Death knell for DB

Financial Adviser

“Radical solutions,” were the words used by Frank Field MP to describe the government’s inquiry into final salary or defined benefit schemes.

Unless something is done, the current generation of workers will continue to pay for the gold-plated pensions of their parents and grandparents.

Ideas likely to be considered are a reduction in member benefits – such as a spousal pension, to name but a few – and a link to the consumer price index (CPI) rather than the normally higher retail price index (RPI).

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Mr Field’s message was stark – 11m 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.

Cases such as BHS and Tata Steel have shown just how much of a financial liability final salary schemes are.

But, of course, it was not always that way. Having a pension that paid out a guaranteed income in retirement was once the norm in many industries.

But somehow, quite a few people did not do the maths – people who should have known better. People who know that what goes up (inflation, the stock market, interest rates) also goes down.

It doesn’t take a genuis to see that no company can afford to pay its former staff such generous benefits.

And now we have ended up in quite a mess. One which means many people are picking up the bill for something they will not benefit from, through a combination of inflated prices and continually supressed wage rises.

Thankfully, the inquiry will not be limited to the private sector schemes. Mr Field has said that the liability of the public sector was also “phenomenal”.

But will our MPs also be prepared to sacrifice their pensions? Because they also have defined benefit schemes, and they are the ones who need a lesson in maths.