Page last updated at 23:39 GMT, Wednesday, 15 April 2009 00:39 UK

The end of final-salary pensions?

Money Talk
By Mark Duke
Head of pensions at Towers Perrin

Mark Duke
Mark Duke

2009 will see a number of large organisations making a fundamental change to their company pensions - cancelling final salary schemes for existing members.

If you are one of the lucky few still in a final-salary, defined benefit (DB), plan, you need to know what this will mean for you and your plans for retirement.

Closing a scheme to current members is a big step for employers.

Many smaller companies have already done this.

So far, larger ones have typically made modifications to their DB scheme, and probably stopped people joining it some years ago.

But cancelling the ability of existing members to accrue more pension, by stopping them paying in any more money, is new for most large organisations.

Looming on the horizon

Two big employers, the Royal Mail and BT, have changed their final-salary schemes for existing staff to a half-way house, known as a career average scheme.

Cutting back on pensions may save jobs

And three years ago the pest control business Rentokil became the most high-profile employer to move all its staff into the standard alternative known as a defined contribution (DC) scheme, which pays money which individuals have to invest in order get a pension.

But once more major companies do this, others may follow relatively quickly.

The main reason they may choose this path is that they see promising a pension for life as too risky and very expensive.

The financial crisis has squeezed company finances, as well as making pensions deficits worse.

Towers Perrin found in March that pension fund liabilities account for nearly 35% of FTSE 100 companies' value on the stock market.

Companies want to focus on fixing their current deficit problems, stop the build-up of any further DB pension entitlements or deficits, and get all employees on to the same type of pension plan.

Also, cutting back on pensions may save jobs.

Consultation

If your employer announces this sort of change, it is very likely that you will be offered a DC scheme for the future instead.

You will still have the DB pension you have built up, but no more pension will be added.

A DC pension fund is like a long-term savings account where what you get out will depend on how much you and the employer pay in, and how well the investments perform.

There is no guarantee related to how long you have been employed or the level of your final salary.

The first thing you will hear is an announcement that a consultation will be held, where the company will ask your views.

This is your opportunity to raise your voice.

You may well find that there is a group of people nominated to collect your opinions and who will seek to influence the company and get the best deal they can.

And if there is a trade union it will certainly be involved.

Is there anything you can do?

If the company has a good case for making the change then there are unlikely to be major modifications - but do not assume you can ignore the consultation.

Young people
Changes will have their biggest effect on young employees

The best approach is to work out how the change will affect you and what decisions you will have to make.

Moving into a DC world means that you are going to have to change your mindset.

In your old DB scheme you did not need to pay much attention to it, but in a DC plan you will have choices about how your money is invested, and how much you save.

If you do not get involved with your DC pension, you will end up in the default investment fund which could be either too risky or too safe for your circumstances.

Understand the offer

The first step then is to read and digest all the available information.

Go to the presentations, read the materials, use any interactive models and ask questions.

Look out in the consultation literature for any tips about how you can tell what level of risk is right for you.

Also, make sure you do not miss out on top-up company contributions.

Often, if you pay in extra to your pension the company will pay extra too.

Think about your wider saving plans, any other pension plans you have and whether you are relying on non-pension savings, even your house, to help fund your retirement.

In some instances, you may be able to choose between accepting the move to DC or staying within the DB scheme but having to pay more into it.

It may even mean that you get lower salary growth.

If this is the case, make sure you understand both options and what they would mean for you.

Advice

Where employees have to make choices like these, some companies will provide access to personalised modellers or advice.

It is almost certain you will have to save more yourself

Whatever change is proposed, it is almost certain you will have to save more yourself if you want to have the same expected retirement income.

It does not mean you have to save more.

You might conclude that overall you are still on target to have enough income in retirement or that you will have to put back your planned retirement date.

But it will be up to you to work this out for yourself using the information provided by your employer, or to seek independent advice.

And finally, once you have a DC pension, set aside some time on regular basis to check that it is still on track to deliver what you need.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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