Page last updated at 22:07 GMT, Tuesday, 25 August 2009 23:07 UK

Final-salary pensions disappear

Money Talk
By Mark Duke
Head of pensions at Towers Perrin

Workers from Barclays bank lobby the shareholders' AGM in August 2009
Pension closures have faced a hostile response at some companies

The year 2009 marks the start of a significant trend, as a number of large organisations make 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.

Until recently, larger employers have typically made modifications - cut backs - to their DB schemes, and probably stopped people joining them some years ago.

Cancelling the ability of existing members to accrue more final-salary pension has been an action taken only by smaller, low profile, employers.

But this is changing.

The Financial Services Authority (FSA) has become the latest employer to take this step, telling 500 of its staff that they will no longer be able to pay into their final-salary scheme.

And the partly nationalised bank RBS wants to severely limit the growth of future pension entitlements for current members of its final-salary scheme.

Finances squeezed

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.

As major companies abandon their legacy final-salary plans others will follow

In this arrangement people accumulate a pot of money with which they buy a pension when they retire.

In recent months we have seen Fujitsu and IBM announce similar actions.

Barclays has said it also intends to cancel its final-salary scheme and move all these employees into its half-way-house cash balance plan, which it has been offering to new recruits for some years.

As major companies abandon their legacy final-salary plans others will follow.

Recent surveys of major employers show that many are expecting to press the stop button over the coming months.

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

The financial crisis is squeezing company finances, as well as making pension deficits worse.

Research by Towers Perrin shows that pension fund liabilities account for nearly 35% of FTSE 100 companies' value on the stock market, and deficits have tripled in size since the start of the year.

Companies want to focus on fixing their 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.

Mark Duke
Mark Duke of Towers Perrin

You will still have the DB pension you have built up, but no more pension will be added from the date it closes to further contributions.

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, in which 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.

Consultation can become negotiation and if there is a trade union it will certainly be involved.

Union responses to some of the recent high profile announcements show that they are up for a fight.

Is there anything you can do?

If the company has a good case for making the change and is following the right legal process then the proposals may be slightly enhanced but are unlikely to be scrapped - so do not assume you can ignore the consultation.

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 probably did not pay much attention or even understand what it was worth.

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 may 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.

It is almost certain you will have to save more yourself if you want to have the same expected retirement income

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.

Always check out whether there are changes being made to the life insurance arrangements. Will your family have the same protection in future?

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.

You may also be able to top up your life cover at the same time.

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 you stay in the DB world.

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

And if the guidance you are offered means you cannot compare the options, ask for more help.

You will probably find that lots of people are having the same problem as you and the employer will be encouraged to provide supplementary guidance.

Advice

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

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.

But it does not mean you are compelled to save more.

You might conclude that overall you are still on target to have enough income in retirement.

An alternative is to plan to work longer and 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 a 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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