Following the recent problems with company pension schemes where employees have no guarantees to even receive a pension if the scheme cannot take the burden, the Department for Work and Pensions have unveiled new protection measures.
According to the Secretary of State for Work and Pensions, Andrew Smith, the UK are looking to adopt measures currently used in the United States. This would mean implementing a pension protection fund to protect pensions if an employer goes bust.
The idea of the pension protection fund is that each pension scheme will have to pay insurance into the fund that will cover 90% of pensions for current employees and 100% of pensions for those already retired.
Mr Smith also commented that those employers wanting to wind up (close down) their pension schemes would have to compensate the members properly. At the moment there is a certain order of priority for when pension schemes are wound up. This means that some people get more protection than others. The idea is that existing pensioners will be top priority, followed by those people that have been in the scheme longest.
Mr Smith said: I want to end the scandal of workers being denied the pensions they have built up over many years or pensioners seeing their pension cut if their firm goes bust or their scheme winds up. This balanced package strengthens protection for scheme members while reducing the burden on companies who run schemes.
Our View
These proposals are long overdue but something has to give if improvements are to be made. According to Mr Smith, the current increase to final salary pensions will be cut from 5% to 2.5% in order to offer these safeguards. This means that people will technically be worse off each year but will be more assured of actually receiving a pension in retirement.
The proposals look to be implemented in April 2005 but many industry commentators believe the Department for Work and Pensions has massively underestimated the cost of these new measures. If they have and the costs are not affordable to employers, we could end up with even less employee pension schemes in place.
Learn more about pensions at the Pensions Adviser.com.