Final salary pension incomes 'could be slashed by 30%'

MPs may change the rules to help firms struggling to fund final salary pensions.

Millions of workers face having their retirement income cut by nearly a third under a Government shake-up of final salary pensions.

MPs on the Work and Pensions Committee are looking at changing the rules in order to make these schemes more affordable and help companies cope with a record £1 trillion funding ‘black hole’.

A combination of people living for longer, record low interest rates, stock market volatility and quantitative easing have impacted pension funds and created big deficits, causing many to shut down.

So the Work and Pensions Committee is looking at allowing firms to reduce the amount they uprate pension income by each year to help make them more sustainable.

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The plans

Currently, final salary pension incomes are linked to inflation.

Under the proposed plans called ‘conditional indexation’ employers would be allowed to reduce annual pension uplifts by less or give none at all for a short period.

Analysis by Hymans Robertson for the Daily Telegraph shows that firms which reduce uplifts to zero would shrink savers’ total retirement income by as much as 30% over the course of an average 25-year retirement.

More than 11 million workers with final salary pensions could be impacted by the overhaul.

The rule change is designed to help employers struggling with their final salary schemes to get some breathing space for a temporary period.

However, many fear that unscrupulous firms may take advantage of the system to cheat workers of the increases, which are meant to help pension incomes keep up with the cost of living and stop them being eroded by inflation.

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Other options

Another option being discussed is to allow firms to change the way they calculate annual pension increases.

At the moment most final salary schemes follow or must be higher than the Retail Prices Index but they could be linked to the Consumer Prices Index, which typically rises at a slower rate.

This move would reduce pension income by a less severe 13% over the course of an average 25-year retirement, according to analysis by Hymans Robertson.

What happens if a final salary scheme fails?

The Pension Protection Fund, funded by the Government, can step in when companies go bust in order to protect their final salary pension schemes.

However, for employees yet to retire or who have retired early they can lose out on up to 10% of income.

Read: Pension Protection Fund: what it is and how much compensation you get for more.

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