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UK Department for Work & Pensions denies deciding to end pensions indexation

UK - The UK Department for Work & Pensions (DWP) has denied any firm plans to end indexation in private sector pension schemes, following comments by pensions minister Steve Webb over the weekend.

Speaking to the Financial Times, Webb indicated that an end of indexation could be a means of reducing the cost of pension funds on employers - as they would no longer be required to protect benefits against inflation increases.

The comments come after he previously pledged to “facilitate” the re-introduction of risk-sharing in pension schemes, although at the time his comments were directed at the possibility of minimum guarantees in defined contribution.

A spokeswoman at the DWP said it made “sense” to consider options to support final salary schemes in light of their decline.

She added that it was important to have a “frank debate” and “open exchange of ideas”, allowing schemes the “flexibility” to innovate.

“We’ve committed to reinvigorating private pensions, and this is part of that debate, but no decisions have been made,” she said. “Our focus however, is future pension provision, not today’s pensioners.”

The National Association of Pension Funds (NAPF) welcomed the idea of reduced indexation, saying there was a “strong case” for what it termed “core DB” - with its chief executive Joanne Segars saying it was encouraging to hear Webb discuss the approach.

“Removing inflation linking could also encourage a greater degree of risk sharing between employers and staff, rather than the polarised world of DC and DB,” she said.

“Employees could still have the certainty of a guaranteed pension linked to their salary, without the exposure to investment and annuity rate risks associated with DC.”

She noted that allowing schemes further flexibility could improve their chances of survival.

Segars said the proposals could reinvigorate workplace pension schemes - a pledge the government has yet to fulfil, according to the NAPF.

She said the end of a legal requirement for indexation would not necessarily lead to an end of inflation-proofing overall, but allow schemes to decide on a case-by-case basis.

“Employees could have the option of paying extra to fund inflation-linking, or employers might choose to offer them anyway - and, of course, any changes would not affect accrued rights,” she said, alluding to an approach not dissimilar to the Dutch system of conditional indexation.

Conditional indexation was most recently considered by the Labour government in 2008, but dismissed, as there was insufficient industry consensus about its implementation.

An end to index-linking benefits was previously suggested in a 2002 report by Alan Pickering, former chairman of both the NAPF and the European Federation for Retirement Provision, and criticised by unions for increasing the risk of old-age poverty.

Further criticism at the time noted that the measure seemed designed to save defined benefit schemes “rather than to help us solve the pension or retirement issue”, according to Peter Dencik, at the time director of Singer & Friedlander Investment Management.

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