, so that everyone’s pension will be at least as good as the pension that he can expect now.”
Workers’ pensions rights were written into the contract for privatisation but these later changed. A revision to the contract brought about a cap on pension costs, and in 2008 these costs hit the cap.
As part of the solution to this, members agreed to changes to their pensions and to a risk-sharing arrangement that capped the employer’s costs. This agreement would ultimately see member contributions increase from 1.5 per cent of pay to 10 per cent.
In 2016, the company then proposed closing the DB scheme. Prospect proposed that the MoD offer a Crown guarantee to keep it open, but this was rejected by the government.
The scheme was eventually closed to all future service and members were offered a DC alternative.
‘AWE employees have been badly let down’
In a letter seen by Pensions Expert that was sent to then-minister of state for defence procurement Harriett Baldwin on July 27 2016, Prospect deputy general secretary Dai Hudd referenced a meeting between the union and the MoD, in which officials had told the union that the department was not legally liable for the benefits accrued in the AWE scheme.
“While this may strictly be the case, in a narrow legal sense there is no practical scenario in which it would be in the MoD’s interests to allow the pension scheme to fail,” Hudd wrote.
“The costs of meeting the deficit will continue to be met by the taxpayer in practice. Given this context it is difficult to understand why the MoD does not provide a Crown guarantee.”
Hudd also suggested a more radical solution that would see the government assume responsibility for all of the scheme liabilities and allow members access once more to civil service pensions.
In a subsequent letter to Baldwin on August 26 2016, Hudd rejected an apparent response from the minister in which she had suggested a Crown guarantee would “place a greater burden on the taxpayer”.
The £150mn contingent liability in the MoD accounts that is linked to the scheme became effective on July 21 2022, and will be noted for 20 years in its accounts.
It is highly unlikely that the liability will be realised, given that it is almost certain that there will continue to be an entity operating the site and sponsoring the pension scheme, especially given that the AWE is now owned by the government.
“The MoD has agreed with HMT that it will provide a guarantee to the scheme trustees, with the intention of securing that the scheme’s assets will be sufficient to meet its liabilities,” Quin told parliament.
“This will ensure that the scheme members can have confidence that their accrued benefits under the scheme will be paid when eligible.”
The decision to bring the scheme’s assets and liabilities under central government control would be subject to a feasibility study, which will be carried out with the AWE and trustees, Quin told MPs.
“While this sounds like good (or at least, not bad) news for members — in fact it will not go down well,” said one source with knowledge of the matter.
King, meanwhile, noted that “AWE employees have been badly let down in relation to pensions over many years”, and added that pension cuts have implications for the AWE’s ability to sustain the UK’s nuclear deterrent.
New funding proposals threaten ‘the demise of DB schemes’
New defined benefit funding rules may lead to “potentially severe outcomes”, consultancy LCP has warned, while Mercer has predicted that the regulations would “accelerate pension liability buyouts and the demise of DB schemes”.
“Promises about their pension rights being guaranteed after privatisation were broken. They made many sacrifices to keep the AWE DB Pension Scheme open, but when they asked the government to help by granting a Crown guarantee they refused,” he said.
An MoD spokesperson said: “We are committed to supporting the AWE in providing their employees with competitive pay and benefits, ensuring that they can recruit and retain top talent to work on one of the most challenging defence portfolios.
“AWE became a non-departmental public body on July 1 2021, and the MoD provided a new Crown guarantee to trustees of the AWE DB Pension Scheme. As a result, we now hold a contingent liability ensuring that all members of the scheme can have full confidence that their accrued benefits will be available when eligible.”
