The Government has set out a range of radical proposals to ensure defined benefit schemes are more sustainable in future.
In its green paper on the sustainability of DB pension schemes, published today, the Department for Work and Pensions has kick-started the debate on managing the risks faced by DB pension schemes at the same time as securing protection for members.
The DWP says it is not convinced there is a case for changes to member benefits across the board, but there may be a need to change arrangements for “stressed” employers and schemes that demonstrate they cannot maintain their deficit reduction payments over the longer term.
Among the changes that have been suggested to shore up DB schemes include allowing schemes to “renegotiate pension promises in some circumstances”, including suspending indexed increases to payments or, as reported earlier, allowing schemes to switch from the retail prices index measure of inflation.
The paper says: “Allowing even stressed employers to renegotiate pensions and reduce benefits in certain circumstances would be a radical move and highly contentious, as it undermines the nature of the hard promise of a pension as deferred pay.
“A very high bar in terms of evidence would need to be met before such an approach could be considered. There does not seem to be evidence of a crisis in affordability across the board that would warrant such action.
“However, some commentators have suggested that in certain circumstances it might be in the interests of both the members and the employer to consider a renegotiation of the DB promise.
“A key question here is then when is the risk in the scheme too much for those whose scheme sponsors cannot show insolvency is likely.”
One of the ideas that has been floated to ease pressure on DB schemes is allowing savers to take smaller pots under trivial commutation rules earlier than age 55. This would involve reviewing the £30,000 limit above which savers are required to take advice on DB transfers.
Other measures proposed include giving The Pensions Regulator more powers to wind up schemes and separate schemes from struggling employers, as well as allowing schemes to take on more investment risk.
Also under discussion is how to create a voluntary “superfunds” system to consolidate certain schemes.