- Fall in number of private sector workers covered by final salary pensions
- It has dropped from more than five million in 1995 to just 1.7million now
- The move could salvage schemes by making them affordable for bosses
Widows could lose their historic right to a pension under plans to halt the ‘terminal decline’ of final salary schemes.
Private sector bosses currently have to make payments to a retired worker’s surviving spouse, typically worth at least half their full pension.
But that obligation would end under proposals from the Department for Work and Pensions.
The soaring cost of final salary pensions – or ‘defined benefit’ schemes – have seen the number of private sector workers covered drop from more than five million in 1995 to just 1.7million now.
The new measures, which could come into force by April, are designed to save the schemes.
As well as signalling the end of widow and widower benefits, the plans could force employees to wait longer before they can retire on a full pension as well as see their payments frozen and left at the mercy of inflation.
The proposals do not affect public sector workers or those in the private sector with ‘defined contribution’ pensions – where benefits are not linked to salaries.
Steve Webb, the pensions minister, insisted the controversial move could salvage final salary pensions by making them affordable for bosses.
‘We want to enable firms to offer good pensions without a lot of regulations,’ he added. ‘If we do nothing, everyone will end up with a pension that doesn’t link to their earnings.
‘Traditional final salary defined benefit schemes which give the consumer certainty are in terminal decline.’
The changes will make the final salary schemes cheaper for bosses – at the expense of workers whose benefits will be watered down dramatically.
Payouts to retired workers must rise by at least 2.5 per cent a year but this rule might be scrapped.
For someone on a pension of £10,000 a year, this would cost them around £70,000 over a 25-year retirement period.
The DWP report states: ‘Of course, employers could continue to offer schemes that include index-linked benefits and survivor rights if they so choose, but it would no longer be a statutory requirement.’
The proposal, subject to a six-week consultation, will affect only the future rights – any pension already built up will be protected.
Laith Khalaf, of financial advisers Hargreaves Lansdown, said: ‘Under these proposals, workers could save diligently throughout their lifetime, only for the rug to be pulled from under them at the last minute.’
Dr Ros Altmann, a leading pensions expert and former Downing Street adviser, said: ‘State workers are the pensions aristocracy. They have an incredibly valuable and generous pension arrangement which is beyond the dreams of everybody else in this country.’
Bosses would also be given greater flexibility to change the age at which a worker is allowed to retire on a full pension.
Earlier this week, a report, published jointly by the Pension Protection Fund and The Pensions Regulator, said a record 30 per cent of ‘defined benefit’ pension schemes have closed to existing workers.
The speed at which schemes have closed is alarming. In 2008, the figure was just 17 per cent, rising to 19 per cent in 2009, 21 per cent in 2010, 24 per cent in 2011 and 26 per cent in 2012.
‘We want to enable firms to offer good pensions without a lot of regulations. If we do nothing, everyone will end up with a pension that doesn’t link to their earnings’
Steve Webb, pensions minister
The Government’s proposals are an attempt to slow down the rate of closure.
Its report warns: ‘Without Government intervention to allow more flexibility and reduce constraints for employers sponsoring defined benefit pensions, they are likely to disappear almost completely from future pension arrangements.’
Lord Oakeshott, a leading Liberal Democrat peer, said: ‘There is no easy answer to the affordability crisis for many private sector pension schemes so more flexibility may well be the only way.’