View more on these topics

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.

Recommended

Advisers must justify charges

I was interested to read Nick Bamford’s comments on fees versus commission (Money Marketing, December 15.) The fact that IFAs have traditionally earned their income from commission on the products they sell has left some people with the perception that IFA services are free of charge. However, with many IFAs now moving towards a fee-based […]

Simply Biz picks up from rivals

SimplyBiz has reached a a total of 1,200 member firms and 2,400 individual adv- isers in the three years since its launch. It says it has also seen increased numbers of new members joining from Bankhall over the latter months of last year since management changes at Bankhall. Managing director Ian Thorneycroft claims that firms […]

Citizen Advice looking to extend generic advice project

National charity Citizens Advice is looking to harness the support of the IFA community to provide free generic financial advice to people on low and middle incomes.The charity is hoping to build on the success of a pilot scheme undertaken last year, which used volunteer advisers from the Personal Finance Society. More than three quarters, […]

Open season

The Treasury must act soon to open up competition in the pension market

In Focus image

In Focus — May 2015: private medical insurance market in Germany

Welcome to the latest edition of In Focus. In this issue, Jelf examines the private medical insurance market for employers with expatriate workforces in Germany. This includes the common challenges faced in sourcing appropriate coverage, along with a selection of available solutions. This will be of particular interest to HR/reward decision makers with employees based in Germany. It will assess the cultural norms, risks and backdrop that are relevant to organisations with expatriate staff in this location.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com