Government proposes scheme to safeguard pensions

whose pension schemes face closure are to receive greater protection under new
government proposals announced today.

Work and pensions
secretary Andrew Smith said the Government would set up a compulsory insurance
scheme to ensure workers did not lose their pension if their employer became

The Pensions
Protection Fund would be funded through a fixedrate levy on all firms that offered
final salary pension schemes, with an additional risk-based levy according to
how under-funded a scheme was.

The scheme would
guarantee that people who had already retired would receive 100 per cent of
their pension, while other workers would receive 90 per cent of the savings
they had built up.

But the fund,
which will not come in until at least April 2005, will not help any workers who
have already lost their pension as a result of their employer going bust.

In return for
enhanced rights, retired pension scheme members face smaller income rises in

A combination of
falling stock markets and an ageing population has left the pension schemes of
the FTSE 100 companies facing an estimated £65bn black hole.

If assets fall
below liabilities, then
employers are duty bound to prop up ailing final salary pension schemes. As a result, many
employers have closed their schemes to new recruits, increased employee
contributions, or simply wound schemes up.

Under current
rules, when a pension scheme is wound up, the bulk of the benefits go to retired members, often leaving
those of working age with little to show for their savings. In some cases, though, solvent schemes
have been closed by firms leaving some members with little to show for their
pension contributions.

Under the new
proposals, if firms
choose to close a solvent scheme,
they will have to buy an annuity, income for life, for retired scheme members. Firms will have to pay scheme members
below retirement age money, which they can invest elsewhere.

The insurance will
mean a fairer distribution of pension benefits but will place an extra burden
on hardpressed

To relieve that
burden, the Government
has announced that it plans to reduce the requirement on schemes to raise the
pension of retired members by 5 per cent a year. In future, schemes will be required to raise the income of
retired members by a minimum 2.5 per cent a year.

Smith announced
that a new pensions regulator is to be set up to ensure that firms follow the
new rules to the letter. He said the raft of proposals would ensure "pension rights promised
are rights delivered".

By Ben Willmott

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