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Cath Everett

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Government u-turn on pension rates makes schemes more expensive

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A pensions fund body has criticised the coalition government’s decision to backtrack on moves intended to slash the costs for employers of providing workplace pensions.

 
Ministers had suggested in July that they would introduce legislation to enable private sector organisations to use the lower Consumers Prices Index rather than the traditional Retail Prices Index in order to uprate pensions, but have now U-turned on the issue.
 
The move would have led to lower pay-outs for pensioners, but cut pension deficits for employers. The switch is already being made in the public sector and is expected to cut the value of workers’ pensions by as much as a fifth over a 20 year period.
 
But a survey undertaken by the National Association of Pension Funds found that six out of 10 current workplace pensions schemes could not make the switch without legislation because they had RPI indexation hard-wired into their rules.
 
On announcing a consultation on the pensions situation, however, pensions minister Steve Webb said: “We do not plan to grant schemes a modification power to make it easier to use CPI where they do not already have the power to amend the scheme rules.”
 
Such a move would “severely damage” members’ trust in pension schemes and their rules and intervention would demand a strong justification, he added.
 
But Joanne Segars, NAPF’s chief executive, warned that pensions funds were currently under “great stress” and required the “breathing space” that an option to switch to CPI would bring by making them more affordable for employers over the long term.
 
“The pensions industry is surprised that the government is no longer considering allowing all pension schemes to have the choice of switching their inflation measure. Having marched us up to the top of the hill and created confusion in the pensions industry, it has now marched us back down again. The government really underestimated the complexity of the issue,” she said.
 
A survey of the body’s members found that 64% believed the government should enable pension schemes to have the option of changing their existing rules on inflation compared with 27% who did not.
 
Among other things, however, the government’s consultation will cover the discount rate used to set contribution levels for unfunded public sector pension schemes. But TUC general secretary Brendan Barber warned: “Public sector workers should be very nervous of this discount rate review as it could lead to a stealth increase in their contributions at a time when they are facing a pay freeze, job losses and a 3% contributions grab announced in the spending review.”
 
There was no case for a special discount rate for public sector pensions, he added, and the government should instead introduce a common means of measuring future costs in today’s money.
 
Any move to change the 3.5% rate currently used would be seen as “just another way to make public sector workers pay an unfair contribution” in order to put right the economic crash that they did nothing to cause, Barber added.

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