The Department for Work and Pensions has launched a Green Paper to consult on significant proposed changes to workplace Defined Benefit pensions which cover 11m people.
The DWP says the new consultation will consider “the security and sustainability of defined benefit pension schemes.” The move could result in a number of sweeping changes including changing indexing from RPI to CPI, a proposal already criticised by trade unions.
The Green Paper suggests reviews for member protection, funding and investment, scheme affordability and consolidation as part of the consultation and the government will also consider strengthened powers for The Pensions Regulator.
The Green Paper will be a wide ranging call for evidence from employers, the pensions industry and consumers.
Defined benefit or final salary schemes remain an “important pillar of the UK economy and our pensions system,” says the DWP. Currently, around 11m members in the UK will rely on a defined benefit scheme for all or part of their retirement income and defined benefit pensions hold around £1.5 trillion of assets.
However the DWP says that increased life expectancy, changes to working patterns and the economy mean that defined benefit schemes are operating in very different circumstances from when they first became popular.
The government says it is committed to a system that works for employers, schemes and the 11 million people in a defined benefit scheme.
The Green Paper will encourage a debate about “striking the right balance” between the needs and aspirations of sponsoring employers, members, the Pension Protection Fund, and the wider economy to ensure that no one group is unfairly disadvantaged.
Pensions Minister Richard Harrington, said: “People need to have confidence in their pension and it is vital that they feel that they are secure. With recent high profile cases highlighting the risks inherent in defined benefit pensions, we want to ensure that these important pension schemes remain sustainable for the future and that the right protections are in place for members.
“Over the coming months we’ll be working closely with the pensions industry, employers and scheme members to see what more can be done to increase confidence in defined benefit pensions. While there is no evidence of a systematic issue, the government recognises that recent high profile cases have raised concerns regarding pensions and is looking to improve confidence in the sector and hear from a wide range of experts, employers and consumers about what action or support could be put in place.”
Views on the proposals can be submitted via the DWP website.
• The Pensions and Lifetime Savings Association welcomed the Department for Work and Pensions Green Paper ‘Security and Sustainability in Defined Benefit Pension Schemes’.
Graham Vidler, director of external affairs, Pensions and Lifetime Savings Association, said: “The Green Paper asks the questions necessary to move forward the increasingly pressing debate about the future of defined benefit pensions in the UK. The interim report published by our DB Taskforce last year identified how the challenges facing DB are posing a material risk to members’ benefits, to employers and the wider economy.
“We firmly support the Government’s desire to explore consolidation as a way to secure the defined benefit pensions of millions of savers. The DB Taskforce’s next report, to be published in March, will look at consolidation in more detail.”
However, allowing schemes to switch from pension increases linked to RPI to CPI could slash member benefits by £90bn, AJ Bell has warned.
Tom Selby, senior analyst at AJ Bell, said: “The Government is performing a £90bn high-wire balancing act on defined benefit pensions. While allowing scheme sponsors to slash liabilities, possibly by switching from RPI to CPI indexation or suspending indexation altogether in certain circumstances, 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."
And the GMB union was also critical. GMB reaction to today's Government’s green paper on defined benefit pensions which outlines a plan to reduce promised indexation for some pensions.
Keir Greenaway, GMB national officer, said: “This green paper once again reveals the true face of the Tories; best chums with their business cronies but happy to take cash from the pockets of ordinary working people. 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.
“However it will no doubt go down very well with the big business bosses who bankroll the Conservatives.”