Pensions dealt another body blow

BRITAIN'S battered pensions has suffered another body blow. In a report commissioned by the Government, an expert is proposing that the law which protects them against inflation should be swept away. Alan Pickering will recommend scrapping index linking of pensions - a move which, in effect, means they will decrease in value.

His shake-up would also end payouts to widows expecting to rely on their husbands' pensions, which could leave many women with little or no income in old age.

Pickering's proposals, to be unveiled on Thursday, would affect millions who have private, work or public sector pensions.

More than four million key workers are members of public sector pension schemes, widely regarded as the most generous retirement plans. Many take low-paid public sector jobs knowing that they will, to some extent, be compensated by a large pension.

But there is already a shortage of nurses, teachers and policemen - and last night there were fears that the proposals could make it even harder to recruit new staff.

Pickering's proposals are unlikely to be retrospective, so savings already built up would be unaffected, but they add to the growing crisis on pensions.

With employees living longer, many companies are trying to reduce their liabilities by scrapping traditional final salary pension schemes, which pay a fixed income according to the size of your salary when you retire.

In their place come risky schemes based on stock market performance. These pensions also require higher contributions from employees. Other companies have simply closed their schemes. And the Government has been accused of aggravating the crisis by imposing higher taxes on pension funds.

Under the Pickering proposals, people could be forced to work longer before they retire or to put more money aside for their old age.

Pickering, former chairman of the National Association of Pension Funds, says it is better to reduce the value of pensions rather than stand by as more companies shut their schemes. But scrapping index linking will seriously affect their value. Someone receiving a £10,000-a-year pension today would see the buying power of that cash cut to about £6,000 after 20 years and less than £5,000 after 30 years.

This assumes inflation running at just 2.5%, the Government's target rate. But some experts fear inflation could rise, making the effect much more startling. At 5%, the same £10,000 pension would be worth £3,600 after 20 years and £2,150 after 30 years.

Independent pensions consultant Ros Altmann said: 'This is extremely worrying. It is OK now when inflation is low but how will the situation look if inflation becomes a problem in the future?'

While the move would be devastating to workers in the public sector, it will potentially save the Government billions in pension payouts. Index linking safeguards the pensions of 12m savers in company and public sector schemes. It also protects about 4m savers with personal pensions bought from insurers or investment companies.

Pickering's proposals will also signal the end of the need to pay a pension or lump sum life assurance payout to a surviving spouse, usually the wife, in the event of a saver's death. A spokesman for Age Concern said: 'Elderly women are most likely to be surviving on low incomes in retirement. If there were moves to alter survivor benefits, this would be likely to cause more poverty.'

Pickering is understood to believe that his proposals will help prevent companies closing their schemes because of the cost.

His report will say it is better to cut the benefits of final salary pensions and company schemes than allow the costs of these plans to force firms to close them.