Employers with final salary pension schemes could save billions of pounds a year if the government decides to pave the way for conditional indexation enabling the removal of index linking if the pension is performing badly.
According to research conducted by Standard Life, employees could lose an average of £2,304 a year off their final salary pension schemes, which would save employers more than £7.7 billion a year.
Last month, the government bowed to pressure from campaigning groups like the National Association of Pensions (NAPF) and announced that it was to hold a consultation on the removal of the ban on conditional indexation, course of action it had earlier dismissed. If any changes are introduced they will only relate to schemes in the private sector. Under final salary pension schemes income received in retirement goes up in line with the Retail Prices Index subject to a cap of 2.5%.
Andrew Tully, pensions policy manager, said that careful consideration should be shown to the “people who are gong to lose out before pushing ahead with significant changes”.
“In December the government didn’t want this to happen, which is not very long ago. Whereas now, a month later, they seem to have been persuaded into at least considering the situation.
“To buy a pension that goes up by 2.5 % costs 40% more than buying a pension that stays the same level each year.”
The NAPF has welcomed the government’s decision to consult on conditional indexation. Its chief executive, Joanne Segars, said: “We welcome the Government’s commitment to retaining good quality defined benefit pensions provision. NAPF members have said loud and clear that the single most important thing the government could do to ensure the future of this provision would be to lighten the regulatory load, including greater risk sharing.
“Any such move for new schemes and for future accruals in existing schemes will be an important step forward in ensuring the third of private sector defined benefit schemes that today are open to new members, stay open.”