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One third of pension professionals think employers should be allowed to reduce accrued DB pensions

16 May 2017

  • 94% fear abuse from unscrupulous employers
  • 69% believe the Government should allow schemes to move to different indicies for the indexation of benefits

Almost one third (30%) of pension professionals believe it should be possible to renegotiate accrued DB benefits under certain circumstances, according to a survey by the Pensions Management Institute (PMI). Of these, 77% would allow a reduction in benefits if there was a danger the scheme would enter the Pension Protection Fund (PPF) without it. 88% meanwhile believe it would be a legitimate response to a fall in funding levels below a predetermined threshold.

The survey of over 230 UK pension consultants, trustees, administrators, actuarial, legal and investment professionals, was launched in response to the publication of the Government Green Paper, which consulted on the Security and Sustainability of DB pensions.

The reluctance in permitting DB pension reviews could be explained by fears that unscrupulous employers could manufacture a scenario that would permit them to renegotiate accrued DB benefits and reduce them, with 94% believing this is a likely risk. There seems to be a general consensus that introducing flexibility in the system could lead to a range of unintended consequences including benefits being reshaped or reduced unnecessarily.

The survey also highlighted an apparent lack of consensus around the issue of consolidation, as one of the cost reduction measures proposed in the Green Paper. The two principal barriers to consolidation were perceived to be a difference in Funding Level (89%) and a difference in Employer Covenant (83%). 53% also believed that a different level in Scheme Maturity could also prevent consolidation.

When asked whether the Government should consider a statutory override to allow schemes to move to a different index, provided that protection against inflation is maintained, 55% of pension professionals said that the Government should be permitted to revaluate both the preserved benefits and the indexation of benefits in payment. However, 31% said that the Government should not allow it.

Furthermore, in response to the question of whether schemes should be allowed to suspend indexation in some circumstances, views were equally divided with 57% of pension professionals against. Of the 43% in favour to suspend indexation, 34% would permit it to keep a stressed scheme out of the PPF and 21% would allow it when funding levels fall below a predetermined threshold.

Kevin LeGrand, President of PMI said: “Defined benefit pensions are often seen as sacrosanct, therefore, renegotiating accrued benefits or reducing them is a very controversial issue. They are all too aware of how introducing a degree of flexibility could open Pandora’s box, leading to various unintended consequences or risks, most notably abuse.

“However, our survey shows that pension professionals are willing to be pragmatic in extreme situations in order to protect benefits and secure the best outcome possible for members.”