When the pension freedoms were first announced it was thought some savers would blow their nest-eggs on Lamborghinis Credit: Andrew Crowley
- Katie Morley, Consumer Affairs Editor
31 July 2016 • 10:00pm
Millions of workers could be denied flexible access to their final salary pension pots if a radical shake-up to let companies ditch pension promises made to staff is passed by the Government.
The move would prompt a rush of people trying to cash in their pensions which would need to be “slowed”, the chairman of the Work and Pension Select Committee has said, as he prepares to launch an inquiry in which MPs will explore ways to contain the problem.
Under the measures, understood to be favoured by MPs and pension funds, cash-strapped employers would be allowed to reduce workers’ pensions by tens of thousands of pounds without first going through courts.
This would be likely to leave staff at some firms scrambling to move their money out of schemes as quickly as possible to fully encash their fund before their employer imposed cuts.
Suspending savers’ ability to transfer funds may prove a “necessary” step, despite “directly contradicting” the Government’s pension freedoms, said Graham Vidler, head of policy at the Pension and Lifetime Savings Association, a trade body which represents final salary schemes in the UK.
Experts warned a large numbers of savers exiting pension plans over a short period could damage remaining members’ pension prospects and cause tensions between colleagues who leave to get a better deal, and those who end up worse off by remaining in the scheme.
To avoid these issues policymakers could suspend or limit savers’ ability to swap annual income for cash – or make it easier for pension schemes to quickly reduce the generosity of cash transfer offers.
It would come at a time when record numbers of final salary savers are already cashing in their funds since the Government’s pension freedoms were introduced last April, with some firms reporting requests from 14 times more customers than the previous year.
The freedoms made final salary transfers more appealing as the new rules let savers spend their money freely instead of buying an income – and lets them hold it free of inheritance tax.
More than 11 million workers have final-salary pensions and could be affected by the possible overhaul, as pressure mounts on the Government to make them more sustainable.
Shop stewards from steelworks across the country will hold emergency talks in London and will continue pressing the Government for help Credit: Ben Birchall
Its plans to offer defunct Steel firm Tata Steel a special deal, allowing it to reduce annual inflation increases for pensioners, could set a precedent which experts warn would give other financially challenged private sector firms the green light to follow suit.
It is thought that an amendment to the Pensions Bill this autumn could provide the wiggle room many of them need to reduce benefits.
A combination of people living longer and poor investment performance means final salary-type pension funds are registering the largest funding black holes they have ever faced, with the total deficit now standing at almost £1 trillion.
Experts say that unless solutions are found to reduce these deficits, hundreds of schemes will need to be rescued by the Government’s lifeboat scheme, the Pension Protection Fund, which provides reduced pension payouts for retired workers.
Malcolm McLean, a senior consultant at Barnett Waddingham, a pension firm, said: “The vast majority of employers would probably never had offered a final salary scheme if they’d known then what they know now. We could get to a situation where employers say they do not want to continue these schemes at all and people are trying to get out of them in droves, which is the exact opposite of what the Government wanted.”
Frank Field, chairman of the Work and Pensions Select Committee, said: “This rush could be a problem and the whole area of slowing down access to pension funds is something will look at in our call for evidence in the autumn.”
A DWP spokesperson said: “We have a robust and flexible system for the regulation of occupational pensions and are working closely with the sector to understand the issues affecting defined benefit schemes.”
Meanwhile yesterday Prime Minister Theresa May was forced to deny that she was planning to scrap the triple-lock protection for state pensions after a secret memo was published saying Ros Altmann, the outgoing Pensions Minister, wanted it scrapped after 2020.
Ros Altmann recently left her position of pensions minister, and now says the triple-lock should be scrapped in 2020 Credit: The Age and Employment Network
The policy, which guarantees state pensions are raised by whichever is higher out of wages, prices or 2.5pc, is set to cost £40 billion a year by 2025/26 compared to the previous policy of RPI uprating, according to a DWP report.
As pensioner living standards have dramatically improved in recent years pressure is mounting on the Government to save money by reviewing the policy.
Research by the Institute for Fiscal Studies last year revealed that the average pensioner-age household had a higher income than working households for the first time, with generous state pensions and benefits for older people cited as a key factor.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: “It is undoubtedly an extremely expensive policy and it was never going to be sustainable in the long term.
“The question was always going to be which politician is brave enough to grasp the nettle and come up with an alternative.
“I’m certain it will be replaced at some point but its about how they will be able to sell it politically. I can see why David Cameron didn’t want to listen to Ros because its pensioners vote.
Jonathan Isaby, Chief Executive of the TaxPayer’s Alliance said: “This policy may be a sure-fire vote winner but it is unjustifiable and devoid of any economic rationale. If this continues the state pension will end up consuning the entirety of public spending, so it’s clearly unsustainable as well.
“It seems the only people willing to support the triple lock are vote hungry members of the government, but they should think long and hard about the gamble they are taking with younger generations’ futures.”