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.”