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A consumer&#39s view

The recent landmark decision by the FSA on differential pay rises has

important implications for all employers and their pension advisers.

The FSA has recently taken the brave step of awarding lower pay rises

to staff who are members of its final-salary pension scheme in an

attempt to head off total closure of the scheme.

Within the FSA, only 900 of the 3,000 employees are members of the

final-salary pension scheme, with the rest in a money-purchase scheme.

The move by the FSA acknowledges the huge value of a final-salary

scheme to employees and the differential pay rises are an attempt to

redress the balance between those who remain within the final-salary

scheme and those who are not members.

It is something that pension advisers can suggest to companies

considering clos-ing down their final-salary scheme.

The move by the FSA is a logical one for any employer wanting to keep

the final-salary scheme open to new contributions, if not new

members, and pension advisers should be out there pointing this out.

It will not be easy, though, as much of the motivation for closing

down final-salary schemes is the desire by employers to remove the

burden of the open-ended commitment of a final-salary pension scheme

from the balance sheet.

Simply restricting pay rises and contributing more to the pension

scheme does not achieve this end.

It is already too late for the majority. According to figures from an

Association of Consulting Actuaries survey, 72 per cent of all

final-salary schemes in the private sector are now closed to new

members and among those still open, most employers are believed to be

thinking of closure.

The money purchase sch-emes which replace the old final salary scheme

transfer the risk to the employee, and give the employer the

opportunity to contain costs and reduce pension expenditure, but

emp-loyees are worse off.

Overall, the survey reveals that contributions to moneypurchase

pension schemes by employers are only half that made to the old

final-salary schemes.

It will be interesting to see how employees within the FSA scheme who

will not receive such big pay rises as those outside the final-salary

scheme, react jam today is always more attractive than jam tomorrow

which is why so many employees still do not save for retirement.

What is really surprising is that the unions and employee

representatives have made so little fuss about what amounts to a cut

in salary. Valuable pension benefits have been rem-oved without much

more than a squeak.

Employers have been able to do this because they never really

explained to employees the real value of a final-salary pension

scheme in cash terms. The situation has been compounded by the fact

that the workforce is more mobile now than in the 50s and 60s, so

many employees get only a fraction of the 40/60ths maximum pension

from a finalsalary scheme and do not see its value.

But there are important implications that the Government as a major

employer will have to consider if there are not to be major

inequities and distortions built into the labour market.

The Civil Service and other public sector employers have long used

the generous final-salary-linked pension scheme as a major recruiting

tool, pointing out that the pension plus job security compensated for

lower pay. But many public sector workers are no longer lower paid

than their counterparts in the private sector, particularly in rural

areas.

Teachers&#39 salaries, for example, start at just over £18,000 a

year and senior staff earn up to £33,000 a year, with head

teachers of big comprehensives earning considerably more.

This is now directly comparable with workers in insurance or other

white-collar jobs such as accountancy as the Government-sponsored

website www.canteach. gov.uk points out.

Employees who have been forced out of their discontinued final-salary

scheme are already viewing with envy their public sector colleagues

who still enjoy final-salary-linked pensions, in many cases

index-linked in retirement and some non-contributory.

If public sector workers are not to become super-privileged, then the

enormous value of the pension scheme must be taken into account when

fixing public sector pay or the labour market will become dangerously

distorted and taxpayers will start to complain. We cannot all work

for the Government, after all.

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