By Charlotte
Beugge
The
government is considering removing the requirement for private sector
defined-benefit pension schemes to be index-linked to inflation.
Currently,
those with incomes from occupational defined benefit pension schemes know their
income will go up by at least 2.5% to protect against rising prices.
But in an
interview in the Financial Times, pensions minister Steve Webb raised the idea
that the inflation protection could go. There are around two million Brits with
final salary or defined benefit schemes.
Mr Webb
told the paper: "I am saying we shouldn't let the pendulum swing all the
way to pure defined contribution. What I want to do is try and create an
environment where the pendulum can swing back a bit.
"If
by reducing the regulatory burden we could encourage firms running entirely
voluntary occupational schemes … to think 'well actually, I'll take on a
measure of risk [sharing]', then that seems like a world we could move towards.
Clearly indexation is the biggest cost [for companies]."
With final
salary schemes, the members know how much they will get in pension income when
they retire, as the risk is on their employer to provide this.
In the
private sector, the money purchase scheme is far more common and with these,
there is no guarantee on how much income scheme members will get in retirement
- it will depend on how the investments in their fund perform and how much
annuity rates are when they retire.
Recent
figures from the National Association of Pension Funds showed that a quarter of
final salary schemes are now shut to new staff and future contributions from
existing staff.
Royal
Dutch Shell this month became the
last FTSE100 company to say it 2.will close its final salary scheme to new
members.
