Fears of pension contribution freezes
Pension deficits have risen to the highest levels ever seen, with schemes run by stockmarket-listed companies estimated to be short by more than £300 billion.
A new report from consultancy firm Deloitte, claims that the cash amount needed by the pension scheme trustees of FTSE 100 companies to plug funding deficits has now exceeded £300 billion. This is more than double the deficit anticipated at the start of this year, and represents the highest ever level.
“The continuing fall-out from the recent financial turmoil means that pension deficits have risen to the highest levels ever seen,” says David Robbins, a partner in Deloitte’s pension consulting practice. “Many companies now face demands for huge contributions to their pension schemes in order to repay losses made on investments.”
The report comes as American Express announces that it is axing pension contributions for all its 6,000 UK staff for 18 months.
The credit card provider previously paid up to 6% into employees’ pensions, but this was suspended on 1 July. The move affects the firm’s stakeholder pension as well as its final salary scheme, which was closed to new entrants in 2006.
It is now feared that other big employers might freeze pension contributions; American Express says it has been forced to do so because the credit crunch means the payment is unaffordable.
Deloitte also warns that more final salary schemes will be for the chop. In June, supermarket Morrison and high street bank Barclays both closed the door on their final salary pensions to new contributions from existing members, while BP closed its scheme to new employees.
Just five years ago, around 40% of companies still offered final salary pensions to new employees. However, pensions expert Ros Altmann says that there are now just four FTSE 100 firms who do so - Shell, Tesco, Cadbury and Diageo.
But closing pension schemes will not wipe out the deficits, warns Robbins.
“Closing the defined benefit pension scheme to all employees is a big step which many companies have previously shied away from,” he adds. “However, with the current unprecedented funding levels in pension schemes and with companies being forced to cut costs in order to remain afloat, we expect to see many more pension schemes closing.”
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Defined benefit pension
Often referred to as a “final salary” pension, benefits paid in retirement are known in advance and are “defined” when the employee joins the scheme. Benefits are based on the employee’s salary history and length of service rather than on investment returns. The risk is with the employer because, as long as the employee contributes a fixed percentage of salary every month, all costs of meeting the defined benefits are the responsibility of the employer. (See also Final Salary).
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.