UK plans changes to salary-linked pension schemes

Workplace pension schemes in UK are set for changes with a view to make them cheaper and more flexible for employers. The new plans will also aim at removing the legal obligations in traditional final-salary schemes, and improving lower grade pension arrangements. According to Pensions Minister Steve Webb, these changes would mean some more generous pension schemes remain open.

Final-salary schemes, which promise to pay a proportion of salary on retirement, have over the years seen a massive drop in the number of people enrolling for them – from nearly 5 million private sector workers contributing to final-salary schemes in 1995 the number has come down to just over 1.7 million this year.

This change may be attributed to the fact that more than 30% of final-salary schemes have been closed; while more than half are open only to existing members – limiting the options for new employees. Meanwhile, millions of employees are being made to contribute, by law, to an inferior workplace pension scheme called auto-enrolment.

Flexibility for employers

The proposed changes will allow employers greater flexibility in providing workplace pensions. Under the new law, employers are no longer required to provide pensions to the spouse of a deceased staff member. In addition, they will also not be required to pay pensioners for annual increases in inflation.

By allowing employers the flexibility to cut back on future benefits of staff pensioners, the Government hopes some of the remaining salary-linked pension schemes will survive and remain open to new employees. According to Steve Webb, these changes will come into effect after the 2015 election.

These changes further highlight the attraction of transferring a UK pension into either a SIPPS or QROPS if you are an ex-pat living outside the UK. Once secured, in the event of death, your surviving spouse will still either receive an income or in some cases the full amount of the pension fund paid free of tax.

More benefits

Millions of workers are contributing to the auto-enrollment workplace pensions but these schemes for the most part are not salary-linked. As a result, in many cases, the contribution levels are severely low, prompting concerns about the eventual retirement income being inadequate.

The new legislation is expected to address these concerns by encouraging employers to provide future income guarantees with a hope to draw in more people making bigger contributions towards their pensions. The Government believes the new schemes will be cost-effective to run, while also assuring the retirement savers get a big enough pension pot. However, the analysts see the proposed changes as just a last ditch effort to save salary-linked schemes and strengthen the alternatives.