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Government proposals could allow firms to cut final salary pension payments

Financially "stressed" businesses could be allowed to cut final salary pension payments to employees to save them from collapse, under Government proposals.

Ministers have concluded that while there is no overall problem with the affordability of defined benefit (DB) schemes, maintaining contributions could prove "unsustainable" for some firms.

A Government green paper set out a series of proposals to ease the pressure, including allowing struggling businesses to "cut or renegotiate" pensioners' benefits.

One option could be to allow firms to suspend annual index-linked rises or peg them to the consumer prices index (CPI) measure of inflation rather than to the usually higher retail price index (RPI), which most schemes are tied to.

The paper said: "While we do not believe a case has been made for across-the-board reductions in benefits paid by DB schemes, there may be a case for changing the arrangements for stressed schemes and sponsors, which will help to preserve value and jobs in the economy, while also delivering a good deal for members.

"The Government does not think the evidence is strong enough to suggest that indexation should be abandoned or reduced across the board. There could however be a case to suspend indexation in cases where the employer is stressed and the scheme is underfunded.

"And there may be a case to rationalise indexation arrangements, as the current arrangement where some schemes are prevented from moving to CPI by scheme rules is something of a lottery."

The paper suggested making it easier for struggling business to separate from their pension schemes through the taxpayer-backed Pension Protection Fund.

It stressed that any changes would have to be carefully drawn in to avoid creating incentives for employers to "manipulate" their financial position to reduce pension liabilities.

"Wherever such lines are drawn there will be significant issues which would need to be resolved - for instance there is the possibility of moral hazard, where sponsors could seek to reduce their DB liabilities and take advantage of safety valves, by manipulating circumstances to ensure they meet the criteria."

The proposals were condemned by the GMB trade union which accused the Conservatives of allowing "business cronies" to take funds from ordinary working people.

GMB national officer Keir Greenaway said: "Allowing schemes to break promises on pensions and raid workers' retirement savings to cover for mistakes in the boardroom will not be music to the ears of employees. However it will no doubt go down very well with the big business bosses who bankroll the Conservatives."

The paper found that while almost all DB schemes - covering 11 million members with funds of £1.5 trillion - have a funding deficit, the shortfalls were likely to shrink as long as employers kept paying in at expected levels.

"The available evidence does not appear to support the view that these pensions are generally 'unaffordable' for employers," it said.

It also suggested tougher powers for the Pensions Regulator, including the ability to impose "significant" fines on employers to "deter poor behaviours".

"However, we also believe that if the regulator is given new powers in this area, they must be proportionate and workable, and not be detrimental to the effective functioning of the economy," it said.

The proposal was welcomed by Frank Field, chairman of the Commons Work and Pensions Committee, who said the Government's plans would be judged on whether they prevented another BHS scandal, after it collapsed with a £570 million black hole in its pension fund.

He said: "The point of a charge big enough to act as a deterrent is that it would never need to be used: the prospect of a significant penalty would concentrate minds on achieving a timely resolution of scheme funding difficulties before they become critical."

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