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Victory for pensioners as Government rules out trimming 'final salary' schemes

Sam Brodbeck
The Government has pulled back from allowing pension schemes to sever links with inflation. This month the price of raspberries was added to the official measure of inflation - PA

The "gold plating" on final salary pension schemes will remain intact after the Government announced it was dropping plans to allow struggling companies to change the way payments are increased each year.

A year ago, Telegraph Moneyreported how policymakers were considering allowing pension funds to suspend inflation protections which could have seen pensions cut by up to 30pc. Rising prices quickly erode fixed incomes.

The proposal – known as "conditional indexation" – would have meant, in the worst cases, no annual increases at all.

Less extreme but still highly damaging to incomes was a separate plan to let schemes switch to using the consumer price index (CPI), instead of the traditional retail price index (RPI) for raising pensions.

If approved, schemes' liabilities could be slashed by as much as £90bn, according to Government estimates.

But in a white paper published yesterday, the Department for Work and Pensions confirmed it was "ruling out" allowing employers or trustees to use CPI where RPI is required by scheme rules.

"We have concluded that we cannot accept any reduction in the value of member benefits," it said.

"Any across-the-board change would allow sponsoring employers to reduce their liabilities at members' expense even if the employer had no difficulties in meeting their existing liabilities."

A series of high-profile corporate collapses, including retailer BHS, has focused attention on Britain's several thousand final salary schemes. The majority have funding deficits, meaning liabilities outweigh the value of investments.

The white paper also introduced new measures to punish company bosses whose business decisions endanger company pensions. This would see executives face prison sentences of up to two years.

Rogue bosses who gamble with staff pensions to be handed prison sentences under Government plans

How is my pension increased?

Around three quarters of final salary schemes use RPI, which is typically one percentage point higher than CPI, when "revaluing" pensions.

Figures published today show CPI inflation fell to 2.7pc in February. The Bank of England's official inflation target is 2pc.

The state and public sector pension schemes switched to using CPI in 2011. 

In some cases trustees are bound to use RPI by rules established when schemes were launched decades ago. In other cases, rules do not specify which measure of inflation should be used. As a result, many schemes have already moved to CPI, and significantly cut the value of pension promises.

In practice, the way final salary schemes must increase payment is far more complex. Pensions built up after April 1997 and before 2005 must be increased annually up to a 5pc cap. Post-2005 pensions are required to increase by 2.5pc.

Around 11 million people have built up entitlement to final salary, sometimes called "defined benefit", schemes.

However, most young people save into less generous "defined contribution" plans that do not promise to pay an income and have no link to inflation.