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Government consider giving ‘stressed’ businesses flexibility on DB pensions

The Department for Work and Pensions (DWP) has today proposed that companies paying significant deficit contributions to defined benefit (DB) schemes could give less generous inflation-linked pension rises to employees.

20 FEB 2017 | CHRIS SEEKINGS
Government could allow a lower level of pension increase ©Shutterstock
Government could allow a lower level of pension increase ©Shutterstock

Its green paper suggests that these ‘stressed’ businesses could link minimum annual pension increases to the consumer price index (CPI), rather than the retail price index (RPI), which they currently use automatically.

The CPI typically rises slower than the RPI, and although ‘affordability’ of schemes is not accepted as a problem for the majority of businesses, giving flexibility over indexation arrangements may be a solution to relieve the financial pressure for some.

Barnett Waddingham LLP, head of corporate consulting, Nick Griggs, said: “The environment, in which these schemes were set up, was very different to today and like everything else, DB must adapt to survive.

“The current level of contributions required to fund DB schemes can in theory be paid by most employers, however, for a significant number, it is having a big impact on their future investment plans and the amount employers are doing to support current employees in saving for their retirement.

“The government should be exploring a mechanism, which would allow employers to reduce the benefits, in appropriate circumstances, to be paid. Allowing a lower level of pension increase to be paid in future is the obvious area to explore.”

There are currently around 11 million members of DB schemes in the UK, which collectively hold approximately £1.5trn worth of assets – roughly three quarters of GDP.

A study by Hymans Robertson last year concluded that the UK’s combined DB deficit could be reduced by £175bn if all schemes switched from RPI to CPI for pension increases and revaluation.

However, the same study showed that doing this would reduce the benefits of an average scheme member by £20,000, with concerns now being raised about how these proposals could impact living standards.

Royal London director of policy, Steve Webb, said: “With rising inflation, annual indexation is an important part of protecting the living standards of the retired population.   

“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.”

The green paper also considers issues of member protection, funding and investment, consolidation, and the strengthening of powers for The Pension Regulator.