Members of defined benefit schemes have “won the lottery” and have no reason to complain about the government’s controversial proposal to cut members’ retirement benefits, Broadstone has stated.
Yesterday (26 May), the government proposed introducing a bill that would allow the British Steel Pension Scheme to shift the indexation from the retail price index (RPI) to the normally lower consumer price index (CPI) in an effort to find a buyer for the scheme’s sponsor, Tata Steel UK.
But John Broome Saunders, a pensions consultant at Broadstone, said the government’s proposal did not go nearly far enough and the change should apply to all workplace DB schemes.
“It seems grossly unfair that, for political expediency, the government gets to bend the rules for the British Steel Pension Scheme, but takes no action to benefit the thousands of other companies who are struggling to fund pension schemes,” he said.
Describing the RPI as an “old, flawed” index that “fails to meet proper statistical standards, and almost always overstates price inflation”, he commented that scheme members are in no position to complain.
“Anybody who contributed to a final salary pension scheme has essentially won the lottery, as their benefits from that scheme will almost certainly be significantly more valuable than they would have expected when they were contributing to the scheme.
“Giving members what amounts to a 10 per cent bonus by continuing to calculate pension increases in a way that does not reflect true price inflation is nothing short of a national scandal.”
Lincoln Pensions managing director Richard Farr agreed, saying the rules linking payouts to RPI were outdated.
“The archaic legislation around pension promises is not fit for purpose for companies who are needing to restructure,” he stated.
“Lessons being learned from the BHS enquiry and [Work and Pensions committee chair] Frank Field’s noticeable frustration with the market’s inadequate response to that organisation’s demise must lead to a reassessment of what tools are in place to protect members interests, but at the same time allowing the companies that should be paying those promises, not the PPF, to survive.”
Last week, FTAdviser reported that Mr Field was planning to introduce a “mega bill” to deal with unsustainable pension promises, including provisions for reducing liabilities.
In its attempt to save Tata Steel UK, the government appear to have pre-empted this bill.
In a consultation paper released yesterday (26 May), the Department of Work & Pensions said the proposal would only move ahead if it would leave members better off – i.e. if the only other alternative was that the Pension Protection Fund would have to take on the scheme’s liabilities – resulting in even worse outcomes for members.
The consultation paper also floated the possibility of using regulatory rather than legislative means to separate the BSPS from Tata Steel. It also asked for feedback on transferring liabilities to another scheme.