UK govt pensions green paper looks at cuts in final salary rises

'Stressed' companies could be given leeway to change indexation

Frank Prenesti Sharecast | 20 Feb, 2017 11:56 | | |

money_150_150

Pensioners in final salary pension schemes could find their benefits cut under new plans put forward by the government on Monday.

Companies who find themselves under “stress” would be allowed to index annual increases to the consumer prices measure (CPI) instead of retail prices (RPI), which is usually higher, according to the consultation document released by the department for Work and Pensions.

This would help companies running a pension deficit, but hit pensioners benefits over the longer term.

The pensions issue has come under the spotlight since the collapse of the High Street retail chain BHS last year which left 20,000 people facing lower payouts after the company's scheme was found to have a £571m deficit.

Former owner Philip Green, who sold the chain to serial bankrupt Dominic Chappell for £1, is at loggerheads with the Pensions Regulator about how to make good the shortfall.

Generally, the government said it was “not persuaded that there is a general ‘affordability’ problem for the majority of employers running a defined benefit scheme”.

“Consequently, we do not agree that across-the-board action is needed to transfer more risk to members, or indeed to reduce members’ benefits in order to relieve financial pressure on employers,” it said in the document.

“However, we do recognise that there are some companies who are paying very substantial deficit repair contributions which may not be sustainable in the long term. We have therefore considered what might be done for these ‘stressed’ schemes and their sponsoring employers, and the difficulties in doing so.”

“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.”

It added that estimates from actuarial consultants Hymans Robertson shoed that a move to CPI from RPI would take away around £20,000 in benefits over an average final salary scheme member’s life.

“Moving to statutory indexation only would increase this loss to members substantially,” the document stated, adding that there would be a knock on effect on the gilt market and wider government financing objectives.

“Currently, index-linked gilts (ILGs) are linked to RPI, as this was the standard measure of inflation when ILGs were introduced. As pension funds hold nearly 23%78 of their assets in ILGs, any changes to scheme indexation could have significant consequential effects on the price of these gilts, which would affect the Government’s ability to issue debt in a cost-effective way.”

More news

22 Sep Europe close: Stocks finish higher on strong PMI readings

Stocks on the Continent finished mostly higher on the back of strong survey readings on the euro area's manufacturing and services sector and ahead of the German general elections at the weekend, although fresh barbs from Pyongyang were a drag on sentiment.

22 Sep Thousands of steel workers protest ThyssenKrupp merger in Germany

Thousands of steel workers gathered in Western Germany on Friday to protest the proposed merger of ThyssenKrupp and Tata Steel's European operations which was expected to result in approximately 4,000 job losses.

22 Sep London Close: FTSE firmer as pound losses ground after May speech

London stocks had reversed earlier losses to trade a little higher by Friday's close, helped along by a weaker pound as investors weighed up a key speech by Prime Minister Theresa May.

22 Sep JP Morgan Chase to establish global headquarters in Warsaw

Polish Deputy Prime Minister Mateusz Morawiecki announced on Friday that US bank JP Morgan Chase had picked Warsaw to play host to its new global operations centre, bringing thousands of jobs to the region from the beginning of 2018.

22 Sep FTSE 250 movers: Pets at Home dashes higher, oilers also lifted

The FTSE 250 index was on the front foot on Friday, led by retailer Pets at Home and a group of oil-related companies.

22 Sep Theresa May calls for post-Brexit transition period, new security treaty

In a speech in Florence on Friday, Prime Minister Theresa May confirmed that she wanted a two-year "implementation period" post-Brexit and a new treaty with the European Union on security and justice.

22 Sep FTSE 100 movers: Johnson Matthey rallies again but Smiths drops on results

London's FTSE 100 was up 0.6% to 7,305.66 in afternoon trade on Friday as investors mulled over PM Theresa May's Brexit speech in Florence.

22 Sep Results round-up

Saga, the specialist provider of products and services for those over 50, reported solid growth of 5.5% in underlying profits before tax for the first half as it ordered a second new cruise ship amid high demand.

22 Sep US economy shows resilience in face of hurricanes - Markit

Business activity in the US picked up in September despite hurricanes Harvey and Irma, as growth in the manufacturing sector helped to offset an easing in services, according to preliminary data released on Friday.

22 Sep Thalassa suspends share buyback as FairfieldNodal commences due diligence

Thalassa Holdings confirmed the suspension of its share buyback programme on Friday, as a suitor continued to circle the marine geoscience and subsea robotics company.