Work and Pensions committee chairman Frank Field plans to put a radical new bill before MPs, which could see defined benefit pension scheme members face cuts to their promised retirement incomes, FTAdviser can reveal.
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.
The two bills will follow proposals to tighten the regulation of auto-enrolment pension schemes, published by the committee on 15 April and since adopted by the government as part of the Queen’s speech yesterday (18 April), in a three-pronged attack on risks to employees’ retirement savings.
New rules are needed in light of the collapse of BHS in April, he said, which exposed a pension deficit at the company of half a billion pounds.
BHS shareholders extracted just over £422m in dividends between 2002 and 2004, according to reports.
Mr Field suggested The Pension Regulator or the Pension Protection Fund could monitor company payments via dividends versus payments to its pension scheme.
But he told FTAdviser if the current low-growth environment persists, many workplace DB schemes will not be able to deliver on the promises they have made to members.
“Over the short-term it may be impossible to deliver everything members have expected,” he said. “So how do we go about giving people a good boost, but one that may not be all that they wanted?”
He explained the committee will be focusing on this question over the coming months, culminating in the recommendation of a bill giving schemes flexibility to increase benefits, should the “fat years” preceding the 2008 financial crisis return.
His comments followed the government’s announcement it would adopt the committee’s recommended pensions bill, which included moves to tighten the regulation of what Mr Field described as “the cowboys who have come into the master trust industry” of auto-enrolment workplace pension schemes.
Mr Field welcomed the government’s inclusion of the bill in the Queen’s Speech on Wednesday (18 May).
“It’s terrific the government has responded so quickly,” he said. “I think it augurs well that they will be on the front foot over BHS.”
He added that, from the select committee’s point of view, it was “one bill down, and two to go”.
Gerry McKeon, a financial adviser and managing director of GM Financial Services, agreed with Mr Field that as things stand the outlook for defined benefit schemes was unstainable.
However, he said it was not fair that members should pay for their employing companies’ failure to fund their scheme. “If a pension is underfunded, then that’s the company’s responsibilty. They should have made sure it was funded,” he said.
But he also acknowledged that many employees will have to accept that, if they want a “decent” pension, they may have to sacrifice pay increases and other benefits.
james.fernyhough@ft.com
