MP Frank Field has launched an inquiry into defined benefit pensions to find “radical solutions” to the increasing pressures on retirement savings posed by rising life expectancy and stubbornly low investment returns.
In a statement released on Friday (27 May), the work and pensions select committee chair said unsustainable promises made to scheme members were being “stacked up against” the jobs of younger generations.
Without urgent action, “the impact on millions of people’s living standards from intergenerational trade-offs of income and wealth are brutal”, he said.
Mr Field did not specify the nature of these “radical solutions”. But in a previous interview with FTAdviser, the MP for Birkenhead explicitly stated they could include reductions in member benefits.
His comments came a day after the government revealed it was considering changing the law to allow the British Steel Pension Scheme to peg its annual benefit increases to the consumer price index (CPI) rather than the normally higher retail price index (RPI). The proposal was part of an effort to find a buyer for the scheme’s sponsor, Tata Steel UK.
“We should be under no illusions that British Steel is a special case,” Mr Field said. “Eleven million people have private defined benefit pensions. More than 5,000 of the associated schemes are in deficit to the tune of £805bn, while the combined surpluses of other schemes is £4bn.”
He said the committee’s in-depth case study of the massively under-funded BHS pension scheme showed DB schemes are “already creaking from rising life expectancy and record low returns on capital”.
Mr Field added: “Pension law and regulation must urgently adapt to the issues of the future, rather than the problems of the past.
“This will be a major inquiry considering radical solutions to one of the great problems of this age. The inquiry will consider, amongst other things, radical solutions that could be more easily implemented if real returns on capital rise again.”
Bill Marshall, a financial adviser with Lamb and Associates Lifestyle Financial Planning, said it may be inevitable the liabilities of final salary schemes would have to be reduced.
“The argument is if you reduce the liability, it means it’s less likely the schemes will fall into the Pension Protection Fund,” he said, adding if more and more funds fall into the PPF, then it may have to be bailed out by the government; a burden born by the taxpayer.
However, he said the inquiry should not be limited to the private sector schemes, saying the liability of the public sector was also “phenomenal”.
From a financial advice perspective, any reduction in DB scheme benefits could trigger mass transfers, according to Mr Marshall. “Can the trustees cope with that, and do they want it? And are their enough people qualified to give pension transfer advice? It’s a minefield.”
Before Mr Field’s announcement, pensions expert Steve Bee told FTAdviser he did not support the government’s proposal to reduce British Steel’s pension liabilities.
“I don’t like it at all. The solution isn’t to give people lower pensions,” he said, adding that companies should not be able to tinker with their pension liabilities simply to facilitate a sale.
“You’re opening a door that would be better left shut,” suggested Mr Bee, adding: “Rushing legislation is always a bad idea; there’s no need for the pension system to turn on a sixpence.”
james.fernyhough@ft.com
