Pension cutbacks as shortfalls loom

4 June 2009

A rash of British companies have imposed further cutbacks on staff pensions in the wake of plunging investment markets and mounting fears of huge shortfalls.
This week supermarket chain 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. The moves mark a significant escalation in the closure of such pension schemes and experts predict more will follow.
Independent pensions expert Ros Altmann says the costs of running final salary schemes are leaving boards with little choice.
“Given the enormous costs involved, the question for most boards is not why should they close their scheme, but why should they keep it open," she explains. “A final salary pension adds well over 20% to payroll costs and, given the large deficits in most schemes, the costs could well rise to over 40% in coming years.  But it is not just the level of cost that is the problem, it is also the uncertainty of that cost.”
Just five years ago, around 40% of companies still offered final salary pensions to new employees. Altmann points out that there are now just four FTSE 100 firms who do so - Shell, Tesco, Cadbury and Diageo.
Businesses cut back
Barclays has applied the brakes to its pension scheme to existing members as well as new staff, claiming that it was forced to take action due to the rising costs involved in providing guaranteed pensions to 18,000 employees.

Members of the existing scheme will see their pension rights frozen and moved into cheaper arrangements. The decision will affect chief executive John Varley, who is expected to follow the example of other directors and set up his own retirement plan.

The bank says the move is “in the best interests of all Barclays employees and shareholders”.
Meanwhile, the 10,000 staff in Morrison’s retirement scheme will receive a pension based on an average salary for their entire career rather than the amount they are paid for the final year of employment. The supermarket giant has already shut its scheme to new members.
Morrison says that it will “move all future benefit accrual onto a career average basis, such that it will grow in line with inflation rather than being linked to final salary”.

BP will close its final salary scheme to new recruits; it blames difficulties on “managing future costs and risks”.

Instead, employees joining after 2010 will be offered a money purchase scheme in which their pension will be linked to the performance of the pension fund rather than to the employee's salary level. BP estimates the move will save it around $120 million a year within 10 years.

What next?

Altmann warns that there is worse to come for private sector workers: “If anyone was previously still in doubt as to whether final salary schemes had a viable future, the latest announcements should have removed the uncertainty.
“The demise of these top-quality, traditional pension schemes is a serious issue for the future, as more and more employees face uncertainty in retirement, with inadequate state pensions, no employer to rely on and an annuity market that they do not understand."
She adds that forthcoming pension fund valuation statements, taken at the end of March, are likely to make for very grim reading due to very low asset prices and artificially depressed gilt yields as a result of the Bank of England’s quantitative easing programme.
“The huge deficits to be announced in coming months will lead to a torrent of new closures, as private sector companies try to cope with the costs of making up past deficits and hope to avoid the pain of increasing liabilities in future,” Altmann concludes.

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