Millions of pensions could be jeopardised under proposed Labour reforms that would permit companies to tap into employee pension funds and reinvest the money, experts have cautioned.
Ministers have faced criticism for potentially treating people’s retirement funds with disregard through plans that would enable defined benefit pension schemes to redirect surplus funds back into businesses.
Investment analysts have expressed concerns that this could lead to scenarios reminiscent of Robert Maxwell’s notorious £400m plunder of the Daily Mirror staff pension funds.
Defined benefit pension schemes, which offer a secured, inflation-proof income for life typically based on an individual’s final salary, currently count approximately 8.8 million members. These schemes are increasingly scarce as escalating costs have compelled employers to switch to defined contribution schemes.
Following years of deficits, it is believed that about three-quarters of these schemes now have surplus funds due to enhanced investment returns and rising interest rates.
This has prompted Rachel Reeves, the Chancellor, to propose giving these schemes more leeway to utilise surplus funds for business reinvestment “where it is safe to do so,” as part of her strategy to stimulate economic growth.
However, experts have raised alarms that without stringent controls, these plans could endanger retirees’ savings. Andrew Tully of Nucleus Financial highlighted the potential for employers to use these surpluses to address the mounting costs of National Insurance and the minimum wage rather than enhancing pension provisions.
He advised The Telegraph, “It’s crucial that there are protections in place to guarantee the security of members’ benefits. Any withdrawn surplus must still leave the scheme robust enough to handle unexpected events that could impact its pension payout capabilities.”
Rachel Vahey from AJ Bell echoed these sentiments, warning that while many defined benefit schemes currently exhibit healthy surpluses, there are no assurances that these favourable financial conditions will persist.
She stressed the importance of trustees acting as custodians of the surplus to ensure it is only transferred to employers if it does not jeopardise the members’ financial future.
The necessity for protective measures against potential abuses akin to those by Maxwell was also emphasized. “Otherwise, the Government is risking cavalier treatment of individuals’ retirement funds,” Vahey added.
Concerns are also rising among scheme members themselves. In a survey of 1,000 members conducted by the Pension Insurance Corporation, 60% expressed fears that the Government’s proposal would endanger their pensions.
Additionally, 56% preferred their pension scheme funds to benefit them directly rather than being allocated to employers, with only 8% placing trust in politicians regarding decisions affecting their pension income.
The Government is presently reviewing expert submissions on the proposals after a consultation acknowledged that extracting surplus funds would “reduce security for members.” It also recognised the need for new regulations to ensure a high likelihood of pensions being paid in full.
Tracy Blackwell, CEO of the Pension Insurance Corporation, pointed out that the voices of defined benefit scheme members, many of whom are elderly or vulnerable, have been largely overlooked in the discussion.
She stressed, “The opinions of these members should be taken into account in any decision-making about a policy that, according to the Government’s own documentation, would diminish the security of their pensions.”
