Minister warns salary-linked workplace pensions could disappear

Frances colour

Steve Webb, Pensions Minister, has unveiled plans to remove legal obligations for traditional final-salary schemes; which promise to pay a proportion of salary on retirement.  Under the proposed new law, employers would no longer have to provide a pension linked to annual inflation increases. Nor would they be expected to provide pensions for spouses after the former staff member has died.

He also wants employers to be able to improve lower grade pension arrangements, now used by most firms.

In 1995, five million private sector employees contributed to final-salary scheme, that figure has fallen to 1.7 million.

Today’s proposals for Defined Ambition pensions combine a last ditch effort to preserve some salary-linked schemes with ideas to enhance the alternative options.

The Minister admits it would have been better if the changes had been made 10 years ago.

Up to 30% of final-salary pension schemes have already closed, and more than half of those remaining are closed to new members.

Meanwhile, under a process called auto-enrolment, millions of staff are being signed up to inferior workplace pensions.

Under the new legislation, which could be in place before the next election in 2015, pension rights already earned would be protected. The government hopes that by giving employers greater flexibility over future benefits, some of the remaining salary-linked schemes will remain open to new employees.

The Director General of the Association of British Insurers (ABI), Otto Thoresen, said: “The ABI welcomes this consultation which provides a clear basis on which to debate a range of alternative ways to improve certainty for pension savers.”

The government is also planning to change the law to allow “Dutch-style” pensions, where employers could “band together” to offer large-scale schemes which target a particular level of pension income.  Ministers have been persuaded that these “Collective Defined Contribution” schemes would be cheaper to run and could provide employees greater certainty about their retirement.

Barnett Waddingham’s Danny Wilding said “There is no private pension structure that will entirely meet the needs of everyone without some risks attached”