A FORMER pensions minister has warned plans to allow struggling firms to opt out of annual increases to retirement payments could lead to more BHS-style disasters.

The UK Government is considering ending the obligation on firms to increase final salary pensions by inflation every year, a move which could swipe up to 30% of some pensioners’ incomes.

The controversial move to end the so-called “gold plating” benefit enjoyed by more than 11 million is being considered for businesses on the verge of going bust.

But former Lib Dem pensions minister and industry guru Steve Webb has raised fears it could be the thin end of the wedge with the move abused by unscrupulous firms.

The former Coalition minister said the £571 million pension scheme black hole that sunk retailer BHS could easily be allowed to build up at other firms in order to allow them to take advantage of the system and deny retired staff pension rises for long periods.

He explained: “It is a worrying proposal which effectively allows certain schemes to ‘suspend’ annual pension increases if money is tight.

“With rising inflation, annual indexation is an important part of protecting the living standards of the retired population.

“There is a significant risk that relaxing standards on inflation protection with the best of intentions for exceptional cases could be exploited and lead to millions of retired people being at risk of cuts in their real living standards.

“There is a basic fairness point here where people would have the goalposts moved, and moved potentially quite dramatically, after, say, 40 years of working and years of being in receipt of a pension.

“How it would work also opens up a can of worms. Who decides how a firm qualifies and what are the criteria? In theory the trustees were meant to be in charge of the BHS scheme but we all know what happened there.

“What can trustees do if a company just turns round and says times are tough, we’re not paying.

“There is an argument this would be just for one or two special cases but the fear is this would actually just be the thin end of the wedge. There are a lot of clever people with clever lawyers who would be looking to take advantage of this.”

It’s estimated the funding “black hole” in UK final salary pension schemes is around £1 trillion and company schemes are required by law to protect pensioners’ spending power by increasing payments by the rate of inflation.

The UK Government last week launched a paper which revealed it is considering whether to allow scheme trustees to override the rules “where the employer is stressed and the scheme is underfunded”.

The idea, known as “conditional indexation”, means companies could completely freeze annual inflation-linked pay rises and industry experts say that over the course of an average 25-year retirement this would cut savers’ total retirement income by as much as 30%.

While it was under the ownership of Sir Philip Green, the BHS pension fund went from a £43m surplus in 2000 to a £571m deficit last year and had to call in help from a Government-backed scheme which helps ensure people are paid their pension even when a company goes bust, though at a lower rate.

Ian Blackford MP, the SNP’s pensions spokesman, said: “Giving employers the ability to suspend pension increases altogether in times of stress might be welcomed by those administering a scheme but there is a need for caution so that employees remain protected.

“The UK Government needs to take a holistic approach to pensions and establish an independent Pensions and Savings Commission so that we can root out the existing inequalities and work towards a fair and universal pensions system.”

Malcolm McLean, a senior consultant at pensions consultancy firm Barnett Waddingham, said: “If the Government were to allow unfettered and unconstrained conditional indexation there could be a free-for-all and it would be an easy way out for many less scrupulous firms.

“It all depends on what is meant by a company being ‘in difficulty’.”

The Government paper acknowledges the potential “moral hazard” in allowing firms to suspend pension increases.

It said: “There is the danger this could encourage employers to allow the funding level of their scheme to deteriorate in the hope that this would help reduce their liability to inflation-link the scheme benefits.”

Q&A

What happens now?

Private company schemes are required by law to protect pensioners’ incomes by increasing payments by the rate of inflation. Depending on the rules of the pension scheme, this is measured either by the retail prices index or, more commonly, the lower consumer prices index.

What are they proposing?

The UK Government has floated the idea of allowing firms in danger of going bust to freeze annual inflation-linked pay rises, in order to stop the scheme going under.

Who does it affect?

Those with defined benefit, or final salary, pensions – so more than 11 million people across the UK.

Is this going to happen?

The idea was put forward in a UK Government paper and there will now be a 12-week consultation. Ministers will then take the feedback from this and publish a white paper by the end of the year, with fewer, more detailed proposals.

WHAT IF YOU ONLY HAVE A STATE PENSION?

These proposed changes would only affect people who have a final salary private pension from an employer in addition to their state pension.