It forecasts possible cuts to member benefits, reductions to inflation proofing, changes to final salary scheme valuations and investment strategies and greater responsibilities for pension scheme trustees.

It also believes the government will give more more powers to the Pensions Regulator, allow more pension scheme consolidation and revamp scheme statistics

The DWP is set to publish a Green paper soon consulting on work-place pensions with the focus mainly on defined benefit schemes which continue to hold most of the wealth and to present most of the “policy challenges” in the pension system, according to HL.

Tom McPhail, head of retirement policy, HL, said: “The UK’s occupational pension system is one of the best in the world. However it isn’t as good as it used to be and it has struggled in recent years to adapt to a world of rapid economic, social and demographic change. This government consultation is vital if we are to ensure that we have a pension system fit for the 21st Century.”

HL says that there is an argument made (mainly by employers and their representatives) that final salary schemes are unsustainably expensive and that changes need to be made to ease the pressure. Most final salary schemes have already closed to new members and to the future accrual of new benefits by existing members.

However, Section 67 of the Pension Schemes Act 1995 means that once a promise of benefits has been made, it cannot be taken away again. So modifying past promises is nigh on impossible, says HL. Just about the only option is to tweak the inflation proofing applied to members’ benefits in retirement, it believes.

If the government were to introduce legislation allowing trustees to modify their scheme rules, switching members’ inflation proofing to a lower index, it would substantially improve the funding position of some schemes, at the cost of lower member benefits in the long term, says HL.

The company believes there has been a dramatic shift in final salary scheme investment strategies in the past 15 years, with schemes moving away from equity investing, towards bonds and other lower risk investments. This makes sense in terms of reducing volatility and unexpected shifts in scheme funding positions but it also comes at the cost of lower long term investment returns; this in turn means employers have to push more money into the schemes.

Within schemes’ equity portfolios, the proportion allocated to UK equities has now declined to just 22.4%, meaning the UK’s final salary pension schemes now only have around 6.8% of their assets invested in quoted UK company shares.

One possible solution may be to look at ways to modify the valuation requirements on schemes, to give them greater latitude to invest in higher risk assets which may be more volatile in the short term but which tend to produce higher returns in the long term. The government is also believed to be keen to explore the possibility of increasing pension scheme investment into infrastructure projects as part of this review, says HL.

HL added: “Breaking the link between the employer and their staff pension scheme and moving away from the old model of every employer having their own unique scheme, as is already the case with Master Trusts and Group Personal Pensions, also opens the door to further possibilities.”