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Ministers have been urged to impose a levy on generous final salary pension schemes to help fund younger workers’ retirement pots.
A voluntary levy on “over funded” defined benefit (DB) pension schemes could see financial surpluses used to tackle “intergenerational unfairness”, consultancy LCP said.
Defined benefit pensions that guarantee an inflation-proofed income in retirement have largely been abandoned in the private sector because they are so costly. Instead, most workers and their employers now save into a pension pot invested on the stock market.
Proposals for a “new regulatory scheme” to unlock funds from DB schemes were detailed in an open letter sent to pensions minister Laura Trott on Wednesday by LCP.
“We believe that recycling surpluses from DB schemes that are now ‘over funded’ into defined contribution funds should form an important part of the social contract between generations, to ensure that intergenerational inequality is addressed,” said Steve Hodder and Laasya Shekaran, the letter’s co-authors.
Defined contribution (DC) pension schemes are where workers and their employers pay into a pot that pays out a variable sum on retirement. This contrasts with DB schemes, where workers are guaranteed salary-style payments from their scheme during their retirement.
LCP suggested that “surplus” funds could not only be used to supplement DC pension pots, which are mainly held by younger workers, but also to stimulate investment in “social and environmental sustainability” initiatives.
Under the plans, DB scheme trustees would pay a “super-levy” to the Pensions Protection Fund in order to guarantee full protection of members’ pension payouts in the event of the fund becoming insolvent.
LCP said: “When surplus funds exceed a specified level (a ‘super-surplus’), we propose that the excess could be used to enhance member benefits and/or be withdrawn by the sponsor to support higher DC pension contributions or further investment in their business.”
However, moves to increase pension fund assets being ploughed into sustainable and green investments could also lead to political controversy.
Defence Secretary Grant Shapps cautioned Aviva against any “immoral” moves to dump defence stocks under its environmental, social and governance (ESG) policies earlier this week after the pension provider wrote to members saying it was withdrawing from arms, coal and tobacco companies.
An Aviva spokesman said it has £600m invested in UK defence companies such as BAE Systems, Rolls-Royce and Babcock and has no plans to divest from them. The Department for Work and Pensions was contacted for comment.