Government's attempt to save salary-linked pensions could eat into other retirement schemes
Friday 08 November 2013
A Government attempt to save salary-linked pensions could see private sector workers’ retirement funds eaten away by inflation and the loss of payments to the spouses of deceased policyholders, it was reported last night.
About two million workers are still on final-salary schemes but their retirement income might no longer be legally required to rise with inflation under new proposals. The scheme would not affect pension rights already accrued by staff.
Payments to survivors – widows and widowers – might also be lost and the change could cut the value of a pension by nearly a third over 15 years in retirement, the Daily Telegraph reported.
However, Pensions Minister Steve Webb insisted the changes were designed to encourage firms to offer salary-linked pensions by making them cheaper to provide.
“Final-salary pensions have been in long-term decline and if we do not act they could disappear altogether,” he told the Telegraph.
“Over time, we hope employers will see they can pay salary-related pensions without all the risk, so we could see a renaissance in this space, but these things take time.”
Mr Webb said in a Government consultation paper that the “time is ripe for innovation”, adding that “these are exciting possibilities”. The consultation will close on December 19 and the Government aims to consult on draft legislation in the new year.
Laith Khalaf, head of corporate research at Hargreaves Lansdown, said the proposals could result in some workers having the “rug pulled from under them”.
He said: “Inflation-linking is an important part of final salary pensions, and workers probably don't understand the full value of it.”
Mr Khalaf said that while a £10,000 annual pension adds up to £250,000 over 25 years without inflation increases, it would add up to £320,000 with inflation increases of 2% a year, assuming the Bank of England hits its inflation target, or £351,000 with increases of the current rate of CPI inflation of 2.7%.
The Government has been investigating the scope for creating a new category of pensions called defined ambition (DA) schemes, which would widen choice by encouraging the growth of a “middle ground” between two very different types of pension which currently dominate the market.
Under the current system, people tend to belong either to a defined benefit (DB) scheme, where the employer bears the investment risks of a worker's pension, or a defined contribution (DC) pension, where the employee bears the risk burden.
“Gold-plated“ DB schemes such as final-salary schemes are in long-term decline and have become increasingly expensive to run as people live longer. The percentage of DB schemes that are still open has more than halved since 2007 - from 36% to 14%.
DC schemes are the type of pension people are most likely to be placed in as the Government's reforms to place people into workplace pensions automatically are rolled out.
The Government has recently moved to tackle concerns that some of these schemes have ”rip-off“ charges and it is considering imposing a charge cap.
Up to nine million people will be newly saving into a pension or saving more over the next five years under auto-enrolment.
Under DA schemes, pension saving risks would be more evenly split between firms and employees.
A range of suggestions has been put forward in a consultation paper to tackle the ”market gap“ between the two types of pension, which aim to give employees more certainty about their retirement outcome as well as removing some regulatory burdens for employers.
Actress sees off speculation about her appearance in an amazing way
Powerful images of strays taken moments before being put down
Enid Blyton’s Magic Faraway Tree really is being made into a film
The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon
Mark Dampier: Woodford’s young companies could be the stars of the future
Money round-up video: Low-rate mortgages; comparison sites; ethical finances
The best - and worst - investments in 2013
10 tips for taking out a personal loan
Bargain Hunter: Cut-price radiator reflectors can stop all that heat going to waste
- 1 Salisbury ranked seventh-best city in the world to visit in Lonely Planet’s Best in Travel 2015
- 2 Disney announces new female-led film Moana
- 3 Banksy not arrested: Internet duped by fake report claiming artist's identity revealed
- 4 Kentucky gang rape: 15-year-old boy left in critical condition after sexual attack by group at party
- 5 Russell Brand threatened with arrest after filming outside Fox News headquarters
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Jose Manuel Barroso warns David Cameron against making 'historic mistake' over immigration reforms
iJobs Money & Business
£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...
£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...
£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...
£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village