Final salary pension schemes shut at record rate

Record numbers of employers are closing their final salary pensions schemes as a result of rising costs, low stock market returns and increased life expectancy in favour of schemes that do not guarantee their staff a fixed level of retirement income.

A survey of the 970 members of the National Association of Pension Funds found 84 companies had closed their final salary schemes to new employees this year, almost double the 46 that closed last year. A total of 25 companies had wound up their final salary schemes and switched to money purchase schemes where pension levels are determined by stock market returns, compared with 13 switches last year. Nearly a third of final salary schemes are now closed to new staff.

The average contribution by private sector employers into a final salary scheme is more than 12 per cent, compared with 6 per cent in a money purchase scheme.

Not all company schemes, however, have funding difficulties, with 24 per cent of private sector firms still enjoying a holiday from contributions to their final salary pension funds. But the ability of these companies to continue their contribution holidays looks slim given the effects of falling stock markets on the funds' solvency. Pension funds control assets of about £420bn and, on average, are even more heavily weighted in equities than life insurers, who have had their solvency margins stretched to the limit this year.

The minimum funding requirement (MFR), set down by law, is still in limbo after the Government announced last year it wanted to introduce a new solvency measure. Peter Thompson, the chairman of NAPF, said the Government must act on a replacement for the MFR as equity markets continue to flounder. He warned the City to expect more deficits in companies using the FRS17 accounting standard. The survey found 86 per cent of firms would find a final salary scheme less attractive to run if FRS17 numbers were disclosed.

"The level of over-funding in pension funds has been decreasing," Ned Cazalet, an independent insurance analyst, said. "They are facing the same dynamic as life insurers, but pension fund liabilities are less flexible. Companies are going to have to start contributing again."

Marks & Spencer, Prudential and British Airways have all moved to close their final salary schemes this year. Rising administrative costs and funding the pensions of longer living retired employees are proving too much for many companies.

Digby Jones, the director general of the Confederation of British Industry, said he was surprised so many companies were still offering final salary schemes, given the factors working against their sustainability. "Any reasonable assessment of the facts shows the pension predicament is about the changing environment, not companies shirking responsibilities," he said. The NAPF survey found employers expect the state retirement age to rise to 70 by 2030 to counter the effects of improved life expectancy.

The NAPF findings come a week before the Government publishes its long-awaited Green Paper on reforming the pension system. It is the culmination of a year of pensions reviews, including the simplification report led by Alan Pickering and the report into long-term savings by Ron Sandler. The Inland Revenue, which holds the key to pension reform as tax regulations contain most of the system's complexity, is expected to publish a paper on the same day, outlining simplification of pension taxation.