RBS caps final salary scheme
Royal Bank of Scotland (RBS) is to scale back its final salary pension scheme to cut costs - just months after former boss Sir Fred Goodwin walked away with a £342,500 a year pension for life.
The bank, which is 70% owned by the taxpayer, is planning to cap the amount of pensionable pay for its main final salary scheme at 2% or the rate of inflation – whichever is lower.
Such a move will significantly slow the rate at which some employees build up additional pension entitlement, especially younger members of staff and those rising quickly through the ranks.
RBS will also trim its pension costs further by reducing the lump sum payable on early retirement for scheme members opting to take an immediate pension.
Neil Roden, head of human resources at RBS, says the move, which will affect around 62,000 employees, is a “pragmatic and necessary course of action”.
RBS had one of the most generous pension schemes of blue chip companies, although last year its deficit soared to £2 billion.
“This is an expensive scheme for our shareholders to fund and a generous one in comparison to the market," Roden adds. "The reforms we are consulting on seek to strike a balance between reducing the costs and future liabilities of the scheme to the group, with doing what we can to protect the welfare of existing staff and scheme members. It is not a decision the board has taken lightly."
Although RBS declined to reveal on the potential size of the cost savings, the reforms are expected to result in a one-off saving of around £500 million and annual savings of around £100 million.
RBS closed its final salary scheme to new members in 2006. Since then around 26,000 newer recruits have joined a defined contribution scheme, which is not affected by the latest move.
The Sir Fred saga
RBS has come in for heavy criticism over the pension pot of its former chief executive Sir Fred Goodwin.
Back in October 2008, Sir Fred struck a deal with the RBS board to double the value of his pension pot to £16.6 million and take early retirement at the age of 50.
Investors and taxpayers were left outraged at his £703,000 a year retirement pot after his aggressive expansion plans, including the ill-fated takeover of ABN Amro in 2007, left the bank on the brink of collapse.
Although he initially refused to reduce his retirement income, threats of legal action from RBS and a public backlash saw him agree to slice around £200,000 a year off his pension. This left him with a £342,500 inflation-protection income for life. He had already taken a £2.7 million lump sum.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Final salary pension
A defined benefit pension scheme is one where the payout is based on contributions made and the length of service of the employee. A typical scheme would offer to pay one-60th (0.0168%) of final salary (the one you’re earning when you finally retire) for each year of contributions to the scheme (even though these years were probably paid at a lower salary). Someone retiring on a final salary of £30,000 who had been a member of the scheme for 25 years would receive a pension of 42% of their final salary (£12,300 a year before tax). Sadly, many companies are winding up their final salary schemes or closing them altogether, meaning pension benefits accrued after a certain date (or those available to new employees) may be on a less generous money purchase basis.
Named after a high value gambling chip, the term is used for an investment seen as solid and whose share price is not volatile. Blue chip companies are normally household names and have consistent records of growth, dividend payments, stable management and substantial assets and are the bedrock of a pension fund’s portfolio.