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Sayonara final salary schemes

Have the decisions taken by Barclays and BP this week, to throw in the towel on final salary pensions, marked the beginning of the end of top-quality private sector schemes?

Experts say yes, and I am inclined to believe them.

Barclays announced plans yesterday to close its final salary scheme to future accruals for all 18,000 existing members in a bid to cut costs. The bank closed to new members more than a decade ago.

From December, members will be moved to the firm’s defined contribution scheme, previously reserved for new staff. Their accrued benefits will be frozen.

Barclays reported a £2.2bn pension fund deficit last September, although this is likely to have increased due to continuing stockmarket turmoil.

A spokesperson says: “Given the current economic situation, managing costs, including pension costs, is one of our top priorities. It is in the best interests of all Barclays employees and shareholders for us to do so.”

Barclays’ move follows BP’s decision to close its defined benefit scheme to new members earlier in the week. It also comes after Fujitsu International UK and WH Smith announced plans to close to future accruals.

Five years ago, 40 per cent of companies still offered final salary pensions to new employees, according to pensions guru Ros Altmann. Now there are just four FTSE 100 firms that do – Shell, Tesco, Cadbury and Diageo.

Altmann says: “As their competitors pull out of open-ended pension commitments, the business case for retaining final salary arrangements becomes increasingly untenable.

“If anyone was previously still in doubt as to whether these schemes had a viable future, the latest announcements should have removed the uncertainty.”

Punter Southall suggests Barclays’ decision was prompted by the punitive capital requirements put on banks and building societies to cover pension risk.

Principal Simon Banks says: “Banks are generally required to carry extra capital to protect against pension risks, over and above their contributions to the pension plan.

“In an environment where capital is tight, this ‘hidden’ pension cost assumes greater significance. The actions taken by Barclays should reduce the amount of capital required to back future pension promises.

“I would not be surprised if other banks and building societies took similar action in the coming months.”

But what about public sector employees? They are clinging on to their gold-plated pension pots while the private sector seems to be hurtling towards the indisputably less adequate personal accounts scheme. That is if it survives the general election.

Altmann says: “When it comes to pensions, those making policy are totally divorced from the reality facing the rest of the country. Policymakers are cocooned in their own pensions world, seemingly oblivious of what is happening in the private sector. The increasing divide between private and public sector schemes cannot continue indefinitely.”

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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Harris Keillar 4th June 2009 at 5:22 pm

    Sayonara FS Schemes
    Thank goodness FS / DB schemes are going. With any luck, this will force all such schemes, especially non-funded public sector ones into closure. FS schemes prevent companies investing as much as they should into their current operations and they also prevent people being recruited who are over 40. Individuals should take responsibility for their own pensions and I speak as one whose pension went down by six year’s contributions last year. Companies should pay into private schemes though not be responsible for employees once they have left.

  2. Chris Robinson 5th June 2009 at 8:57 am

    Cash in = Cash out
    Pensions are a standard part of the remuneration package for most UK employees.

    The inequality in pension outcome that exists between a new and existing employee doing the same job with, otherwise, the same package is becoming highly material. Employers contribute at least twice and, for higher paid staff, many times the level of contribution to the ‘old’ employees DB scheme as they will the ‘new’ employees DC scheme.

    Evidence suggests most employees don’t understand this and, until they do and start to agitate about it at the ‘offer’ stage if nowhere else, nothing much is going to change.

    The question of ‘fairness’ is one society needs to grapple with – but the fundamental point of ‘less in = less out’ needs to be brought out more rather than emotional rants.

  3. Scott Gallacher 5th June 2009 at 9:39 am

    Tesco Final Salary scheme
    I might be wrong but I recall the Tesco Final Salary scheme is no longer available to new employees. New Employees instead can join an ‘average earnings’ type scheme.

  4. Sayonara final salary schemes
    Beginning of the end? More like the end of the end. The beginning was years ago. Market and economic conditions are just hastening the end. Employees just have to accept that DBFS schemes just aren’t going to be viable in the future. Employers have to make greater efforts to explain the changes and encourage employees, particularly younger ones, to up their contributions.

    The real funding problem the country faces is the tax payer funded Government schemes. Some councils report they spend a third of their council tax on staff pensions. Politicians have been running away from this problem for years but it must be faced. The demographic changes in the country mean an ever increasing burden on the tax payer or the collapse of the scheme. We are approaching a breaking point. Why should any private sector employee face increasing funding to their own pension, with reduced guarantees, and still be expected to pay more tax to fund far superior benefits for the public sector?

  5. Final Salary pensions
    The beginning of the end to final salary schemes was 11 years ago when G Brown started to tax the funds. Commentators at the time said ‘what a shrewd move, the Chancellor raises £5/6,000m every year without taking money out of peoples pockets and they won’t even notice for the next 10-20-30 years’.
    Anyone with any knowledge of pensions realised that this would mean large scale additional funding for employers. Of course it also hit the Personal Pensions market. No longer would funds grow ‘Tax Free’, the greatest incentive to tie money up for so long.
    We are now seeing the fruits of G Browns too clever by half scheming. His assertion that he was trying to have a ‘level playing field’ for all investments was rubbish. Pensions have restrictions on access to funds that are just not there for other investments.
    This was confirmation to me of my assessment that G Brown was going to prove to be an unreformed Labour ‘Tax and Spend’ chancellor. He has proved to be arrogant as well, with such a ‘big brain’ that he can never be wrong.

  6. Julian Stevens 5th June 2009 at 12:01 pm

    Sayonara final salary schemes
    Ros Altman is as usual right on the money ~ people in the cosy public sector, with no understanding of the realities of the commecial world, making policy that has to be followed by those in the private sector. Just one of Gordon Brown’s black legacies will be the destruction of UK private sector pensions system, not just Final Salary pension schemes but Personal Pensions as well. All we can hope for is that a new government kicks off by undoing as much as possible of the damage done by Labour.

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