Pensioners in their 80s would be among the victims of a pension scheme rule change being proposed by the government.
That may not go ahead, but Frank Field MP, chair of the Work and Pensions Select Committee, was surely right when he warned last week that private sector firms would probably have to renege on promises made to members of their pension schemes.
Field was speaking after launching an inquiry into defined benefit (DB, or final salary) pensions that will consider “radical solutions to one of the great problems of this age”. The inquiry was sparked by the BHS and British Steel pension crises, but they are just the tip of the iceberg.
To recap, the government is consulting on a change to legislation that would allow the Tata-backed British Steel DB scheme to peg the rate of increases in payments to the consumer prices index, which is lower than the retail prices index basis currently used.
Most members are retired, but some could lose more than £10,000 over the next decade if the proposals are implemented. That was the warning from Steve Webb, pensions minister in the coalition government and now at Royal London, as he pointed out that members who retired before 1997 would have their payouts entirely frozen under the suggested rule change, while many who did most of their service before 1997 would get only very small increases.
Renewed scrutiny of scheme funding is necessary. So-called pension freedoms have taken the spotlight off the funding crisis over the past two years, but the challenge has only become more acute over that time. Total deficits of DB schemes rose above £300 billion last month for the first time, according to JLT Employee Benefits. Increased longevity is an issue that the industry hasn’t got to grips with, with the short-term effects exacerbated by low interest rates. And the difficulties facing schemes “aren’t going away any time soon”, said Joanne Segars, chair of the Pensions & Lifetime Savings Association, who pointed out that there are still 16 million people in DB schemes.
The government insists that the proposed changes to the British Steel scheme would be a one-off, but the precedent is dangerous. There should be no doubt that if they go ahead, other employers will do all they can to follow suit (even those that can afford to continue funding their schemes on the current model).
What is rarely mentioned is that despite the impact on members, a change of indexation still won’t be enough to prevent the deficits of many schemes from continuing to rise.
Changes are needed, however, and they may be similarly controversial. Failure to act will have consequences too, not least for the younger generations paying the price as their employers spend vast sums of money on funding DB payments.
So while the government’s proposals should be rejected, they do point towards an unpalatable but likely direction of travel – reducing the benefits already promised and being paid to retired scheme members.
When it comes to occupational pensions, today’s retirees have enjoyed a degree of security that those still years from retirement can only dream of. Indeed, the concept of retirement as we know it is becoming outdated; it’s a luxury that relatively soon only the wealthy will enjoy.