Pension schemes under threat

26 June 2009

Final salary pension schemes in the private sector may cease to be a feature of the pensions landscape in the future.

A new survey of a thousand firms has revealed that many have already closed or are planning to close their defined-benefit schemes to current members.

Of the 157 firms that responded, 16 per cent said they had already closed their final salary schemes to existing members, with a third reporting they intend to do so over the next five years.

Almost eight out of ten companies have shut their schemes to new members.

While refusing entry to new employees has long been a policy in many firms, the latest figures suggest that increasing numbers of businesses and private sector organisations are now looking at curtailing access to final salary schemes for those employees who are already participating in them.

Most companies cited the costs of running defined-benefit pensions as the reason for freezing the schemes.

Defined-benefit pensions provide a fixed retirement income set at a percentage of the employee’s career earnings and the time they have spent working for their employer.

However, credit crunch funding deficits have turned final salary schemes into a cost that many firms believe they can no longer sustain.

Instead, companies are moving workers into defined-contribution schemes where the money is used to buy a retirement annuity. The schemes, however, shift the risk of the investment failing to provide sufficient retirement income onto the employee.

The Pension Protection Fund estimated that the present funding deficit for defined-benefit schemes stood at £179.3 billion at the end of May.