UK - The National Association of Pension Funds (NAPF) has backed a proposal by the government to half the cap on indexation of deferred retirement benefits, but consultancy experts have criticised such reforms.

Mike O'Brien, minister for Pensions Reform, has recommended the cap on the revaluation of deferred pensions be reduced from 5% to 2.5% per annum, as part of the government's response to the deregulatory review.

"The Government's proposals plot a sensible middle course between safeguarding members' benefits and encouraging employers to provide good quality occupational pensions," Joanne Segars, NAPF chief executive.

However, actuarial firm Lane, Clark & Peacock (LCP) has attacked the proposal, arguing it would add to the regulatory burden for scheme sponsors instead of reducing it.

As deferred benefits will be revaluated to the lower rate after a certain date, pension schemes will have to introduce separate benefit slices for people who left the scheme before that date, explained David Everett, head of pensions research at LCP.

These persons' deferred benefits up until the date the changes are introduced would then be revaluated to a different rate than those after the deadline until actual retirement date.

"Sponsors can only save money under this proposal by making their scheme more complicated," he commented.

Criticism of the proposal also came from the Trade Union Congress (TUC) which said the proposal was "going too far" and was a case of "deregulation straying into attacks on pension scheme members".

"We are very disappointed at the proposal that the cap on the revaluation of deferred pensions should be cut from 5% to 2.5%," said Brendan Barber, TUC General Secretary.

He argued the lower indexation of retirement benefits between a member ceasing contributions and effectively retiring from the scheme would hit people with broken careers, especially women, hardest.

The TUC also said it was positive the government had "stood up to the very strong employer lobby to end Limited Price Indexation (LPI) for pensions in payment".

Yet consulting actuaries Punter Southall said they were "particularly disappointed" by the decision to retain mandatory indexation in payment.

"The UK is almost unique in providing mandatory increases to pensions in payment, no matter what the funding level of the pension scheme," said Jane Beverley, principal and head of research at Punter Southall.

"Making pension increases discretionary as in the Netherlands would have given employers more flexibility at times of difficulty."

O'Brien mentioned the obligation for an employer to make a contribution to a multi-employer scheme on leaving it ("Section 75"), principles based legislation and existing rules on surplus in defined benefit schemes as three other issues to be looked at under the deregulatory review.

If you have any comments you would like to add to this or any other story, contact Barbara Ottawa on +44 20 7261 4618 or email barbara.ottawa@ipe.com

Topics