The government's admission there is a case to suspend indexation for certain underfunded defined benefit (DB) schemes has been welcomed by some while others warn it would open the floodgates.
The suggestion there could be flexibility around the way benefits are indexed in certain circumstances was supported by PwC, LCP, Aegon and the Confederation for British Industry (CBI).
However, former pensions minister Sir Steve Webb and the union GMB voiced concerns about the watering down of benefits.
At the moment most schemes pay out benefits linked to the retail price index (RPI), as most are not able to move to the lower consumer price index (CPI) due the hardwiring of their scheme rules. Whereas others have been able to change their scheme rules to move from RPI to CPI.
While the government does not want to slash benefits across the DB landscape, it acknowledges the inflexible nature of indexation can present problems for some sponsors and schemes. In its green paper published yesterday the Department for Work Pensions (DWP) said one option could be to allow underfunded schemes with struggling sponsoring employers to suspend paying indexation. Although a wholesale move from RPI to statutory minimum increases has been effectively ruled out, rationalisation of increases that may involve a move from RPI to CPI for all schemes is not off the table yet.
The CBI's director of people and skills Neil Carberry said: "Actions like moving to the official measure of inflation for indexation CPI and encouraging different ways to accurately and appropriately measure the funding position of schemes, could provide real support to businesses."
PwC's global head of pensions Raj Mody (pictured above) argued the government's approach is sensible and could give hope to employers which have struggled with the pension commitments. "For many schemes, pension increases far outstrip modern inflation measures, due in part to the lottery of how they were set up and layer upon layer of subsequent legislation. Allowing these to be eased in cases of distress is sensible."
However, he warned that people should not expect the green paper to solve all problems in DB and wondered whether the consultation asked enough fundamental questions about employer obligations to underwrite pensions.
LCP partner Alex Waite added it was disappointing the government has not immediately looked at a way to change indexation methodology. "It would have been more constructive to have an immediate proposal to resolve the issue. It is clearly going to take time for a preferred way to come through during which time schemes will continue to pay out increases based on what the green paper calls ‘anachronistic' increase rules, and it seems like that some more employers will struggle as a result."
It is a shame that DWP has failed to note that the Office for National Statistics has said RPI should not be used wherever possible, he added.
Yet Aegon head of pensions Kate Smith warned any flexibility on indexation has to be managed carefully. "Although moving to CPI indexation will reduce employer's costs it will also cut pensioners' future benefits. To avoid a moral hazard we strongly believe that employers/trustees should only be allowed to cut future pension increases if the sponsoring employer and their scheme meet stringent requirements set out in legislation, with each case approved by the regulator."
Royal London director of policy Sir Steve Webb explained what could happen if indexation is relaxed too much: "There is a significant risk that relaxing standards on inflation protection with the best of intentions for exceptional cases could be exploited and lead to millions of retired people being at risk of cuts in their real living standards."
GMB national officer Keir Greenaway added:"Allowing schemes to break promises on pensions and raid workers retirement savings to cover for mistakes in the boardroom will not be music to the ears of employees."
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