Labour had no right to hand over £1.5bn to retired miners

In last month’s Budget, Rachel Reeves provided compensation for two well-known UK scandals – £11.8bn for those hit by infected blood and another £1.8bn for postmasters wrongly accused of fraud.

But the Government also announced £1.5bn to end what it called an “historic injustice” for the 112,000 members of the Mineworkers’ Pension Scheme (MPS), which will boost their annual pensions by 32pc.

It was confirmation of an election manifesto pledge and one which was triumphantly echoed on stage by Ed Miliband at the Labour Party conference.

So what is this injustice that Labour considered worthy of such repeated public commitments?

The MPS was set up five years after the nationalisation of the UK coal industry in 1947, when mining was a huge business employing 700,000 people.

By privatisation in 1994, British Coal had shrunk drastically, down to only 13,000 staff. The MPS became a stand-alone trust, with the Government guaranteeing all pensions would be paid, including annual inflation increases. In return, the state would receive half of any surplus calculated at the three-yearly actuarial valuations.

In September 2023, the MPS had £10.6bn in assets, and 120,000 members, with 112,000 drawing a pension. Its sister scheme for former white collar staff – the British Coal Staff Superannuation Scheme – has £8.5bn in assets and 40,000 members, but for the moment at least, its members are not being given the same deal.

Since privatisation, all MPS members have received every last penny of the pensions promised to them, including inflation increases.

More than that, under the rules set-up at privatisation, the other half of valuation surpluses – around £5bn – have been given to members as “bonus” pensions. These are not fully guaranteed, but a “secondary” guarantee ensures that total pensions, including bonuses, cannot fall in any given year.

As all promised pensions, plus large bonus pensions, have been paid since 1994, it is difficult to see any “historic injustice”.

Yet MPS lobbyists claim the 50/50 split of surpluses is unfair to members, and that the £5bn paid to the Government for its guarantee is too much.

Back in June 2003, an MP said in Parliament: “The modest risk of underwriting the pension scheme does not justify the massive amount of money that the Government is taking. It is a bit like paying to insure a Ferrari when one rides a moped.”

In the Government’s role as guarantor, it must step in to make payments if there is a deficit. Once money leaves the scheme, the only way it goes back in is if taxpayers write a cheque.

So, is there really a surplus today that justifies paying out £1.5bn?

Although the MPS says the 2023 actuarial valuation shows a £1.1bn surplus, it has not published any additional details. The Government won’t either.

But the results of the 2017 and 2020 valuations are public. In those, we can see that instead of using the objective corporate bond rate to value liabilities (promises to pay pensions), which is required for all private sector schemes, they both used the “expected return on assets”.

This is much higher than the bond rate, because 85pc of MPS assets are in equities, private equities, hedge funds and property, which have a higher expected return.

Using this method for the 2017 valuation produces a higher value of liabilities and a higher deficit of around £1bn, not the “official” £1.5bn surplus.

Using the same one for 2020, we see a deficit that rises to around £1.9bn, not the “official” deficit of just £225m.

Using this corporate bond value of liabilities is not revolutionary. The Department for Business’s annual accounts show the IAS19 liabilities and assets of all eight pension schemes it is responsible for. The Department’s accounts should also, as a matter of course, include them for the MPS and BCSSS – after all, the department is the guarantor.

Since they don’t, the Government should produce and publish a calculation showing whether the MPS had a deficit or surplus against AA bonds for 2023. Taxpayers have a right to know, and none of the £1.5bn should have been paid out until they can see for themselves that there is a genuine surplus.

The Government should do the same for all the earlier valuations to show whether the £5bn paid to taxpayers and £5bn paid to members over the years came from genuine surpluses.

If any money was paid from any ‘incorrrect’ surpluses, it is future taxpayers who have suffered an “historic injustice”. And, by the way, MPS and BCSSS asset managers have been paid around £1.5bn over the last 30 years, so they have done rather well.

Yet even if the surplus is real, this is not the end of the problem. The surplus could disappear very quickly because 85pc of assets are in “risky assets”, not index-linked bonds to match liabilities.

This means a big chunk of any surplus should have been retained as a cushion to protect future taxpayers from stumping up cash for any shortfall, rather than simply paid out to members.

The money has now been transferred and the scheme is already using it to improve members’ pensions. But if it was paid out of £1.5bn of surpluses which turn out to be “incorrect”, this will define Labour’s first few months in office – and hang round its neck like a proverbial albatross.

The Government, and specifically Mr Miliband, have some explaining to do.