November 8, 2013
By Liam Tomlinson
Final salary pensions may no longer be protected from inflation under new plans that have been outlined by the government.
In addition to this huge change, widower benefits could also be scrapped, as the proposals aim to bring about a “renaissance” in the world of company pensions.
Such defined benefit (DB) schemes have always guaranteed the worker a level of income when they retire, but they are becoming fewer and far between. [EXPAND Read more]
This is because it is the employer that takes on the risks of investment returns and longer life expectancy.
These expensive schemes are therefore being forced out and defined contribution (DC) schemes put in their place.
Companies prefer these as they do not have to shoulder the risks, but employees are then faced with the same gamble that was previously absorbed by employers.
The Department for Work and Pensions is trying to propose a third alternative, known as flexible defined benefits, which would act as a compromise between the two current options.
Steve Webb, Pensions Minister, told the Telegraph: “There are less than two million people in DB schemes now and that will fall away completely in the years to come.
“Over time we hope employers will see they can pay salary-related pensions without all the risk, so we could see a renaissance in this space, but these things take time.”
If this third option were to become the norm, pension payments would not be required to grow in line with inflation, but employers would provide a set level of income for retirement.
It would, in effect, be a halfway house in terms of risk with it spread evenly between employer and employee.
Mr Webb said: “I want people to have the best pensions possible, where risks are shared between employers and their workers. Final salary pensions have been in long-term decline and if we do not act it could disappear altogether.
“We want to help the best employers offer good alternatives including new forms of salary-linked pensions.” [/EXPAND]