Final salary pensions ‘killed off’ by excessive regulation

Millions of savers are relying on retirement income from final salary pension schemes that are being “killed off” by excessive regulation according to a new report.

The claim was made by academics and lawyers in a paper which suggests businesses are closing “defined benefit” schemes — and shifting staff into riskier retirement plans — because of high compliance and running costs.

The government is facing calls to strengthen the Pension Regulator’s powers following the high-profile collapse of BHS last year, which left many of the 20,000 members of the retail group’s pension facing cuts to their retirement income.

Like most members of defined benefit pension schemes, BHS staff had been promised a secure income for life, typically inflation proofed, and based on a percentage of their final salary at retirement.

Now some face cuts of up to 10 per cent to their pension, after BHS collapsed and the scheme was placed into the hands of the so-called pensions lifeboat.

In the wake of BHS, an influential parliamentary committee has called on the government to force firms to seek clearance from the watchdog before undertaking corporate deals.

However, this would come on top of an estimated 160,000 pages of UK pensions legislation including rules, regulations, codes, case law and guidance notes, according to a joint report by Pinsent Masons, the law firm, the Pensions Institute, part of the Cass Business School, and Pendragon, the information service provider.

“Failings of the pension system over the years have led to calls for more legislation and regulation, to prevent scandals being repeated,” said Carolyn Saunders, head of pensions at Pinsent Masons. “While rules might indeed be a good thing, too many might be bad for us.

“Despite the major increase in pensions rules over the last 10 years, aimed at protecting the consumer and encouraging better retirement saving, there has been a significant drop in the membership of defined-benefit pension schemes, with many people on course for inadequate incomes in retirement.”

Ms Saunders said she believed the rules were currently strong enough to prevent “another BHS” if the regulator used its existing powers more effectively and improved its skill mix.

The call came with the pace of closures of the UK’s 6,000 remaining private sector defined benefit schemes quickening. Last year, 35 per cent of schemes were closed to future accrual, up from 12 per cent in 2006.

“Things began to go wrong when they issued more pages of regulations than the number of pension schemes in the country,” said Professor David Blake, director of the Pensions Institute.

“Our once brilliant, flexible, final salary schemes have been killed off by over-regulation. We will all live to regret this.”

Some experts did not agree that legislation was the reason why schemes were shutting their doors.

“It is fanciful to claim that ‘excessive regulation’ has killed off UK defined benefit schemes,” said John Ralfe, an independent pensions consultant.

“These schemes have closed because their cost has increased dramatically in the last 20 years — people are living longer, and real interest rates have fallen — so more money must be put aside today to pay the pension promise.”

Mr Ralfe said the forthcoming pensions green paper on the topic should make funding requirements “crystal-clear, with no wriggle-room” for companies.

“We should be clear that pension regulation is designed to ensure members get their pensions paid and to prevent companies walking away from their pension promises,” said Mr Ralfe.

The call came as the Pensions Regulator revealed in a freedom of information request that it has spent more than £10m pursuing nine employers to settle pension debts.