“The government’s paper stimulates a much-needed discussion relating to the future funding of this type of pension scheme in the private sector. However, the possibility of using a new measure of inflation or even allowing schemes to suspend inflation indexation altogether will be a contentious point.
“It would be likely to save money for businesses while at the same time reducing pensions for scheme members. Similar measures have been considered in the past but did not gain traction because government was partly concerned about a backlash from millions of pension holders.
“On the flip side, DB pensions have turned out to be far more expensive than most could ever have imagined. Factors such as significant increases in life expectancy mean that companies are now having to pay much more than originally anticipated to fund pensions for their former employees decades after they finish work.
“It is easy to see why business wants some room to help it meet the cost of paying pensions, especially given recent high profile cases where the weight of funding the pension scheme has had a serious impact on the business.
“It is possible that some DB pension holders may accept these proposals if they believe that it makes their pension more secure. This is what happened at Tata Steel, where pension scheme members voted to reduce their benefits. Although the Pension Protection Fund (PPF) supports workers and retirees if their scheme goes under, it may pay them less than they might have expected.
“For those people with private sector DB scheme benefits, it is worth planning ahead. Members can get a transfer value quotation from their DB scheme once a year. This will tell them how much could be invested into pension scheme. At present, transfer values are at record highs and many people have chosen to transfer from their DB scheme to benefit from the pension flexibility options offered by defined contribution (DC) pension schemes, such as personal pensions. However, as there are costs and risks involved in this course of action, it is essential to take advice beforehand. A professional financial planner will also be able to help you identify, and make up for, any shortfall if your projected pension benefits are lower than they expected.”