Blanket legislation allowing defined benefit schemes to reduce pension increases could result in "morally wrong" behaviour, damaging consumer trust in the pension system, MPs have been warned.
Malcolm Booth, chief executive of the National Federation of Occupational Pensioners, said if there were to be any changes to DB benefits, they could only be made as a last resort to prevent schemes from falling into the Pension Protection Fund.
Mr Booth's comments were made during a Work and Pensions Select Committee hearing on the DB funding crisis on Wednesday (2 November).
The committee is investigating the possibility of permitting DB schemes to peg their annual pension increases to the consumer price index, rather than the higher retail price index - a move that would considerably reduce deficits.
But Booth warned such a rule, if introduced on a blanket rather than bespoke basis, could be abused.
“I think the concern I would have again is, if it’s blanket legislation, companies who can afford to continue to pay levels at RPI should do so, but will choose to move to CPI to reduce the deficit, which I think is morally wrong," he said.
"However in a situation where a 'move to CPI or go to PPF' is a straight choice, I don’t think that is a choice. That is a case of go to CPI."
He said company schemes going down that route should agree to it with The Pension Regulator and Pensions Protection Fund.
He said the "already-damaged reputation of the financial services industry and pensions in general" could be further damaged if a poor decision was rushed through.
That, he said, could mean "all the hard work that’s been done to create the right environment to encourage savings now for future pensioners will be lost".
"And the risk then is that people will become disinterested in pensions,” he said.
Despite his caution, Mr Booth's position was actually close to that of committee chair Frank Field, a vocal supporter of allowing troubled schemes to reduce benefits. Both have said it should only be permitted to prevent the scheme entering the PPF.
Last month Mr Field told FTAdviser he hoped to introduce more flexibility for schemes, but with strict caveats.
“What we’re anxious to achieve is that greater flexibility is introduced so company schemes can ride through this difficult period, but when the good times return they can reclaim the benefits they surrendered,” he said.
“The bottom line is, what would you be getting from the PPF? People do need to understand that, while the PPF is a lifeboat, there isn’t much luxury in it."
For those whose company goes bust before they have reached retirement age, or if they retired early, the PPF will pay out 90 per cent of the benefits accrued under the failed company's pension scheme to members.
For those who have already retired, the PPF will generally pay 100 per cent of benefits accrued.
Appearing before the committee last month, former pensions minister Steve Webb took a more sceptical view, saying benefit reductions should be a last resort.
Instead, he recommended redirecting dividend payments into pension schemes, and encouraging more DB to DC transfers.
james.fernyhough@ft.com
