Some steel pensions could be largely frozen, Steve Webb says

Fed up British Steel workers Image copyright Getty Images

Some retired steelworkers could see their pensions "largely frozen" under possible changes to the scheme's rules, a former pensions minister has warned.

Steve Webb said proposals in the government's consultation on the steel industry's scheme could cost older pensioners thousands of pounds.

The impact would be in addition to proposals to change the inflation measure used to up-rate the pensions.

Tata is trying to sell its loss-making UK steel business.

However, the company's pension deficit is said to be hampering the process.

Inflation switch

Last month, the government launched a consultation to consider the financial situation of Tata's UK pension scheme.

One proposal being consulted on would see increases in pensions paid out by the pension scheme being changed from the Retail Prices Index (RPI) inflation measure to the generally-lower Consumer Prices Index (CPI).

The government has said this change is better for steelworkers and pensioners than if the scheme collapsed and had to be taken over by the pensions lifeboat, the Pension Protection Fund (PPF).

But another proposed change would result in some pensioners and their widows having their pension completely frozen or largely frozen, according to Mr Webb, now director of policy at insurer Royal London.

That is because the legal requirement to index all of a pension in payment only applies in respect of years of service since 1997 - for service before that date, there is only a very restricted legal requirement to up-rate the pension and only then for a limited period, he explained.

It means an older pensioner who did all their service before 1997, and particularly before 1988, could have their pension income frozen.

More generally, pensioners who did most of their work before 1997 could see a large part of their pension frozen with only a very small annual increase.

"Many thousands of older steel workers and their widows could see their pensions largely frozen for the rest of their life if these plans go ahead, with losses running into thousands of pounds," said Mr Webb.

Losing out

Paragraph 85 of the consultation document warns that "If adopted, this [rule change] would mean that in the future existing pensioners would receive lower increases to their pensions ... or possibly no increases at all."

Image copyright Reuters

Mr Webb has calculated that an 80-year-old pensioner on £100 per week who did all of their service before 1997 could see their pension held at £100 for the rest of their retirement, rather than see it rise every year in line with inflation as it does at present.

Adding up the differences over a 10-year period would leave the 80-year-old losing more than £10,000.

Widows hit

Widows, who make up around one third of the 'pensioner' members of the British Steel Pension Scheme, could be particularly affected, Mr Webb warned.

"This is a big issue for the steel workers scheme, but an even bigger issue if the principle is applied to a wider group of salary-related pension schemes," he said.

"This potentially huge impact, buried in the small print of the government's consultation document, highlights the way in which rushed legislation can all too often have unintended consequences.

"The government and the pension scheme need to make sure that older workers know what is happening and feed in to the consultation process."

Tom Selby, senior analyst at pensions company AJ Bell, said: "To freeze the pensions of older workers would be manifestly unfair and cause those already struggling to make ends meet serious financial hardship.

"Policymakers should seriously consider how this could impact on the confidence of savers making future retirement plans."

A Department for Work and Pensions spokesperson said: "We are consulting on a wide range of options for the British Steel Pension Scheme and are keen for as many people as possible to provide their views, including those who will be affected by any changes."

More on this story

Related Internet links

The BBC is not responsible for the content of external Internet sites