Experts agree the changes being proposed to the British Steel Pension Scheme will impact salary-related pensions more broadly, but differ on whether the long-term effects will necessarily be negative.
The changes mean the oldest pensioners and their beneficiaries stand to lose as much as £10,000 over the next decade, as inflation protection is reduced from the retail price index to the lower consumer price index and pensions will be frozen for those whose service was before 1997.
The government wouldn’t want this to spread, but if a law passes that allows it many employers may want to walk away from their pension schemes
Steve Webb, Royal London
Breaking promises made law?
Steve Webb, former pensions minister and director of policy at Royal London, explained British Steel is seeking changes that would allow it to reduce benefits to keep the scheme open, such as a lower-value index.
“That the consumer prices index is a better measure of inflation is generally accepted, but British Steel rules say ‘retail prices index’,” he pointed out. “The issue becomes whether pension schemes should be able to change their own rules and break their promises.”
Webb expressed concern that the oldest pensioners – those who completed service before the Pensions Act 1997 was passed – would be most affected. “The legal minimum [protection] prior to 1997 is very low”, he noted.
Moreover, Webb said, the changes will have repercussions for salary-related pensions generally. “The government wouldn’t want this to spread, but if a law passes that allows it many employers may want to walk away from their pension schemes”.
In need of a generalised solution
Tom McPhail, head of retirement policy at consultancy Hargreaves Lansdown, said the consultation was highlighting the pension industry’s need for standardisation.
“The opinion emerged that periodic catastrophic failures such as BHS shouldn’t be tolerated, and that a more generalised solution would be better for members as well as employers”, he said.
McPhail also emphasised the importance of member communication throughout the consultation. He said that trustees need to model the impact of a proposed solution and clearly show the long-term implications of a deal being reached to members and their beneficiaries.
McPhail said that while the proposed changes have been carefully planned, “this is becoming a binary problem of ‘pensions or jobs’”.
“If it were possible, a ‘breathing space’ solution would be a better outcome”, he added.
Over-reliance on past behaviour
Rosalind Connor, partner at Arc Pensions Law, cautioned that there is legal ambiguity around making the transition from RPI to CPI.
She said that schemes have to use their discretion when making rule changes, “but there is a legal issue if the rules don’t allow for that discretion.”
“The government seems to be saying that it is unfair that only some schemes are allowed to make changes to their rules,” Connor added.
Past legislation mandated that “you have to index-link people’s pensions, which can be very costly for businesses… the move to CPI would mean a scheme would cost [the employer] less”.
But these assumptions about CPI are being based on past behaviour, which will not necessarily continue into the future, Connor warned.
“There is a risk that this will be done, but that it won’t make a difference; that the scheme will end up in the PPF anyway”.
A complete lottery
David Fairs, partner at consultancy KPMG, said despite government legislation, individual schemes’ indexing will ultimately depend more on the wording individual lawyers used when writing their rules.
Fairs pointed out that schemes seeking to switch to CPI are those under duress, in which case they might have to enter the PPF, which would mean they automatically become CPI-linked. It therefore makes sense, he said, to allow schemes to pre-emptively change indices to mitigate damage.
“If there was overriding legislation to allow companies to move their schemes from RPI to CPI, this strategy might become more prevalent”, he stated.
He said the industry is "crying out" for an intermediate mechanism to allow this.
However, Fairs conceded: “It would be wrong to introduce any mechanism that makes it too easy to take away pension pots built over 30 or 40 years… so the solution can’t be simple”.
