RBS set to cut pension benefits

RBS closed its final salary scheme to new members in 2006

High Street bank RBS is set to scale back on the benefits to staff in its final-salary pension scheme.

The bank said that it would cap any future increases in pensionable pay to 2% a year, or the rate of inflation, whichever was lower.

This means that even if workers get a larger pay increase or promotion, only a maximum 2% rise would be used when calculating their eventual pension.

The bank was criticised early in 2009 for the pension of its former boss.

Sir Fred Goodwin initially took a pension of £703,000 when he left his position as chief executive at the bank, although he has since agreed to lower his pension income to £342,500 a year.

'Pragmatic'

RBS closed its final-salary scheme to new members in 2006, and like many other businesses has been looking at its provision for existing members.

This is an expensive scheme for our shareholders to fund and a generous one in comparison to the market Neil Roden, RBS

The bank said the move was "pragmatic and necessary" but the decision was condemned by the trade union Unite which said that it was a "body blow" to its 60,000 staff.

It is a less drastic a move than the intention of another High Street bank - Barclays - which is planning to shut its final-salary scheme for existing members.

Final-salary schemes have traditionally been seen as the best type of pension a worker can get. They promise to pay a retirement income based on a percentage of your salary every year for the rest of your life.

The amount you get depends on how long you have spent working for your employer and how much you were earning at the time you left the business - your final salary.

Early retirement

RBS, which is now 70%-owned by the taxpayer, said that it would also cut its pension scheme's costs by reducing the size of the lump sum payable on early retirement, for those members opting to take an immediate undiscounted pension.

Sir Fred Goodwin's generous pension provoked widespread astonishment

It said that a third of its staff were still members of the final-salary scheme, also known as a defined-benefit plan.

"This is an expensive scheme for our shareholders to fund and a generous one in comparison to the market," said Neil Roden, head of human resources at RBS.

"The reforms we are consulting on seek to strike a balance between reducing the costs and future liabilities of the scheme to the group, with doing what we can to protect the welfare of existing staff and scheme members.

"It is a pragmatic and necessary course of action and not a decision the board have taken lightly," he added.

But the banking trade union, Unite, said that the move would add "insult to injury" to workers following the controversy over the Sir Fred Goodwin pension affair.

"Unite will support its members in any action they choose to take to defend their pensions. The union will be meeting again with RBS and we expect there to be meaningful negotiations over these changes," said Rob MacGregor, Unite national officer.

"RBS staff, who already face great uncertainty in the face of major job losses, now face a future with retirement benefits severely reduced," he added.

More of the same

This year has seen a growing trend for employers to shut their final-salary schemes to current staff in order to save money.

Barclays bank has been one of the biggest employers to propose such a move.

Poor investment returns, and the growing longevity of employees, has pushed up the costs of funding retirement benefits.

In many cases schemes have fallen into a deficit, a situation that requires employers to make extra payments.

Earlier this month, actuarial firm Watson Wyatt predicted that about half the final-salary pension schemes in the private sector would close to existing members within the next three years.

In June, accountancy firm PwC identified 55 firms who were likely to do this within five years.

Research published by pension advisers MGM Advantage said that employers in the UK had saved themselves £4.5bn a year through lower contributions as a result of closing their final-salary schemes.