The bridging pension anomaly faced by the Pension Protection Fund (PPF) will be removed under plans unveiled by the Department for Work and Pensions (DWP).
The anomaly occurs where recipients of bridging pensions - where a higher rate of pension is paid in retirement before a scheme-specific date, and is actuarially reduced from then on - enter the PPF assessment period.
If this happens, they will find themselves eligible for the higher rate of pension for life, receiving a higher sum in retirement than if their scheme had not been absorbed by the lifeboat fund, as the PPF does not account for changes in benefits.
Now, in a consultation on draft regulations to remove the anomaly, the DWP has suggested the PPF should mirror incoming schemes' rules, in a departure from past tradition.
The department had initially suggested the higher rate be "actuarially smoothed" into a flat-rate lifetime equivalent amount, which would be the "most straightforward for the PPF to implement and administer".
However, it has bowed to the industry's preference to continue existing rules, despite it previously describing this approach as a "step change in the way that the PPF operates".
This is mainly due to a significant number of respondents expressing concern that members would see an "immediate drop in income for pensioners" and "could result in personal financial hardship".
The DWP is consulting on the draft regulations until 3 December, with an ambition for the rules to come into effect from February 2018.
The rules will bring PPF compensation in line with that of its predecessor - the Financial Assistance Scheme - which already accounts for bridging pensions in a similar way.
The move comes as around 4,600 British Steel Pension Scheme members with bridging pensions are being asked to choose between entering the PPF or joining a new, more affordable scheme by the end of next March.
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Paul Budgen is set to join financial technology and auto-enrolment (AE) firm Smart Pension as director of business development.