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Rolls-Royce is boosting retirement benefits for 86,000 UK workers and pensioners, even as fellow blue-chip companies claim they have no option but to cut retirement promises which they say are now unpayable in full.

A result of decisions taken more than a decade ago to address funding concerns, the move by the UK’s premier engineering company comes as the government is under increasing pressure from business and the pension industry to change rules to allow so-called defined benefit schemes to water down promises made to millions of members.

Deficits have ballooned at companies with such schemes, where pension income is salary-related and increases with inflation, after bond yields dropped sharply in the wake of Britain’s vote to quit the EU.

Just 16 per cent of the UK’s 6,000 defined benefit schemes are in surplus, according to the Pension Protection Fund, and the parliamentary work and pensions committee is considering whether defined benefit schemes should be allowed to suspend inflation-linked increases.

Rolls-Royce is bucking that trend with a reform of its myriad defined benefit pension funds made possible by the merger of four schemes into one, leaving the overall pension fund with a £1bn surplus.

The changes will allow more than 35,000 pensioners and workers yet to receive their pensions to receive annual increases of 2 per cent a year on benefits accrued before 1997. Previously there was no guaranteed annual increase on this portion of benefits.

Other members will receive improved terms if they choose to cash in pension pots, better transfer values and free financial advice before making any such decision.

John Ralfe, an independent pensions consultant, said to let companies water down promises would be “an unjustified transfer from pensioners to shareholders”.

He said it appeared Rolls-Royce had safeguarded its pension many years ago by “doing the right thing”.

In 2004, workers agreed to substantial benefit cuts, while the company injected £500m to fill a gap which by 2006 had grown to more than £1bn.

The pension trustees subsequently shifted the balance of investments from equities to assets that better matched liabilities, transforming the deficit into a more than £1.5bn accounting surplus on the balance sheet, or £1bn if measured on the funding basis used to agree cash contributions.

Joel Griffin, head of pensions and benefits for Rolls-Royce, said the most significant strategic shift had been the decision to hedge against a fall in interest rates, which was crucial to protecting the schemes against the recent collapse in bond yields. “Brexit hasn’t hurt us at all,” Mr Griffin said.

The changes were voted through by scheme members earlier this month.

The improved benefits will be funded by the pension scheme itself, which was closed to new members in 2007, as long as the fund remains in surplus. Rolls-Royce, meanwhile, stands to save several million pounds in administration costs, contributing to its target of £150m-£200m savings a year by the end of 2017.

Rolls-Royce’s main union said the changes were a win-win for both the company and workers. “This is a significant proposal for both our pensioners and employees that secures the future of our defined benefit pension schemes,” it said.

Simon Hemmings, staff convener at Rolls-Royce’s main manufacturing site in Derby, said: “At a time when other schemes are closing or having benefit cuts Rolls-Royce and Unite have negotiated the opposite.”

Additional reporting by Josephine Cumbo

This story has been amended since original publication

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