UK – Work and pensions minister Andrew Smith is set to respond to months of consultation on pension reform proposals this week.

According to his department, Smith is to respond to the consultation which followed the Green Paper on pension reform that was released late last year.

According to an unsourced report in the Financial Times, one proposal to be announced will be the modification or scrapping of the rule that allows pensioners’ payments to be adjusted for inflation, or increased by five percent - whichever is the lower.

According to the FT, ministers believe that the current requirement to be able to fund inflation increases of up to five percent is imposing unnecessary costs on final salary schemes. It is unclear whether Smith will propose reducing this inflation guarantee to 2.5% or scrap it altogether.

Such a move could result in a dramatic fall in pensions. Says Roger Lyons, general secretary of the manufacturing union, Amicus: “If the rumours are correct and the government does propose to allow companies not to increase the pensions of pensioners year on year, then this is unacceptable for a number of reasons. Primarily because if an individual enjoys a long retirement, the value of their pension will go down year on year.

“Individuals could end up destitute after a number of years as pensions lag well behind inflation rises.”

Alan Pickering had also advocated the removal of inflation-proofing in his government-commissioned report into the simplification of the regulation of private pensions. He argued that the lack of matching assets for Limited Price Indexation and the shortage of index-lined gilts had made the compulsory provision of inflation guarantees disproportionately expensive. Pickering also said that it was driving employers to switch from defined benefit to defined contribution schemes.

A spokeswoman at the Department of Work and Pensions referred to the rumours as ‘speculation’, and said that Andrew Smith’s response would be this week.