Pensioners could see savings pot plummet by staggering £20,000
Companies could be allowed to remove the so-called “gold plating” which protects former workers’ benefits by ensuring pension incomes rise with inflation.
This would save firms in the region of £90billion, but leave as many as 11 million “defined benefit” members worse off.
The proposal is to allow firms to suspend index-linked rises or to peg them instead to the CPI (consumer price index) measure of inflation rather than the more usual RPI (retail price index) measure.
But allowing schemes to switch from RPI to CPI would mean a significant reduction in benefits for final salary members.
A move over to CPI could cost an individual member an average of £20,000 in lost pension benefits
Malcolm McLean – Barnett Waddingham
CPI has been lower than RPI in nine of the past 10 years and 22 out of the last 27 years, up to 2015. In some circumstances, where a company is facing significant challenges, it could suspend pension increases altogether, according to a Government green paper published yesterday.
It is the first time there has been any official suggestion of allowing firms to break the pension promises they have made to staff without first going through the courts.
Malcolm McLean, from pension specialists Barnett Waddingham, said: “A move over to CPI could cost an individual member an average of £20,000 in lost pension benefits over a lifetime.
Switching from RPI to CPI would mean a significant reduction in benefits for final salary members
“It must be emphasised that this is a green paper and the government is well aware of the adverse reaction it would cause were they to firm up in full on these very tentative proposals.
“On the other hand, if it meant the scheme collapsing under the weight of its liabilities and the sponsoring employer going into liquidation it could be in the best interests of the members and everyone else if some relief on the scheme funding could be provided, at least on a temporary basis.
“However, the Government will need to tread very carefully in coming to final conclusions on how to support the few without grievously upsetting the many.”
Former pension minister Sir Steve Webb, now director of policy at Royal London, said: “The most worrying proposal is to allow certain schemes to ‘suspend’ annual increases if money is tight.
“With rising inflation, annual indexation is an important part of protecting the living standards of the retired population.
“There’s a risk that relaxing standards on inflation protection, with the best of intentions for exceptional cases, could be exploited and lead to millions of retired people being at risk of cuts in their real living standards.”
Changes could save firms around £90billion, but leave as many as 11 million people worse off ISA advice from Martin Lewis Thu, February 9, 2017
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The proposals were condemned by the GMB union. National officer Keir Greenaway said: “Allowing schemes to break promises on pensions and raid workers’ retirement savings to cover for mistakes in the boardroom will not be music to the ears of employees.”
There are more than 11 million members of final salary schemes with funds of around £1.5 trillion.
Under an option called “conditional indexation”, which is mentioned in the paper, companies could completely freeze annual inflation-linked pay rises.
Over the course of an average 25-year retirement this would cut savers’ total income by up to 30 per cent.
The proposal comes as the total funding “black hole” in final salary pension schemes has topped £1trillion for the first time, with experts suggesting they are too costly in their current form.
There are more than 11 million members of final salary schemes
Company schemes are required by law to increase payments by the rate of inflation.
While some firms moved from RPI to CPI to cut costs, others are blocked by their schemes’ original terms.
An industry-funded lifeboat scheme, the Pension Protection Fund, pays final salary pensions if the sponsoring company has failed. However, pensions are capped at 90 per cent for those under retirement age when the firm goes bust.
Pensions minister Richard Harrington said: “We all have a responsibility to ensure the system works in the interests of all – employers, schemes and scheme members."