Should struggling company pension schemes that have offered guaranteed levels of retirement income to their members be allowed to drop a promise to protect them from inflation? Frank Field, the veteran Labour MP who chairs the House of Commons work and pensions select committee, says the cross-party group will debate exactly this.
The idea would be to lighten the burden for around 6,000 defined benefit company pension schemes that collectively provide pensions to 11 million current and future pensioners. In most cases, these schemes raise pensions-in-payment each year in line with the change in the consumer price index (CPI) or the retail price index (RPI), or at least by a minimum percentage that is linked to inflation. Trustees are rarely allowed to cut back on this guarantee.
Field's argument is that with company pension schemes suffering huge funding issues, particularly as bond yields have fallen, employers could be forced to fall back on the Pensions Protection Scheme, which protects savers where a scheme is unable to make good on its promises. The MP fears this would see many members even worse off than if they lost their inflation protection. By contrast, giving trustees more discretion to vary the inflation link might help employers cope with pension-scheme costs.
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The debate will focus on the cost of inflation protection, which tends to be expensive, even though UK inflation currently stands at almost zero. But the discussion will also be of interest to anyone with private pension savings, since they too have the option of buying inflation protection on retirement if purchasing a guaranteed annuity income. In fact, the merits of doing so look highly questionable at the moment.
The cost of building annual inflation-linked increases into your pension income is so high in terms of the lower starting income you must then expect that inflation would have to rise substantially to make it worthwhile. Against that, however, inflation-proofing does offer peace of mind certainty that however high inflation rises, your pension's purchasing power won't be eroded.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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