Pensioners warned they could lose thousands in planned rule changes
Pensioners across the board are being warned they could lose out on over £10,000 as a result of proposed Government rule changes to the British Steel pension fund.
Insurer Royal London said plans in the Government's consultation paper on changes to pensions law last month could see an 80-year-old pensioner on a pension of £100 per week lose more than £10,000 over the next decade, compared with current rules.
The Government wants to swap the benchmark of the British Steel fund, which has liabilities of around £14 billion, to the consumer price index (CPI) rather than the higher retail price index (RPI), in a move that could save £2.5 billion.
The changes come amid Government efforts to help Indian owner Tata successfully sell its UK steelworks, safeguarding thousands of jobs.
But Royal London said a second aspect of the rule change would result in some pensioners having their pension, and any pension for their widows, completely or largely frozen.
This is because the legal requirement to index all of a pension in payment only applies to years of service since 1997. Pension service before that date comes under a very restricted legal requirement to uprate the pension and only then for a limited period.
This will mean pensioners who retired before 1997, and particularly those who retired before 1988, could see their pensions frozen.
However, Royal London said that more generally, older pensioners who did most of their work before 1997 will see a large part of their pension frozen with only a very small annual increase.
The independent Office for Budget Responsibility has estimated that in the long-run the RPI will generally be about 1.4% above the CPI.
Royal London said that assuming that CPI reverts to its Bank of England target of 2%, this suggests a long-run RPI level of 3.4%.
The insurer calculates that an 80-year-old pensioner on £100 per week who did all of their service before 1997 could see their pension frozen at £100 for the rest of their retirement, rather than see it rise to £103.40 a year later, £106.92 the year after that, and so on.
Former pensions minister and Royal London policy director Steve Webb said: "This is a big issue for the steel workers scheme, but an even bigger issue if the principle is applied to a wider group of salary-related pension schemes.
"This potentially huge impact, buried in the small print of the Government's consultation document, highlights the way in which rushed legislation can all too often have unintended consequences.
"The Government and the pension scheme need to make sure that older workers know what is happening and feed in to the consultation process.
"The rules around pension uprating are complex, and the Government's consultation document is far from clear about how this change will disproportionately affect older and more vulnerable pensioners."