personal finance

UK ‘final salary’ pension reform watered down after backlash

The government has watered down plans to tighten funding rules for “final salary” style pensions after facing an outcry that its proposals would lead to widespread scheme closures.

Draft changes to the funding code for the UK’s 5,500 “defined benefit” plans would have pushed schemes that promise a secure retirement income for life to invest in lower-return assets.

The government had argued the move would help reduce the risk of a “minority” of employers using flexibilities in the current system to bank on returns from higher-risk assets, such as equities, to bring down the cost of pensions, and thereby the employer’s contributions to the plan.

But over the past year, the government has faced a backlash from within the House of Lords, from the industry and from pension scheme trustees who have said the measure would have a particularly damaging impact on open schemes, those still taking new members, that needed higher-risk assets to drive returns for new joiners.

Some 550 schemes in the private sector with more than 2m members are still open to new joiners. Unlike open schemes, plans that are closed to new joiners face less pressure to generate returns for members, as they are not taking on new liabilities.

The Railways Pension Scheme, which serves the UK railway sector and admits new members, had told ministers the proposals would blow open a £15bn hole in its finances if it were forced to de-risk its investment portfolio.

Speaking in the Lords on Tuesday, Deborah Stedman-Scott, a junior minister in the Department for Work and Pensions, said the government had “refined” its approach after listening to concerns raised by members about the differences between open and closed schemes.

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“We absolutely do not want good and viable open schemes to close unnecessarily,” she said. “We want them to be treated on their merits in a truly scheme-specific regime.”

Lady Stedman-Scott, said subsequent regulations, to be set out by The Pensions Regulator would “acknowledge the position of open schemes” but had yet to be set out.

“I want to make it absolutely clear that they do not need to invest in the same way [as most closed schemes do now],” she added.

Ros Altmann, a former pensions minister who had lobbied for more than a year against the proposals, said she was “delighted that the government had a rethink”.

“The proposal would have set open schemes on to a doom loop. Forcing schemes to buy lower-return assets would have required substantial increases in contributions from employers now. It was a recipe for disaster.”

Steve Webb, a partner with actuarial firm Lane Clark & Peacock and a former pensions minister, also welcomed the government’s change of position.

“The new funding regime needs to be genuinely ‘bespoke’ and take proper account of the unique circumstances of schemes which may be planning to remain open for decades to come,” said Sir Steve.


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