Defined-benefit pensions still viable, says government

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Most defined-benefit (DB) pension schemes are still "affordable" for employers, the government has said in a discussion paper.

That is despite the fact that most DB schemes are currently in deficit.

Eleven million people are members of DB schemes, which link pensions to salaries.

And the government's message to employers is unequivocal: most can clear their pension deficits if they want to.

The government said the total deficit of all DB schemes in January 2017 was £197bn, down from £459bn in August 2016.

"Our modelling suggests that these deficits are likely to shrink for the majority of schemes, if employers continue to pay into schemes at current/promised levels," the paper declares.

"While DB pensions are more expensive than they were when they were set up, many employers could clear their pension deficit if required."

DB schemes have declined over recent years, as employers have switched to more affordable Defined Contribution (DC) schemes, where pension pay-outs are linked to investment returns.

'Moral hazard'

However, the paper accepts that some companies are "stressed" as a result of big deficits.

It says approximately 5% of schemes are in that category.

As a result, it leaves open the question of whether companies could save money by changing the way they uprate pension payments in line with inflation each year.

Some companies have been keen to uprate payments according to the Consumer Prices Index (CPI), rather than the Retail Prices Index (RPI).

Doing so could cut a pensioner's income by £20,000 over his or her lifetime, but save the pension scheme an equal amount.

In the paper, the government warns about the dangers of such losses to pensioners.

"There could however be a case to suspend indexation in cases where the employer is stressed and the scheme is underfunded," it says.

But this could raise "moral hazard issues", it warns, where companies might be tempted to deliberately increase their deficits, so they become stressed.

The industry will now be consulted on the issues raised.


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