The government has been accused of dragging its feet over plans to give greater pension protection to long-serving workers.
Changes to the Pension Protection Fund (PPF), the pension lifeboat that takes over the defined benefit (DB) pension schemes of failed company, have not been implemented despite being written into the Pension Act 2015.
The scheme pays pension income to retired and current workers when an employer goes bust. The PPF has been thrust in to the limelight in the past two weeks due to concerns about Tata Steel and the fate of its £15 billion British Steel Pension Scheme. While Tata on Monday announced the sale of its Scunthorpe plant to Greybull Capital, the pension liabilities will remain with Tata and the future of its larger Port Talbot plant is still in doubt.
It is unlikely that the government will be able to take over the pension scheme in order for a sale of the Port Talbot plant to go through. This means the only option left is to place the British Steel Pension Scheme into the PPF even though Tata has not gone bust. Although the PPF is used to protect the pensions of insolvent company schemes, on rare occasions it takes on pension funds of companies that have not gone bust.
However, former pensions minister Steve Webb, who now works for insurer Royal London, said many long-serving Tata steel workers would take a hit on their pension income due to a cap on pension pay outs.
For those who are already retired, which make up 85,000 of the 134,000 pension scheme members, there would be no change but a move into the PPF would hit the 15,000 workers relying on the fund.
Webb said there were three ways ‘someone who works at [the Tata site in] Port Talbot may not get their full pension’.
The first problem is that the fund only pays 90% of the annual pension income due to those who are still working and those who retired early.
‘If you are under scheme retirement age when the balloon goes up and insolvency happens then you are only entitled to 90% of what you would have got,’ he said.
‘The argument is that people who are retired [who receive 100%] cannot do anything [about their circumstances] but those who have not retired yet could carry on working. It is pretty crude but that is how it is.’
The second hit that workers take is that not all of the pension they do receive will be indexed – or increase in line with inflation – so that in real terms their pension income is worth less over time.
‘The years worked post-1997 get indexed but [years worked] pre-1997 are not, even if the scheme did index [generally],’ said Webb. ‘And the British Steel pension would have been indexed anyway.’
The indexing of the pension was ‘to help long-serving workers’.
‘If you worked for nearly 40 years at a company – 20 years before 1997 and almost 20 years after – then only half the pension [you receive] would be indexed.’
The final problem workers will run up against is the cap on income pay outs. The PPF will only pay out up to £37,420 a year, which means current workers will only receive up to 90% of the £37,420 cap, or £32,761 a year.
Webb said the cap was put in place to stop ‘well-informed fat cats suddenly letting the balloon go up on the company and getting a huge pension off the PPF’ but long-serving workers were also being hit as the longer you work at a company the more entitlement to pension income you build up.
‘It is catching salt-of-the-earth people who have worked forever at a company – you don’t need to earn a king’s ransom to fall into this category [where you will be hit by the cap],’ said Webb.
It was because of long-serving workers that in 2013 the coalition government, in which Webb was pensions minister, announced plans to increase the cap by 3% a year, meaning fewer workers would be caught out.
Webb said the failure of car parts firm Visteon, which was owned by Ford, was the catalyst for increasing the cap.
‘There were those [working at Visteon] who had been there for 40 years and getting a capped pension today, and they were the reason for the change,’ said Webb.
However, despite the change being included in the Pension Act 2015, no legislation has been written, meaning the PPF cap is not rising at all.
‘[The change] was put in the 2015 Pension Act but it has not been implemented yet because it needs detailed rules on how it would work and the Department for Work and Pensions has not done that yet,’ said Webb.
‘The government could legislate tomorrow and it would be implemented straight away. [A pension of £37,420] is a good pension but those people have put in 30 or 40 years and the cap is not meant to catch them. [Increasing the cap] has been bumped to the bottom of the list.’
The Department for Work and Pensions declined to comment.
Source: CityWire (UK)