The points raised by the CBI yesterday all have their merits but many can't realistically be implemented quickly enough to help companies through the current financial crisis. However, as long-term objectives some of the recommendations would certainly help in reversing the decline in the final-salary pension provision.
Benefit amendments: any change to an employee's pension benefits will be a sensitive issue. Most employers with a final-salary scheme will have gone through this process in the past few years as schemes have reduced the level of benefits being accrued in respect of future service. In most cases these seem to have been accepted by employees who are grateful to retain any form of final-salary pension or acknowledged that this had become common practice in the private sector. The increased coverage of pension issues in the press has certainly raised the profile of final-salary schemes and those employees who still have one may now appreciate it more than ever.
However, would a change to reduce the value of benefits already accrued, as proposed by the CBI, be a step too far? The obvious change for the Government to allow would be a retrospective increase in members' normal retirement age. As the CBI point out, a pension scheme member's life expectancy has increased significantly over the period since the benefits were promised. This increase and the consequential increase in cost could never have been predicted at the time and is it really fair for the employer to pay for all this increase? This becomes a moral rather than a legal issue and a very difficult political decision.
The Government has effectively made a very similar change itself when it announced the increases to state pension age over the next 30-plus years. This change seemed to pass with little fuss probably because the increase was relatively small and had the most impact on those who had not even started to think about retirement. The size of change needed to provide meaningful financial help to those with a final-salary scheme will need to be much bigger and is therefore likely to be more of an issue with employees.
The detail behind any legislation that allows accrued benefits to be altered needs to be considered carefully. For example, if changes can only be made when a scheme is in financial trouble is it fair that one that has been funded more prudently, with the employer historically paying higher contributions, can't benefit from this relaxation?
From an HR perspective reducing the benefits for former employees must be an easier option - although under the ethos of trust law it would seem unlikely that a scheme could reduce deferred members' benefits without altering the accrued benefits for current employees. This obviously creates numerous HR issues that will vary from company to company.
Pension Protection Fund: The CBI is asking for restrictions to be maintained on future increases in the levy that subsidises the Pension Protection Fund (PPF). This may help business in the short term but the Government needs to take a more fundamental look at the continued financial viability of the fund in its current form. The PPF is already underfunded and the expectation is that many more schemes will be entering it in the next few years at a time when they are severely underfunded. Does the level of benefits offered by the PPF need to be reduced already if politically the Government could allow them to be reduced?
The other point to note is that the restriction on future increases to the PPF levy being advocated by the CBI only applies to the total amount of levies collected from all pension schemes. Individual schemes could still see huge jumps in their PPF levy as the company's fortunes decline and their credit rating used to calculate the PPF levy worsens.
Nick Griggs is a partner at Barnett Waddingham
