Providers have raised concerns about the long-term consequences of changing arrangements for defined benefit members after the Government set out its plans to shore up final salary pensions.
Earlier today the Government published a wide-ranging green paper on the options for DB funding reform including “renegotiating pension promises” to members, changing or suspending the way payments are indexed, and greater powers for The Pensions Regulator to intervene in the way schemes are run and managed.
Royal London policy director and former pensions minister Steve Webb says he is disappointed by the lack of firm proposals contained in the paper.
He says: “Even in the area of trying to avoid a repeat of the BHS fiasco, the green paper is remarkably timid on the idea of giving the regulator more power to challenge takeovers which could damage a pension scheme.
“The most worrying proposal is to allow certain schemes to ‘suspend’ annual pension increases if money is tight. With rising inflation, annual indexation is an important part of protecting the living standards of the retired population.”
He adds: “There is a significant 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.”
AJ Bell senior analyst Tom Selby says moving indexation from RPI to the Consumer Prices Index could be dangerous as it could see member benefits cut by £90bn.
He says: “The Government is performing a £90bn high-wire balancing act on DB pensions. While allowing scheme sponsors to slash liabilities, could preserve guaranteed pensions for more people, it would also more than likely reduce the value of these pensions and potentially whip up a storm of protest from trade unions.
“Pension promises already built up have historically been sacrosanct, so even a seemingly innocuous reduction in benefits could be viewed as the thin end of the wedge and stir up controversy.
“The green paper avoids setting any firm direction of travel, and instead attempts to set the scene of what is likely to be a fierce debate on the future of DB pensions. Any formal proposals further down the line will need to consider not only any direct impact on DB members and schemes, but also the wider implications for trust in the UK pensions system as a whole.”