The Department for Work and Pensions’ impact assessment has acknowledged that its pension reforms could place nine million savers at risk, according to its own impact assessment.
The admission reveals that proposed changes would permit companies to extract surplus funds from defined benefit pension schemes.
Civil servants have warned that these reforms could result in more schemes running out of money, potentially leaving them unable to meet their financial obligations to members.
The DWP’s impact assessment states that removing surplus funds “adds an indirect cost to members in terms of the increased likelihood of members not receiving their pension benefits in full.”
The reforms are being championed by Chancellor Rachel Reeves and Work and Pensions Secretary Liz Kendall through the Pension Schemes Bill.
Critics have condemned the proposals, with the Pension Security Alliance (PSA) describing the plans as treating pension schemes as “a piggy-bank that politicians can dip into or a cash-cow for employers.”
The PSA, which includes Silver Voices and pensions consultant John Ralfe, said: “The Government’s own analysis proves that the Government’s plans pose a risk to the retirement incomes of millions of members of defined benefit pension schemes.
“It’s shocking to learn that civil servants have told ministers that if these plans go ahead, some pension schemes could struggle to meet their obligations to pay pensions.”
Millions of pension savers at risk of missing out on full retirement payouts, Government admits
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The alliance emphasised that “pension scheme members have worked to earn their pensions and the money in pension schemes is there to provide them with a secure income in retirement.”
The impact assessment specifically warns that “a scheme surplus can act as a financial cushion for members, to absorb unexpected costs or investment losses for the scheme.
Without this cushion, the scheme may be more likely to struggle to meet its obligations to members, especially in times of financial stress or economic shocks.”
Although interest rates have since risen and most schemes have returned to surplus
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The concerns stem from recent history, when lower interest rates following the financial crisis pushed many schemes into deficit by damaging their expected investment returns.
This forced sponsoring companies to inject billions of pounds to cover shortfalls.
Although interest rates have since risen and most schemes have returned to surplus, critics fear another economic crisis could send rates tumbling again, leaving schemes vulnerable without their financial cushions.
The proposed changes would create new rules enabling employers to remove cash from schemes deemed to be in surplus – when they have more money than needed to meet all promised payments to members.
Companies argue that funds no longer require this money now that interest rates have risen. Any money extracted as profit would be subject to tax, providing revenue for the Treasury as it attempts to balance the books.
The 400-page impact assessment acknowledges the risks but states: “Overall, it is assumed this increased likelihood of members not receiving their benefits in full to be very low given the important role trustees will play in overseeing any decision.”
The reforms are contained within the Pension Schemes Bill currently under consideration.
The PSA maintains that “this official assessment, prepared by independent civil servants, shows that the Government’s plans could actually harm members
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Supporters of the reforms include Steve Webb, former pensions minister and current partner at pension consultant LCP.
Webb said: “The funding of company pension schemes has been transformed in recent years. The majority of schemes now have surplus funds which can be used in a responsible way to benefit scheme members, through improved benefits, as well as the companies who have paid so much in for so long.”
He added: “The plans have plenty of safeguards, including the judgment of trustees who will be seeking to ensure that using surplus funds does not undermine the security of member benefits. This is a positive initiative which should be supported.”
However, the PSA maintains that “this official assessment, prepared by independent civil servants, shows that the Government’s plans could actually harm members. That can’t be right.”
