Only a few years ago, proposals made by Alan Pickering were slammed for suggesting reductions in workplace pensions and the furore over Gordon Brown's £5bn a year tax raid on pensions is still getting major headlines. So it seems strange that a current consultation exercise which proposes even more fundamental changes seems to be passing largely unnoticed.
There have been so many pension consultations already this year, this one may simply have slipped under the radar. Or it may be that the very short period to reply to such major, wide-ranging proposals hasn't allowed sufficient time to digest the enormous ramifications of what is suggested.
The Department for Work and Pensions (DWP) is leading this consultation - the Deregulatory Review of Private Pensions - which aims to find ways of reducing the costs of running defined benefit pension schemes. There are two proposals I want to focus on - the possibility of removing the statutory indexation of pensions in payment and a reduction in the level of revaluation required for deferred benefits.
Limited Price Indexation (LPI) has been a requirement for all final salary benefits built up since 6 April 1997. For benefits accrued between 1997 and 2005, LPI means pensions in payment have to increase in line with the Retail Prices Index (RPI) up to a maximum of 5% per year. Benefits built up since 2005 need to increase by the lower RPI and 2.5%. The consultation suggests removing LPI from 2008, although the initial view in the consultation does not favour removing LPI increases for benefits already built up.
There is no doubt this change will enable schemes to make substantial savings, as removing LPI for future benefits will save an employer around 30% of existing costs. But this will come at a price as many pensioners will not see their benefits protected against inflation. This will have a particular impact on poorer pensioners who will see the real value of their income going down in retirement.
The second major proposal affects those people who have left a defined benefit scheme. This is likely to be people who have left one employer and moved to a new job. But given the large-scale restructuring of defined benefit schemes currently taking place it may also impact on existing employees.
Currently pension entitlements of members who have left defined benefit schemes must be increased in line with RPI capped at 5%. The consultation paper suggests the increase for deferred benefits should be limited to a maximum of 2.5%. As there are more than five million deferred members in UK private sector pension schemes this will have a significant saving to schemes. But member's pension benefits would receive less protection against increases in inflation. For example if someone changes jobs in their mid-40s, and inflation is 4% per year - as it is now - then by age 65 their benefits will have reduced by 25% in today's money terms.
Prior to the mid 1980s, pension benefits for people who left an employer could be removed, or reduced in real money terms. Over the past 20 years the situation has gradually improved to give leavers a fairer deal. To suggest retreating to the dark ages when those who move jobs lose some or all of the value of their pension benefits seems a bizarre suggestion.
Proposals to simplify the overly complex UK pension system are always welcome. But changes which reduce protection against inflation - both before and after retirement - could have a devastating effect on the welfare of many pensioners. It is vital that such important changes are debated in an informed way in the public arena, before we sleepwalk into some of the most significant changes the UK pensions system has ever seen.
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