“Carillion is the latest company to struggle under the weight of pension debt as defined benefit pensions have turned out to be far more expensive than most could ever have imagined,” the pensions expert said.
“Factors such as significant increases in life expectancy mean that companies are now having to pay much more than originally anticipated to fund pensions for their former employee’s decades after they finish work.”
Pressure to deliver
The white paper, Browne said, is likely to contain proposals to give employers more flexibility to switch to less generous annual increases for pensioners.
He said the government may give companies the power to use a new measure of inflation or even allow schemes to suspend inflation indexation altogether.
“This would be likely to save money for businesses, while at the same time reducing pensions for scheme members.
“Similar measures have been considered in the past but did not gain traction because government was partly concerned about a backlash from millions of pension holders,” Browne said.
Nigel Green, chief executive of deVere Group, said the failure of Carillion is a “wake-up call” for pension savers.
“The government’s pensions lifeboat, the Pension Protection Fund (PPF), is now to take over payment of pensions for the company’s retirement scheme members.
“Whilst the PPF is an important and valuable support, UK final-salary pension schemes have an enormous deficit blackhole, which raises the inevitable question, how many more big hits can the PPF take,” Green said.
Neil Moles, managing director of Progeny Group, said Carillion had about 28,000 UK pension scheme members.
“It’s landed in the PPF lifeboat so at least the 12,000 pensioners in payment are largely safeguarded, for now, but for those not yet drawing a pension things are less positive.
“They will get 90% of what they expected but this is capped at £38,505.61 pa for someone aged 65,” Moles said.
Pension transfer difficulties
There are currently more than 6,000 private sector DB schemes in the UK. About 880 schemes and 235,000 members have transferred to the PPF to date, with total claims amounting to around £5.5bn.
The government has predicted that another 600 schemes and around 150,000 members will transfer to the PPF by 2030.
While scheme members have been lured out of DB schemes with the promise of sky-high transfer valuations, the Financial Conduct Authority announced last week that it will collect data from every UK firm that advises on DB pension transfers, as part of a probe into practices across the market.
This could mean that people looking to transfer out of DB schemes may find it more difficult in future.