The government has announced plans to review some private sector company pensions in a way that may reduce pension income for employees.
The pensions minister, Steve Webb, has announced that future pension income from certain schemes may now be linked to the Consumer Prices Index (CPI), breaking the link to the Retail Prices Index (RPI). While both indices are used as a measure of inflation for pension income from company pension schemes, the CPI index generally rises more slowly than the RPI and would therefore significantly reduce future pension income. The CPI has risen more slowly than the RPI in 17 of the last 20 years.
The plan is being seen by experts as a way of cutting the costs of company pensions obligations in relation to all final salary pensions schemes, in the hope that the schemes will be kept open to new members.
Final salary schemes are the most generous type of private and public sector company pensions, as they have hitherto provided a pension income related to final salary at the time of retirement. However, in times of recession, when the investments underlying final salary company pensions schemes fail to perform, the guarantee remains and the company itself must shoulder the shortfall to meet its payment obligations.
The proposed changes, which would come into effect in 2011, would affect an estimated 25-50% of company and occupational pension schemes.
It remains to be seen, however, how many companies can be persuaded to retain their final salary schemes, even under the new, cheaper regime. With over 90% of final salary schemes already closed to new members, and many of the remainder already beleagured by heavy deficits and the effects of increasing longevity among retired members, many speculate that final salary company pensions will soon be no more than a cherished memory in pensions history.
