Thursday, 7 November 2013

Extinction beckons for quality pensions

The number of salary-linked workplace pensions will fall to zero unless action is taken to make the schemes cheaper for employers, the Pensions Minister Steve Webb warned today.

The government has unveiled proposals to remove legal obligations to gold-plate traditional salary schemes and to improve the lower grade pension arrangements which most companies are moving to instead.

Only 1.7 million private sector employees are contributing to a scheme which promises to pay a proportion of salary on retirement, compared with over 5 million in 1995.

Under new laws employers would no longer be required to give pensioners annual inflation increases. Nor would they be expected to provide pensions for spouses after the former staff member has died.

Pension rights already earned would be secure. But the hope is that by giving bosses the flexibility to cut back future benefits, some of the remaining salary-linked schemes will survive and remain open to new employees.

The legislation could be in place before the next election in 2015, according to Mr Webb.

Millions of workers are being enrolled automatically in new workplace pension arrangements, but for the most part these are not linked to pay.

In many cases the contribution levels are so low that the eventual pension income is likely to be disappointingly meagre.

The forthcoming legislation will encourage companies to provide income guarantees in these schemes, in the hope that people will regard pensions as less of a gamble and contribute more.

The government is also planning to change the law to to allow "Dutch-style" pensions. Employers would be able to band together to offer large-scale schemes which targeted a particular level of pension income.

Ministers have been persuaded that these "Collective Defined Contribution" schemes would be cheaper to run and could provide savers with more certainty about their retirement.

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