Tesco has said it wants to make major changes to its pension scheme, which could see employees retiring later with smaller pension incomes.
Tesco, the UK’s largest private sector employer, has started a consultation with staff on changes it would like to introduce to its staff pension; it is likely other UK employers will be monitoring the outcome closely before making decisions about their own scheme.
The consultation focuses on two main areas, moving the retirement age from 65 to 67 and increasing pension payments in line with CPI (Consumer Prices Index) and not RPI (Retail Prices Index) in retirement.
Income from the Tesco pension currently rises in line with RPI, although increases are subject to a cap of 5%. Following recent changes public sector pensions now rise in line with CPI, which is generally lower than RPI and it seems Tesco want to follow suit.
According to Tesco the change to the retirement age would not force staff to work until the age of 65, however employees will not accrue the maximum pension possible if they decide to retire at their previous retirement age of 65.
A spokesman for Tesco said: “We are keeping one of the best pension schemes in the UK for our staff and making some essential changes to ensure it is sustainable for the future. Importantly, the changes don’t affect the pensions staff have already built up, they don’t require colleagues to work for longer and their contributions will stay the same.”
Tesco also pointed out that the changes were necessary due to increased life expectancy; when the scheme was set up in 1973 a member was expected to live until they were 77. In contrast a 40 year old employee is now expected to live until the age of 90.
The changes could affect thousands of people; the Tesco pension scheme has 293,000 members, of which 172,000 are active.
The existing defined benefit scheme is generous, offering a pension based on career average earnings, and although similar changes have been implemented in the public sector it is likely that Tesco employees will react angrily to these proposals.
Pension experts have warned that if the changes are made retirees in the Tesco pension scheme are likely to get significantly less income over the life of their pension. Estimates of the reduction vary but many experts believe it will be between 15% – 20%.
However, in a move seemingly designed to appease staff Tesco has said it will keep the defined benefit scheme in place. Many employers have moved from defined benefit schemes, where the level of pension is guaranteed, to money purchase schemes where the final value is dependent on investment performance.