BA ditches final salary pension plan

The changes will not affect existing staff

British Airways has become the latest blue chip company to cut back the pension commitments it makes for its workers.

Firms ending final salary pension schemes

British Airways

Marks & Spencer

British Telecom

ICI

Lloyds TSB

Abbey National

Ernst & Young

Iceland

The company said it would move from a final salary scheme to a defined contribution scheme for new staff in the autumn.

But BA said that the benefits of the 101,000 members of its existing two pension schemes would not be affected.

Many UK firms have changed their pension schemes recently, some saying their decision was because of a change in accounting rules.

Employees bear the risk

Under a final salary scheme an employee receives a fixed level of pension calculated as a proportion of his or her salary at retirement.

And the company has to bear the risk of poor performance from investments which make up that pension.

But under a defined contribution scheme the final pension depends entirely on the performance of investments and it is the worker who bears the financial risk.

Shortfall

The UK Government has recently backed a change to accounting rules, known as FRS17, which forces companies to publish pension fund deficits on their balance sheets.

BA said that under FRS17 rules it had an accounting shortfall of £394m in its pension schemes, although the funds had investments of nearly £10bn.

John Rishton, BA's chief financial officer said: "The change to a defined contribution pension arrangement for future new UK staff is a measured and necessary response to the competitive environment in which British Airways operates."

BA announced its decision on the same day that the Secretary of State for Work & Pensions, Alistair Darling, said British companies and their shareholders may have been too hasty over the closure of final salary pension schemes.

Mr Darling made his comments when he spoke to the annual conference of the National Association of Pension Funds (NAPF).

Rising trend

Major UK firms such as Marks and Spencer, British Telecom, ICI, Ernst & Young, Lloyds TSB and Iceland have all announced changes to their final salary schemes.

The NAPF said 46 companies closed their final salary schemes to new members during the year to October 2001, compared with only 18 the year before.

A further 13 companies closed final salary schemes to existing members, transferring them to money purchase, compared with six in 2000.

Tesco has bucked the trend by taking 59,000 employees out of its current pension plan and putting them into a scheme which will be based on their average earnings.

Although it is not a traditional final salary plan, income in retirement will still be based on an individual's earnings - and should be better for employees.

CadburySchweppes is another major company to have taken this "average salary" approach to pension schemes.