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Final call

Thoughts of pensions may have been put on the back-burner for many people, given the economic turmoil and rising unemployment. Spare cash is at a premium for many households, with getting by day to day the order of the day rather than planning for those retirement years.

But there is a real fear that millions of people face an impoverished retirement in the decades to come. This is no secret, of course. Insurers know it, actuaries know it and the Government knows it.

Revelations that pension deficits for FTSE 100 firms have grown to their highest levels will do little to ease the fears. The move by ITV to ask pensioned employees to give up their inflation-linked pensions is just one ruse to try and ease the burden of its scheme. Expect more such ideas to follow and expect even more final-salary schemes to bite the dust.

There is little doubt that the baby boomer generation is going to be the last to have the luxury of a decent pension. Anyone younger is going to have to rely on themselves, to some extent on their employer and on no small amount of luck from the stockmarket.

We have been reading the last rites for final-salary schemes for some time now, with Barclays, BP and Morrisons simply the latest to announce that they plan to ditch their final-salary schemes. Following their decisions, there are just three FTSE 100 firms left that offer these gold-plated plans to new recruits.

It would be easy to criticise such companies but final-salary schemes have become untenable. Increasing longevity has played a huge part and with deficits making a massive dent in balance sheets, it makes business sense to kick them into touch. A final-salary pension adds well over 20 per cent to payroll costs. In fact, given the deficits in most schemes, the costs could well rise to over 40 per cent.

But Labour has played its part in final-salary’s fall. Its decision to remove tax relief on income from share dividends has been a significant factor in the closure of final-salary schemes. Experts calculate that it has cost pension funds over £150bn.

Given the revolving door at the DWP, you could argue that the Government has also paid nothing but lip service to our pension dilemma. Following the recent resignation of James Purnell, there have now been 20 ministers responsible for pensions in some shape or form since New Labour came to power.

Labour has made, and is still making, a pig’s ear of encouraging us to save of our own accord. Stakeholder pensions were an utter shambles and the consultations continue.

The taskforce, led by Lord Turner, has led us to personal accounts, due to go live in less than two years. Yet, with the clock already ticking, there are still huge doubts about this pension model.

The success of personal accounts is paramount but so too is the success of defined-contribution schemes. The DC sector will be the beneficiary of the demise of the final-salary scheme. To some extent, it already is.

Of course, this leads to another fear – that not enough insurers and fund managers will be able to sustain a level of performance to ensure that future generations have enough to live on when they retire. Choice, monitoring and fund selection is going to be vital. It is another burden that advisers are going to have to bear.

Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing

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