Pension peril

Exel will face opposition to the closure of its scheme

Union leaders are threatening industrial action after another leading employer revealed that it would close its final salary pension scheme to new recruits.

Exel, the former National Freight Consortium, confirmed reports that from next spring the scheme would only cover existing members and employees.

Danny Bryan, National Secretary for Road Transport at the TGWU, vowed to fight the restrictions.

"I'm alarmed and very angry," he told Working Lunch, "because this is a company which has benefited very considerably over the years from very large surpluses in its pension fund."

Alternatives

A survey from the Association of Chartered Actuaries reported that 55% of final salary pension schemes had either been closed to new entrants or to further contributions.

But some employers are developing alternatives which preserve the promise of a certain level of pension, but don't cost so much to provide.

Average salary linked
Tesco, Debenhams and Nationwide provide Career Average Salary pensions, where the level of retirement income is linked to the average salary achieved during the employee's time with the company.

The pension may be lower in the end, but the employer still takes all the risks over maintaining the value of the pension fund.

Five year qualifying period
Another idea is being put in place in John Lewis department stores. Staff will have to work for the Partnership for 5 years before qualifying for the pension scheme.

The retail sector is notorious for job-switching so the terms will reward loyal service.

Smaller pensions
One company which has already faced a strike in support of a final salary scheme is Caparo Steel.

It abandoned plans to scrap its scheme, but replaced it with a less costly version.

Each year's contribution to the scheme now buys a smaller amount of pension.

Higher employee contributions
Simply asking employees to contribute more can provide another escape route for companies trying to cut down on pension costs. And some pension consultants will advise employers to restrict extra benefits, including death in service payments to spouses.

Delay retirement age
Legal & General has just announced plan to delay the normal retirement age for its employees by 2 years, until they reach 60.

Saving money

It's all about saving money.

Staff could still end up with a decent pension. But there is a danger that the value of some schemes will be eroded too much.

"It is possible to throw the baby out with the bathwater," warns Malcolm McLean, chief executive of the Pensions Advisory Service (Opas).

Money purchase schemes

Companies have been derided for replacing final salary pensions with money purchase schemes, better known as personal pensions.

With these, the employee takes all the risk, contributing to the plan during his or her working life and hoping that the resulting fund will be sufficient to buy a decent retirement annuity.

Malcolm: a money purchase scheme could be an option

The conventional wisdom is that money purchase schemes are inferior. But there are limits.

"You could curtail the benefits of a final salary pension to such an extent that a money purchase scheme would be a better option," says Malcolm McLean.

Money purchase schemes are easier to take with you from one employer to another. And many companies will add their own contributions.