• Firms may be allowed to water down pension payouts, says minister

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  • 20 Mar 2017
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‘Super funds’ would permit businesses to hand over responsibility for final salary schemes

The government has suggested it is likely to introduce measures to help firms struggling with the costs of their ‘final salary’ or defined benefit (DB) pension schemes – including a controversial proposal that could allow employers to walk away from their responsibilities by placing their schemes into an outsourced ‘super fund’.

Millions of employees saving into DB schemes would have to accept cuts to their pensions if the proposals were enacted.  

DB schemes, through which an employee’s retirement income is guaranteed based on salary and length of service, have become increasingly cumbersome for employers, thanks to a combination of poorly performing bond markets and historic underfunding.

The Pensions and Lifetime Savings Association (PLSA) estimates there is only a 50 per cent chance that the weakest schemes are currently capable of paying out to members in full. The deficits of FTSE 350 DB schemes are reported to have trebled over the course of 12 months.

The government has been seeking ways to ease the burden on firms in the wake of the BHS pensions scandal, which was only resolved when Sir Philip Green paid £363m into the business’s DB scheme.

Pensions minister Richard Harrington has now said that the pension system needs radical reform because Britain is a “very different place” compared to when many of the schemes were established. He said savers would need to help “soften the blow” to DB schemes to help them remain viable.

Writing in The Telegraph, Harrington said: “I have a very clear set of criteria in mind when it comes to the future of the defined benefit sector. Any changes must balance the needs of consumers, employers and schemes and I don’t want to see it tipped in favour of one particular group.”

The PLSA and the government are suggesting forming ‘super funds’ that would enable employers to pay a one-off fee to absolve them of responsibility for their pensions, which would be assumed by the independently owned fund.

Pooling assets in this manner would protect pensions and make high-profile failures less likely, officials said, while offering better payouts than the Pension Protection Fund (PPF) – a scheme that guarantees the pensions promised by failed companies.  

The PPF caps payouts for those yet to retire at 90 per cent and has an overall cap of around £38,000 for most savers. Organisations already have the ability to pay to have a scheme taken off their hands by insuring benefits, but the costs are extremely high.

The minister did not offer details of the likely level of payouts among schemes in super funds but the concept is likely to prove highly controversial, as it will effectively enable companies to walk away from their historic obligations, setting the scene for battles with unions and pensioners.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The terms of how weak employers can go into a super fund will be critical. For a super fund to be fair to the other participants, you have to apply the same entry requirements, otherwise you’re just shifting liabilities.”

One of the key reasons DB schemes are so costly for employers is that the payments increase annually in line with inflation. The details vary from scheme to scheme, meaning that some pensioners have payments linked to the consumer prices index (CPI) and others to the retail prices index (RPI).

The government is considering allowing pension trustees currently using RPI to switch to CPI, or even to suspend increases if the company finds itself in financial difficulties. A green paper on the topic was released in February.

Harrington said public sector savers had already experienced such changes. “CPI has already replaced RPI for the pensions of civil servants, the military, teachers, NHS staff and MPs,” he said. “If using a modern and more accurate measure [of inflation], which still protects pensioners against rising prices, also makes the scheme more sustainable in the long term, it is worthy of consideration.”

The government’s consultation on reforming final salary schemes closes on 14 May.

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Comments (2)
  • That was good of Phillip Green to put so much in to the BHS scheme - he should be knighted!

  • This I do not agree with at all, is this the start of watering down employees pensions, would this also be applicable to employers pensions as well? This looks look a slippery slope for employees pensions.