Government's attempt to save salary-linked pensions could eat into other retirement schemes


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.

Independent Partners: 10 top tips for retirement. Get your free guide here


Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
Serge Pizzorno of Kasabian and Noel Fielding backstage at the Teenage Cancer Trust concerts
musicKasabian and Noel Fielding attack 'boring' musicians
peopleLynda Bellingham's tragic final Loose Women appearance moves audience to tears
Arts and Entertainment
The last great picture - Winner 'Black and White' and overall 'Wildlife Photographer of the Year'
Arts and Entertainment
'Right Here' singer Jess Glynne is nominated for Best Newcomer at the MOBO Awards 2014
musicExclusive: Jess Glynne hits out at 'ridiculous' criticism of white artists nominated for Mobo Awards
'Irritatingly Disneyfied': fashion vlogger Zoella

Arts and Entertainment
Enid Blyton's Magic Faraway Tree is to be made into a series of films

Enid Blyton’s Magic Faraway Tree really is being made into a film

Arts and Entertainment
Separated at birth? Frank Sivero (left) claims The Simpsons based Mafia character Louie on his Goodfellas character
arts + entsFrank Sivero sues Simpsons studio over allegedly basing mobster character on Frank Carbone
Carl Bernstein (left) and Bob Woodward (right) with former 'Washington Post' executive editor Ben Bradlee

The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultants

    £20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

    Helpdesk Analyst

    £23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

    Day In a Page

    Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

    A new American serial killer?

    Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
    Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

    Sting to trap paedophiles may not carry weight in UK courts

    Computer image of ‘Sweetie’ represented entrapment, experts say
    Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

    Return to Fukushima – a land they will never call home again

    Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
    Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

    Wildlife Photographer of the Year

    Intimate image of resting lions claims top prize
    Online petitions: Sign here to change the world

    Want to change the world? Just sign here

    The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
    Ed Sheeran hits back after being labelled too boring to headline festivals

    'You need me, I don’t need you'

    Ed Sheeran hits back after being labelled too boring to headline festivals
    How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

    How to Get Away with Murder

    Shonda Rhimes reinvents the legal drama
    A cup of tea is every worker's right

    Hard to swallow

    Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
    Which animals are nearly extinct?

    Which animals are nearly extinct?

    Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
    12 best children's shoes

    Perfect for leaf-kicking: 12 best children's shoes

    Find footwear perfect to keep kids' feet protected this autumn
    Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

    Arsenal’s ray of light ready to shine again

    Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
    Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

    Moyes’ show of sensitivity thrown back in his face... by Ferguson

    Manchester United legend tramples on successor who resisted criticising his inheritance
    Two super-sized ships have cruised into British waters, but how big can these behemoths get?

    Super-sized ships: How big can they get?

    Two of the largest vessels in the world cruised into UK waters last week
    British doctors on brink of 'cure' for paralysis with spinal cord treatment

    British doctors on brink of cure for paralysis

    Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
    Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

    Lonely Planet’s Best in Travel 2015

    UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London