Neasa MacErlean reports on dwindling pensions

Neasa MacErlean reports on dwindling pensions

Some of the biggest and best employers in the UK are expected to close the final salary pension schemes they run for their staff to all investors in the next 12 months.

About 70 per cent of big employers have already closed their final salary scheme to new staff, but have kept the pension funds open to further contributions from existing members.

But the National Association of Pension Funds, an authoritative body that represents the biggest institutional investors in the country, will this week warn that some of the best final salary schemes will take no further contributions.

Christine Farnish, chief executive of the NAPF, says there is 'a real possibility' of an end to final salary schemes for all members - a point she will raise on Tuesday at a pensions reform seminar hosted by Adair Turner, chair of the Pensions Commission, and attended by pensions secretary David Blunkett.

She says: 'A lot of people in the industry are saying that the next big wave of change is going to be closure to future accruals. Everything is very different to when these schemes were set up.'

Ironically, recent government initiatives to protect and regulate final salary pension schemes have had the effect of discouraging finance directors from running them at all. 'There isn't any coherent set of incentives or a coherent regulatory framework,' she says.

Final salary schemes have traditionally been regarded as the most generous and secure form of.....continued below

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pension scheme: the pension they pay is linked to the employee's earnings and the number of years' employment with the company.

In contrast, the benefits paid out by money purchase schemes, the alternative to final salary, depend on the size of contributions made by both employer and employee, and the performance of the investment markets.

However, many companies have huge pensions liabilities - far bigger than the assets they have to pay them. This could leave thousands of workers in a parlous state if their employers suffer prolonged bad trading and go under - as has happened with MG Rover. One in 10 companies in the FTSE 100 has a pensions deficit greater than 25 per cent of its market capitalisation, according to actuary Lane Clark & Peacock.

British Airways - which a couple of years ago had a larger deficit on its pension fund than its market capitalisation on the stock exchange - had a deficit equal to 60 per cent of its market cap at its year end on 31 March. While its shares were worth £2.8 billion, the deficit was £1.7bn. Like many other companies, it no longer lets new employees join its final salary schemes, but existing employees can still contribute and BA says it has no plans to change this.

Similarly, BAE Systems had a pension deficit of £4.4bn, which was equal to 63 per cent of its £7bn market cap at its year end last December.

'The biggest risk facing a lot of pension schemes is not equities crashing 20 per cent, or longevity [of pensioners], but will your company be around in five or 10 years to pay the benefits?' said Aidan O'Mahony, head of Standard & Poor's pension services in Europe at a seminar last week.

Much of this news will be unwelcome to Blunkett and Turner, who see employers as being crucial to the future of pension reform.

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