Major pensions update as 9m threatened with new savings raid | Personal Finance | Finance
Plans to overhaul final salary pensions have triggered alarm after officials admitted the changes could threaten millions of savers’ retirement incomes.
The reforms, included in the new Pension Schemes Bill, would allow companies to access surplus funds in defined benefit (DB) pension schemes – plans that guarantee a fixed income based on workers’ final or average salary. While the Government argues this could unlock billions in capital for businesses and the Treasury, critics warn it may weaken the financial safety net protecting pensioners.
According to an impact assessment by the Department for Work and Pensions (DWP), changing the rules could increase the risk that some schemes may fall short in paying full pension benefits, particularly if future economic shocks erode scheme funding.
The report warns that allowing companies to extract surplus assets could reduce the financial “cushion” that schemes rely on during periods of market volatility.
The civil servants wrote: “Without this cushion, the scheme may be more likely to struggle to meet its obligations.”
While the likelihood of this outcome is described as low, the risk has nonetheless alarmed campaigners, The Telegraph reports.
The Pension Security Alliance, an advocacy group including Silver Voices and pensions consultant John Ralfe, said the Government’s own analysis shows the changes could jeopardise retirement income for as many as nine million people.
The group said: “Pension schemes are not a piggy-bank that politicians can dip into or a cash-cow for employers. Pension schemes exist to benefit members, and this is official confirmation that the Government’s plans could actually harm members. That can’t be right.”
The proposal would allow companies to reclaim pension surpluses, which are currently locked in schemes, as profit or reinvestment, subject to trustee oversight.
Steve Webb, a former pensions minister and now partner at consultancy LCP, welcomed the move. He said the improved scheme funding due to higher interest rates has left many schemes with more assets than liabilities.
Mr Webb added: “The plans have plenty of safeguards, including the judgment of trustees who will be seeking to ensure that using surplus funds does not undermine the security of member benefits. This is a positive initiative which should be supported.”
In recent years, higher interest rates have helped many defined benefit schemes recover from deficits caused by a decade of low returns. But critics of the Bill warn that the improved position could quickly unravel in another downturn.
The DWP‘s impact assessment acknowledges this possibility but maintains that the risk is small, citing the role of independent trustees in approving any withdrawals. It said: “Overall, it is assumed this increased likelihood of members not receiving their benefits in full to be very low given the important role trustees will play in overseeing any decision.”
