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Terminal diagnosis

It is all over bar the shouting for private-sector final-salary schemes

Company pension schemes in the private sector are in serious decline, particularly the so-called gold standard final-salary schemes. Over the past month or so, the national press has been full of yet more horror stories as some household-name employers have taken the next inevitable steps along the long road to shedding their pension shackles.

The popular press can feign surprise and even outrage as company after company water down or even close their pension schemes but the specialist financial press cannot or at least should not.

Final-salary schemes are now little more than a public-sector perk. According to the TUC, only one in four private-sector employees are members of good company pension schemes and I think it will not be long before that number falls away ever further from the high water mark set in the late 20th Century. It is all over bar the shouting.

There should not be too much of a surprise in this. For a long time now, there has been a steady trend among companies making final-salary promises to exclude new employees from schemes. Today, the vast majority of final-salary schemes in the private sector are closed to new entrants and the indications are that many of those left open to all employees are set to follow the trend. It is now the norm for companies in the private sector to operate final-salary schemes for their older employees and less generous money-purchase schemes for those employed more recently.

It cannot end there, of course. Closing a final-salary scheme to new entrants can only be regarded as the first step on a long but fairly predictable, road that ends in full closure of the scheme. The longest route to that inevitable end would be to simply leave the scheme closed to new entrants and wait for the last member in the closed-off scheme to retire and eventually die. At that point, the final-salary scheme would die with them. The minute that schemes close to new entrants, that is where they are bound to end up. All the final-salary schemes that are currently closed to new entrants are in their final phase. It is simply a question of when and how the end will come, not if it will come.

Waiting for a slow and dignified death for a final-salary scheme is not likely to be an attractive option for employers, particularly as they have lost control over the pace of funding their promises over the last decade or so. Many employers are still bitterly criticised by trades unions for having taken so-called pension holidays when scheme returns were at an all-time high but there were no other sensible fiscal options open to employers at the time. Now times are harder, employers have been hit by new regulations requiring them to fund at much higher levels to rectify imbalances in their funding positions. It is little wonder so many of them have decided to throw in the towel.

The next steps seem fairly straightforward to me. Rather than biting the bullet and closing down schemes for future accrual for existing members, I would think companies will first go through the motions of reducing the funding pain if they can. The most obvious way to do this is to reduce the value of the final-salary promise by decreasing the pension accrual rate or by increasing the personal contribution of members towards the costs. Doing both might prove attractive to some employers. Other employers will certainly take advantage of the changes in the last Pensions Act to get people to retire at 65 if they currently run a scheme retirement age of 60.

I am sure we will be reading much more about a combination of all three – lower benefits, higher personal contributions and longer working periods to qualify for a pension. But it is not a new story, nor is the end in doubt. Final-salary schemes in the private sector are finished. We should start to concentrate on what is likely to replace them.


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