Government kicks off inquiry amid growing concerns over size of deficits; employers may be able to reduce future liabilities or change calculation methods, say reports
The government is expected to consider a number of radical reforms to the management of corporate pension schemes, as mounting deficits and the fallout from the sale of Tata Steel prompt an inquiry into the way pensions are regulated.
The Work and Pensions Committee is gearing up for an inquiry into defined benefit (DB) schemes and broader regulation, while membership body the Pensions and Lifetime Savings Association has set up its own taskforce to look into potential funding solutions.
The Daily Telegraph has suggested the inquiries could lead to an amendment to the pensions bill this autumn, which would allow firms to reduce their DB scheme liabilities – in the same way Tata Steel’s owners have made the company more attractive to potential purchasers by reducing the level of future payouts.
Malcolm McLean, pensions expert at consultancy Barnett Waddingham, said change was likely as many organisations needed state assistance in meeting their future post-retirement payment commitments.
He suggested one route was for the government to allow employers to use the consumer prices index (CPI) to calculate certain pension liabilities rather than the retail prices index (RPI).
“It seems to me that it is pot luck what form of words are in your scheme rules to allow this, so if it was possible to standardise it so everyone used CPI that would be good,” said McLean.
“Some measures are needed, but the changes should be forward-looking rather than hitting people’s pension entitlements retrospectively. If someone has been accruing their pension for 30 years it seems to me you should not interfere.”
Another option would be to push back the age at which people could claim their DB pension, McLean added.
“That is one way of helping firms with a major problem,” he said. “Many employers must regret setting up these schemes – they did not realise what a noose they were putting around their necks. No one now would contemplate starting a final salary scheme.”
Iain Wright, the chair of the Work and Pensions committee, has said that, if major reforms are enacted, it could be necessary to remove pensions freedoms that have allowed thousands to swap part of their pensions for cash before reaching retirement age.
McLean warned that the threat of people transferring their pensions early, in effect increasing the pressure on organisations rather than reducing it, could be self-perpetuating.
“The more people talk about that possibility, the more likely people are to panic,” he said. “Faced with this, the government could stop people from transferring, which would be difficult to enforce, or they could reduce the value of transfers quite substantially.”
He said that with the value of some investments rocked by the vote to leave the EU, and with people living longer, the gaps between the assets held by many pension schemes and their potential liabilities was a growing problem.
“They need some help, either directly or in terms of flexibility to reduce costs,” he said. “We will look closely at the forthcoming enquiries. How radical the government is prepared to be remains to be seen.”
Deficits in final salary pension schemes – which more than 11 million people in the UK have paid into – have reached more than £390bn, according to the latest figures from JLT Employee Benefits. They increased by £2.6bn a week over the past year, while the value of bond markets has nosedived since the Brexit vote.
Nathan Long, head of corporate pension research at Hargreaves Lansdown, said: “Although employers should be forced to honour their promised pensions, the level of deficits in DB schemes certainly requires regulators and policymakers to step back and take another look at how best to govern them.
“It is all well and good insisting promised pensions are paid, but there are some potential pitfalls that come with this: some organisations may go bust, while some may be able to carry on trading but may not be able to invest in their business to the same extent. Large amounts of funding to DB pension schemes could actually limit the level of contributions that employers would otherwise pay to their existing members of staff.”
A spokesperson for the Department for Work and Pensions said: “We have a robust and flexible system for the regulation of occupational pensions and are working closely with the sector to understand the issues affecting DB schemes.”
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