31 May 2016

Major DB pension scheme inquiry launched

An inquiry has been launched by MP Frank Field into defined benefit pensions in order to find ‘radical solutions’ to the increasing pressures on retirement savings, which is posed by rising life expectancy and low investment returns.

On Friday 27th May, a statement was released by the work and pensions select committee, stating that unsustainable promises made to scheme members were being “stacked up against” the jobs of younger generations.

He said that without urgent action, ‘the impact of millions of people’s living standards from intergenerational trade offs of income and wealth is brutal.’

Mr Field did not specify the nature of these ‘radical solutions’.  However, the MP for Birkenhead said they could include reductions in member benefits.

The comments from Mr Field came a day after the government revealed it was considering changing the law to allow the British Steel Pensions Scheme to peg its annual benefit increases to the consumer price index (CPI) rather than the usual higher retail price index (RPI). The proposal was introduced as part of an effort to find a buyer for Tata Steel UK – the scheme’s sponsor.

Mr Field said: ‘We should be under no illusions that British Steel is a special case.

‘Eleven million people have private defined benefit pensions. More than 5,000 of the associated schemes are in deficit to the tune of £805bn, while the combined surpluses of other schemes is £4bn.’

He continued to explain that the committee’s in-depth case study of the massively under-funded BHS pension scheme showed DB schemes are ‘already creaking from rising life expectancy and record low returns on capital.’

A financial adviser with Lamb and Associates Lifestyle Financial Planning, said it may be inevitable the liabilities of the final salary schemes would have to be reduced.

He said:  ‘The argument is, if you reduce the liability, it means it’s less likely the schemes will fall into the Pension Protection Fund.’

He explained that if more and more funds fall into the PPF, then it may have to be bailed out by the government.

However, he said the inquiry should not be limited to the private sector schemes, saying the liability of the public sector was also ‘phenomenal’.

By Samantha Atherton