Millions of Final Salary Pension Holders Face Shortfalls



Posted on: 21st March 2017

Should a new government initiative be enacted, it could amount to thousands of pensioners losing an alarming 30% of their retirement income. Specifically, those with final salary pensions are being warned that these ‘gold-standard’ pensions may not in fact receive as much as they were promised by the time they begin accessing their pension pots.

A change in current legislation is being explored by the Department for Work and Pensions, which could enable businesses facing financial difficulties to remove ‘gold-plating’ protection from the pension schemes they offer – protection that ensures the income of those with final salary pensions rise in line with inflation.

As it currently stands, businesses have no legal right to take these kinds of steps and must first seek the permission of the courts if they want to touch the final salary pensions they offer. It is estimated that approximately 11 million workers across the UK are currently locked into final salary pension schemes and could be directly affected by the new legislation, should it go ahead.

The initiative is known as “conditional indexation” and would give businesses struggling financially the power to eliminate on-going increases to match the Retail Price Index. The exact extent to which this would affect any given saver depends entirely on individual circumstances, but experts have warned that over the course of a standard 25-year retirement term, it could lead to a total income reduction for many pensioners of as much as 30%.

The news comes as UK savers and experts continue to speculate and express concern over the security of pensions in general, following the collapse of BHS which left an enormous gap in the company’s pension scheme. Financial advisers continue to warn that in the current climate, there really is no room for assumptions with regard to pension safety as there are very few 100% safe pension options out there.

According to Sir Steve Webb, director of policy at Royal London, the biggest concern is the way in which any move such as this by the government could set a “dangerous precedent” and may be wide open to manipulation and exploitation.

“There is a significant risk that relaxing standards on inflation protection with the best of intentions for exceptional cases could be exploited and lead to millions of retired people being at risk of cuts in their real living standards,” he said.

However, there were many who welcomed the announcement, having stated that it is unfair for there to be such an enormous gap in inter-generational fairness.

“Current retirees, whose over-generous pensions have led to such large pension liabilities, have to accept that current workers cannot carry this burden alone,” commented Ashley Seager, co-founder at the Inter-generational Foundation.

Nothing has yet been confirmed, though the government has stated that its primary motivation remains that of creating a system that works fairly for everybody, as opposed to favouring some savers over others.

If you’re worried about the possible effects these proposed changes may have on your benefits why not contact one of the team at Haven IFA for a chat. Call us direct on 0161 495 9340.