Defined Benefit  

Pensions minister 'open minded' to DB benefit changes

Pensions minister 'open minded' to DB benefit changes

Pensions minister Richard Harrington has said he is "open-mined" about allowing defined benefit pension schemes to change the way they calculate pension increases.

Speaking to MPs on the Work and Pensions select committee, Mr Harrington said he had no "in principle" objection to allowing trustees to switch indexation of annual increases from the retail price index to the usually lower consumer price index.

Mr Harrington was responding a proposal, put forward by committee chair Frank Field, to allow companies facing collapse to reduce the benefits paid to members of their DB scheme.

While Mr Harrington said he was open to this idea, he insisted that DB pensions should be considered non-negotiable.

“We have to remember that to me a DB scheme is fundamentally not negotiable, insomuch as it is an obligation of a company in the same way that salaries are, leases on buildings, it’s not an optional service charge on a restaurant bill. It’s a commitment," he said.

But he went on to add that, like some of the contracts mentioned, it was possible to change aspects of contracts under certain circumstances, adding that they were not "written in stone".

"In principle I’ve got no objection to giving trustees the right to change the indexation, as long as pensioners are protected for what was intended, which was to be protected against rises in prices," he said. 

He said he was "quite surprised" to find a difference linking to CPI rather than RPI could make. 

“We mus remember the reason theses clauses were put in was to protect pensioners against increases in costs of living,” he said.

In October, ahead of the first hearing of its current inquiry, Mr Field told FTAdviser: "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."

While the proposal has gained some support, others have warned against it.

Earlier this month, Malcolm Booth, chief executive of the National Federation of Occupational Pensioners, told the committee 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.

He said blanket legislation allowing trustees to switch to CPI would result in "morally wrong" behaviour on the part of businesses, damaging consumer trust in the pension system in the process.

Mr Harrington also raised concerns about damage to the reputation of the pension system.

"We can't have people thinking they've been fiddled," he said.

james.fernyhough@ft.com