Controversial plans from the work and pensions select committee could solve the problem of underfunded final salary pension schemes but have been labelled “political suicide” by industry experts.
Last week FTAdviser revealed Frank Field, work and pensions select committee chairman, planned to call for legislation that will include deep cuts to members’ promised retirement benefits, as well as other plans to tackle the pensions deficit crisis by reducing schemes’ liabilities
Members of final salary company pensions must face the fact their schemes may never meet their liabilities, and adjust them to more realistic levels, Mr Field said.
The proposals would form part of what the Labour MP for Birkenhead referred to as a “mega bill” to deal with the unsustainable liabilities faced by some defined benefit pension schemes.
Mr Field is also planning a separate bill which would prevent companies paying out generous dividends at the expense of their employees’ pension schemes.
Darren Cooke, director of Derbyshire-based Red Circle Financial Planning, offers defined benefit scheme transfer advice.
He predicted Mr Field’s legislation would lead to mass strikes to rival those carried out during the civil unrest in 1978 to 1979, known as the ‘Winter of Discontent’.
Such legislation could also cause a spate of transfers out of defined benefit schemes - akin to a run on the banks - and more mis-selling scandals, he warned.
Mr Cooke said Mr Field’s “great policy in theory” could “never happen” because it would be “political suicide.”
If the government forced private DB schemes to cut their benefits, he suggested it would have to do the same to public schemes. “Every nurse, teacher, fireman, doctor would be on strike.”
He also said the threat of an assault on benefits could see a spate of final salary transfers. This could potentially send schemes bust – in the same way a bank run can ruin a bank – and lead to another mis-selling scandal.
“As soon as a lot of people start transferring out of DB schemes, then the sharks will begin to circle,” he said.
But two professional pension trustees – one of whom preferred not to be named – said Mr Field’s proposals were workable and potentially good policy.
They blamed the current crisis facing DB schemes to a large extent on government requirements, such as linking payments to the retail price index.
“Governments over the years have imposed a number of constraints on defined benefit schemes, such as RPI linking” Clive Gilchrist, deputy chair of professional trustee firm Bestrustees, said.
“They were imposed by legislation, so they would have to be undone by legislation.”
He backed forcing DB schemes to link to the lower consumer price index (CPI) instead of RPI, which he predicted would be unlikely to raise too many concerns among members as it would not amount to a significant pay cut.
But he doubted the government would adopt the policy because “politicians tend to shy away from decisions on major issues like that, because they are not popular.”
Once politicians began debating the issue, however, he suggested no solution would be off the table.
Smart Pension chief operating officer Peter Walker, who was formerly chief operating officer at the Pension Protection Fund, said legal barriers to cutting members’ benefits could scupper Mr Field’s plans.
james.fernyhough@ft.com
