Government pension reforms could put “millions of people’s pensions at risk”, increase the prospect of scheme “collapses” and lower returns, experts have warned.
Pensions specialists, campaigners and businesses issued the warning after the government said it would push ahead with plans to change the law to make it easier for employers to dip into pension schemes.
There are also widespread concerns that reforms to allow the government to force pension funds to invest in British assets may put returns at risk.
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As part of a broader set of changes designed to boost the economy, the government said on Thursday that it would change rules governing the extraction of billions of pounds of surplus money in defined benefit pension schemes.
It said it would “remove barriers to extraction” and amend a threshold at which pension trustees can share a surplus with employers. The government hopes the plans will support investment and productivity.
However, the Pension Security Alliance, a new group, warned ministers that pension schemes were “not piggybanks for others to dip into”.
It said the changes were “not in the interests of” more than ten million members of traditional private sector pension schemes and noted the government had previously warned that surplus extraction could “reduce security for members”.
The group warned that extraction “before members’ benefits have been secured runs the risk of those schemes running short of money if financial conditions change. In that case, some schemes could collapse.” It added: “We urge ministers to think again.”
Members of the alliance include Just Group, which specialises in retirement financial services, Pension Insurance Corporation, an insurer, John Ralfe, a pensions consultant and chairman of two schemes, and groups representing older people.
The government has said it will consult on the surplus extraction plans, which would only happen at the discretion of trustees, with “stringent safeguards” to protect savers. It said that more liberal extraction rules could “benefit both employers and members”.
“Employers could use this funding to invest in their business, increase productivity, boost wages or utilise it for enhanced contributions,” the Department for Work and Pensions said.
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The reforms also give ministers a “reserve power” to enable them to force pension funds to invest in British assets if they do not do so voluntarily.
The UK Sustainable Investment and Finance Association, which represents more than 300 financial services firms with more than £19 trillion in assets under management, said it was concerned.
James Alexander, chief executive of the association, said that “mandation” risked “distorting markets, creating asset bubbles and potentially lowering returns for pension savers. It could also push some schemes into riskier assets than appropriate.”
Renny Biggins, head of retirement at The Investing and Saving Alliance, said schemes must not be forced “down a path which could jeopardise member outcomes”.
Torsten Bell, the pensions minister, insisted that the government was not directing specific investment strategies.
One expert says that with the right safeguards, the proposals could benefit savers
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Schemes can already return surpluses to employers under certain conditions, typically buyouts by insurers. Current rules generally prevent employers from taking surplus funding while running a scheme.
The government estimates that three in four schemes are in surplus and about £160 billion of surplus assets are being held, although another estimate has put the figure at closer to £360 billion. Economic and demographic changes can quickly alter the position.
Ralfe said the legislation must be carefully designed with surpluses “defined on a tough basis’’ and that employers should be on the hook for repayments if schemes fall into deficit after surplus sums are removed.
Daniela Silcock, a pensions expert, said that with the right safeguards, the proposals could benefit savers by making scheme transfers to insurers less attractive.
“A change that encourages more schemes to continue running and to pay benefits directly, rather than transferring to an insurer, could help members by maintaining flexibility, avoiding transaction costs, and potentially preserving higher benefit value.”
