Oldest British Steel pensioners set to lose £10,000
The oldest and most vulnerable members of the British Steel Pension Scheme could lose more than £10,000 if proposals from the government get the green light.
As part of plans to reduce the final salary pension scheme’s liabilities ahead of a potential sale of Tata Steel’s UK operations, the government is consulting on new rules that would reduce annual increases to pension payments.
The rule change would permit scheme trustees to link annual increases to consumer prices index inflation (CPI) instead of retail prices index inflation, which is typically higher than (CPI). However, making matters worse, some older pensioners may also see their pension (and any pension for a widow) frozen.
This is because the law that requires pension payments to be linked to an index only applies to service after 1997. For the years worked prior to this date there is only a restricted requirement to increase payments and only for a limited period of time.
As a result pensioners who did most of their work before 1997 will have the bulk of their pension frozen. Calculations from Royal London show that this means an 80-year old British Steel Pensioner with a £100 a week pension could lose more than £10,000 over the next decade.
“Proposals may have unintended consequences”
Commenting on the proposals, Royal London’s director of policy, Steve Webb says: “The rules around pension uprating are complex, and the government’s consultation document is far from clear about how this change will disproportionately affect older and more vulnerable pensioners. This is not simply a case of switching from one inflation measure to another.”
“Many thousands of older steel workers and their widows could see their pensions largely frozen for the rest of their life if these plans go ahead, with losses running into thousands of pounds.”
- If you have a final salary scheme and are worried about its future or whether it is right for you, read our article Should you trade in your final salary pension?
Mr Webb says the change could also have far reaching consequences beyond this specific scheme. He says: “This is a big issue for the steel workers scheme, but an even bigger issue if the principle is applied to a wider group of salary-related pension schemes. This potentially huge impact, buried in the small print of the government’s consultation document, highlights the way in which rushed legislation can all too often have unintended consequences.”
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).