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Last Updated: Monday, 22 October 2007, 17:00 GMT 18:00 UK
Government ponders pension change
A calculator
Parked pensions may not rise as fast in the future
The government is proposing to cut some of the protection against inflation built into company pension schemes.

Staff who leave an employer but defer taking a pension until they retire will have their pension entitlement revalued each year by a maximum of only 2.5%.

Since 1986, pension schemes have been obliged to revalue deferred pensions by up to 5% each year.

The plan is aimed at making it cheaper for employers to run schemes but has been criticised by trade unions.

Hurting women?

"This is particularly important for those with broken careers, typically women and carers," said Brendan Barber, general secretary of the TUC.

"If we were to return to higher rates of inflation in the future this could quickly eat away at benefits built up early in a working life - something that seems to go against the government's message that we should all start saving as early as possible."

If implemented, the new rule would apply to pensions built up in the future.

These proposals will help sustain the future of defined benefit pensions
Joanne Segars, National Association of Pension Funds

Past pension entitlement will still be revalued up to 5% each year.

The aim of the government's proposal, which is now out to formal consultation, is to make it cheaper and simpler for employers to continue offering final salary schemes.

The plans were welcomed by the National Association of Pension Funds (NAPF).

"We are pleased that the Government has listened to the NAPF's calls to reform the rules related to the revaluation of deferred pensions," said the NAPF's Joanne Segars.

"These proposals will help sustain the future of defined benefit pensions, which provide valuable income to millions of working people in retirement."

Final salary closures

Final salary pension schemes have become increasingly expensive to finance over the past few decades, partly due to the introduction of legal minimum requirements such as compulsory indexation in deferment.

As a result, the majority of final salary schemes have now been closed to new joiners.

This trend has gathered pace in the past ten years, with some employers even closing their schemes to existing members.

Some employers have also been lobbying for the abolition of compulsory indexation of pensions in payment, already reduced in 2005 from 5% to 2.5%, but this idea has been rejected by ministers.

"Removing the statutory requirement for employers to index pensions would put the value of future payments at risk, and we do not believe that would be in members' best interests," said Ed O'Brien, the minister for pension reform.

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