The government has acknowledged proposals in its long-awaited Green Paper on defined benefit (DB) schemes could leave members £20,000 worse off on average.
In an effort to reduce scheme liabilities, the government is proposing to allow "stressed employers" with DB schemes to change their reference point for indexation - the means by which pensioners are protected from the effects of inflation - from the Retail Price Index (RPI) to the Consumer Price Index (CPI).
The government, which itself switched from RPI to CPI as its preferred measure of inflation for pension purposes in 2010, said various commentators had argued indexation should be cut to reduce the burden on employers - for example, estimates from the The Pensions Regulator suggest moving from RPI to CPI would reduce scheme liabilities by around 5% to 10%.
At the same time, the government conceded estimates from consultant Hymans Robertson show the move from RPI to CPI could leave DB members around £20,000 worse off over an average DB scheme member's life.
It went on to acknowledge a move to statutory indexation would only exaggerate this loss and have a wider impact on government financing objectives because of its interactions with the gilt market.
The Green Paper observed: "The government does not think the evidence is strong enough to suggest that indexation should be abandoned or reduced across the board. There could however be a case to suspend indexation in cases where the employer is stressed and the scheme is underfunded.
"And there may be a case to rationalise indexation arrangements, as the current arrangement where some schemes are prevented from moving to CPI by scheme rules is something of a lottery."
AJ Bell said the government's "high-wire balancing" act with indexation could equate to an overall £90bn loss for DB members.
Senior analyst Tom Selby said: "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."
Royal London director of policy Steve Webb was also critical of the paper - attacking its lack of direction and describing the absence of firm proposals from the government as "disappointing".
"This must be one of the ‘greenest' Green Papers in living memory," the ex-pensions minister said. "Despite months of public debate led by the Select Committee and the pensions industry, the government's own thinking does not seem to have advanced significantly."
He continued: "Given the years that can elapse between floating ideas in a Green Paper and implementing them on the ground, the lack of firm proposals is disappointing. Even in the area of trying to avoid a repeat of the BHS fiasco, the Green Paper is remarkably timid on the idea of giving the regulator more power to challenge takeovers that could damage a pension scheme."
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