Struggling defined benefit schemes should be allowed to reduce the benefits they pay their members to prevent more BHS-style collapses, MPs on the Work and Pension select committee have said.
The recommendation, which could see many pensioners receiving lower incomes in retirement than they were promised, was part of a suite of major reforms recommended in a report published today (21 December).
The report also called for extensions to the The Pensions Regulator's powers, which would provide what it described as a "nuclear deterrent" against another BHS-style scandal.
It also called for trustees of small DB schemes to be allowed to consolidate their schemes in an "aggregator fund" to be run by the Pension Protection Fund.
These three major reform recommendations come after several months of hearings that saw former and current pensions ministers, think tanks, employer groups, businesses and unions give evidence before the select committee.
Committee chair Frank Field, who had stated from the beginning of the inquiry that the committee would target member benefits, said:
"To prevent another BHS we need to have the means to nip inevitable disasters like this one in the bud.
"We hope the government will consult on the package of measures we propose, which would go a long way, without resorting to any new reams of red tape, towards doing just that."
While stressing that pension promises were "just that", and that any changes to benefits should "not be taken lightly", the committee nevertheless urged the government to find a way to allow struggling pension schemes to reduce the benefits they pay members.
This would most likely involve switching indexation of annual pension increases from the retail price index (RPI) to the usually-lower consumer price index (CPI).
"We recommend that in its forthcoming green paper the government consult on means of permitting trustees to propose changes to scheme indexation rules in the interests of members," the paper stated.
"These proposals should be subject to regulatory approval but the presumption should be in favour of change. This measure should not only facilitate permanent changes to indexation rules; in many cases a conditional arrangement, whereby the scheme and employer have some breathing space to overcome difficulties, but then revert to more generous uprating when good times return, may be most appropriate."
The committee claimed the BHS pension scheme may have avoided falling into the PPF, and taking the associated 10 per cent cut in benefits, if it had been allowed to reduce the indexation of benefits.
The committee's second headline proposal was to give TPR the power to impose punitive fines three times the size of current fines.
In the case of BHS, it would give TPR the power to call for payments of £1bn rather than the £350m reportedly demanded from the failed company's former owners.
It claimed the regulator would never have to use these powers, because they would act as a total deterrent similar to that supposedly provided by nuclear weapons.