Pensions: a major British concern

An insurance plan is to be launched which will pay out in the event of a company pension scheme going under, Work & Pensions Secretary Andrew Smith told the House of Commons.

And, in future, solvent employers choosing to wind up solvent pension schemes will have to compensate workers in full.

But, in return for enhanced rights, retired pension scheme members face smaller income rises in future.

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A combination of falling stock markets and an ageing population has left the pension schemes of FTSE 100 companies facing an estimated �65bn black hole.

Mr Smith told the Commons that employer pension schemes were "under pressure now and need to take early action".

If assets fall below liabilities employers are duty bound to prop up ailing final salary pension schemes.

UK PENSIONS IN CRISIS Key pension facts and figures at a glance In pictures

As a result, many employers have closed their schemes to new recruits, increased employee contributions, or simply wound schemes up.

Under current rules, when a pension scheme is wound up the bulk of the benefits go to retired members, often leaving those of working age with little or no pension.

The Conservative's spokesman on pensions, David Willetts, welcomed "some" of the government's proposals, for example looking at the priority order when schemes are wound up, but said Mr Smith's announcements were "about insuring for failure, not planning for success".

Solvent schemes closed

In some cases, though, solvent schemes have been closed by firms leaving their employees in the lurch.

Mr Smith said that this had an unhealthy effect on UK pension provision.

"In the cases where firms have done this it has inflicted untold damage to people's confidence in the whole system."

To combat this threat, Mr Smith said he planned to amend as soon as possible current 'debt on the employer' legislation to prevent firms from walking away from pension promises made to employers.

Following a takeover, employees often found that their new bosses had slashed pension contributions or closed schemes all together. Q&A: What the changes mean for you?

If firms choose to close a solvent scheme they will have to buy an annuity, income for life, for retired scheme members.

Firms will have to pay scheme members below retirement age money which they can invest elsewhere.

In addition, pension schemes are to be forced to pay into the new pension protection fund an insurance to protect 90% of the value of current workers' pensions and the full value of retired members.

The insurance will mean a fairer distribution of pension benefits but will place an extra burden on hard pressed employers.

To relieve that burden the government has announced that it plans to reduce the requirement on schemes to raise the pension of retired members by up to 5% a year.

I am delighted that the government has finally grasped some important nettles. Malcolm McLean, pensions advisory service Costs 'could bankrupt firms'

In future, schemes will be required to raise the income of retired members by inflation or 2.5% a year.

Rights delivered

Malcolm Mclean, chief executive of the pensions advisory service, told BBC News Online that the governments proposals should make feel scheme members feel more secure.

"I am delighted that the government has finally grasped some important nettles. Employers will not be able to walk away from their responsibilities in future," he said.

As for enforcement Mr Smith announced that a new pensions regulator is to be set up to ensure that firms follow the new rules to the letter.

The Minister said that the raft of proposals would ensure that "pension rights promised are rights delivered".