Warning on final salary pensions

Some employers are closing final salary pensions to new members

A pension consulting company says that the 2009 outlook for final salary schemes is the "bleakest ever".

The UK's 8,000 final salary pension schemes lost an estimated £226bn in the last year owing to weaker investments, said Aon Consulting.

But it called for "sensible financial planning" and a long-term strategy to overcome the issue.

Earlier Aon warned that the value of employees' defined contribution pensions had fallen 28% over 12 months.

Bearing the risk

Companies bear the risk of any reduction in the value of the pension pot in privately sponsored pension schemes.

Of the 200 biggest schemes, 64% are now in deficit, according to Aon. This was caused by stock market falls and the economic downturn making it more difficult for companies to contribute extra cash.

But trustees of the schemes might still approach these companies to help cover the shortfall in the next few years as people retire.

"Just as employers thought the economic news couldn't get any worse, they are likely to be hit by more big bills to pay for their pension schemes when they can least afford it," said Marcus Hurd, of Aon.

Aon estimated that this figure could reach £45bn a year in the next five years, but it warned that this might not be the best approach.

Mr Hurd suggested that sensible financial planning might take the pressure off these companies in the short-term, by reducing contributions instead of raising them.

These would then rise again in the long-term as the economic outlook strengthens again.

Such a move might again raise fears of an acceleration in the number of final salary schemes being closed to new members.

About four million people in the UK are in defined contribution pensions provided by their employer.

Unlike final salary schemes, these do not guarantee a pension based on end-of-career earnings and length of service. They depend instead on the performance of these investments on the stock market.

Earlier in the week, Aon said that the value of employees' defined contribution pensions has dropped by nearly a third from £552bn to £395bn.