Plan to cut pension protection to save salary-linked schemes

State pensions in Britain are low compared to average earnings, so for many Britons much of their retirement income will come from a pension provided by their employer.

In the past, pensions were often linked to a percentage of final or average salary, but such schemes are now rare outside the public sector due to their high and uncertain cost for employers.

It is now more common for firms to contribute a fixed amount towards an employee’s individual pension pot, which will offer an unpredictable income in retirement dependent on investment growth and long-run interest rates.

The Department for Work and Pensions said that for new pension schemes and future payments into existing ones, employers should be allowed to remove inflation protection and automatically raise pension ages if their staff live longer.

Staff who left their employer before retirement could lose additional rights, the DWP proposed.

“Final salary pensions have been in long-term decline and if we do not act it could disappear altogether,” said Pensions Minister Steve Webb.

“We want to help the best employers offer good alternatives including new forms of salary-linked pensions.”

For pensions into which employers make a fixed contribution, the Government said it was looking at legal changes to allow financial services companies to offer staff some degree of guaranteed income.

Nigel Ashton, who manages defined contribution funds for investment firm State Street, said he welcomed this part of the Government proposals.

“Giving individual savers increased predictability of potential outcomes ... in terms of retirement income is to be applauded,” he said.

“Whether or not this is best achieved through a ‘hard guarantee’ should certainly be explored.”