£7bn blow for final salary pensions

Steve WebbDave Thompson/PA Archive/Press Association Images

If you still have a final salary pension, you may be feeling pretty proud of yourself. As all those around you fell by the wayside onto less generous pensions, you were safe in the knowledge that whatever happened, your payout was guaranteed.

However, today you may be feeling somewhat less safe, as the government is considering changing the legislation - which could have a massive effect on your payouts.

Inflation link

According to This is Money, the change under consideration at the moment is whether companies in the private sector would be able to cut the link to inflation.

At the moment, payouts must be guaranteed to rise with the cost of living. This has already taken a beating in many workplaces since April last year, with a shift from indexation to the RPI to the less generous CPI. Now Webb is considering capping annual increases at 2.5% a year - in something called Limited Price Indexation.


So why consider such a drastic move?

The problem is that firms are struggling under the weight of their final salary pension obligations. The vast majority have switched new members off final salary schemes to something where the member carries the risk rather than the company (around four in five have made this move). However, they are still having problems meeting their obligations.

The schemes are victims of two things they never expected. The first is failing investments (both shares which have struggled for well over a decade now and bonds which are struggling to return anything neat what the pension schemes need).

The second is the fact that members of the pension scheme are living far longer than anyone expected them to when these schemes were first set up. When the scheme was put in place there was every likelihood the average pension would be pad out for about 15 years. Now it is easily more like 25.

If things get too bad, there is every chance that the pension scheme could pull the company under altogether, which would mean pensioners get far less than they were expecting in payouts.


It's therefore in everyone's interests to find a way to help these schemes survive.

A further consideration is the fact that final salary pension members are the lucky few. In companies where most people currently working for the firm are in a defined contribution scheme with no guarantees, there is every argument that the money poured into the pockets of the small minority shouldn't be such a massive amount more than their colleagues.

The question is whether the suffering of the few is worth it if it means bolstering the position of the company, or whether profitable businesses will use it as a stick to beat their staff with even more.

What do you think? Let us know in the comments.
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