From the blog: The international day of the older person might not have been as riotous as usual when it took place this Saturday, as private sector pension increases looked more under threat than ever.

Just the day before, Work and Pensions Committee chair Frank Field MP announced that he and his colleagues will consider the impact of allowing schemes to suspend inflation-linked pension increases, as part of the committee’s inquiry into defined benefit schemes.

Now Field and his team will investigate what needs to be done to “help create a climate of opinion so scheme trustees would naturally think about introducing flexibility on benefits”, Field told the Financial Times.

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Just the day before, Work and Pensions Committee chair Frank Field MP announced that he and his colleagues will consider the impact of allowing schemes to suspend inflation-linked pension increases, as part of the committee’s inquiry into defined benefit schemes.

Currently, schemes are required by statute to provide pension increases in line with the consumer price index, although the particulars of scheme rules mean many still have to provide indexation according to the retail price index or other measures.

Now Field and his team will investigate what needs to be done to “help create a climate of opinion so scheme trustees would naturally think about introducing flexibility on benefits”, Field told the Financial Times.

The DB landscape has not seen any marked improvements in the past month, lending some credit to Field’s suggestion that modifying promised increases may be the “price of survival” in the current economic climate.

A DB funding update from consultancy JLT Employee Benefits yesterday showed that UK deficits have eased only slightly to £503bn on an IAS 19 basis, with the possibility of a further base rate cut by the Bank of England on the horizon.

An industry divided

The pensions industry is anything but united in its stance on change to indexation rules. While the proposals have seen support from consultants such as LCP senior partner Bob Scott, others, such as former pensions minister Steve Webb and Andrew Warwick-Thompson, executive director of the Pensions Regulator, have said they do not think the current environment merits such drastic measures.

David Brooks, technical director at Broadstone, voiced his concerns over the proposals, but said he expects them to be implemented anyway.

“The indexation debate is the classic echo chamber. The pension industry is both convinced that there is a DB crisis and that something must be done. The obvious thing to do is to attack the liabilities by allowing schemes to renege on past promises. However, allowing past benefits to be reduced would set a dangerous precedent,” he said.

“While there are some important obstacles to get over to allow this to happen, from the rhetoric being used it does appear something along these lines will be introduced.”

What is clear is the potential negative impact of hasty or indecisive policy. Do nothing and the government risks deepening the perceived intergenerational unfairness between undersaving young people and their DB-wielding grandparents.

But allow employers and schemes too much flexibility and the retirement plans of the generations celebrated last weekend could suffer a nasty shock.

Longer retirements

If society’s older cohorts need cheering up after that news, they might find some comfort in a pertinent piece of research that resurfaced this week, originally published by the National Bureau of Economic Research in the US.

As Institute for Fiscal Studies director Paul Johnson observed, in 1977 a 59-year-old British man had a 2 per cent chance of dying that year, but 90 per cent of them worked.

In contrast, when today’s men have the same chance of dying, at age 68, just 20 per cent work.

So our pensions might be looking shakier than ever, but at least we’re spending longer in retirement than ever before...

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