Pension closures 'save billions'

Employers in the UK have saved themselves £4.5bn a year by closing their final salary pension schemes, an insurance company estimates.

MGM Advantage says there are two million fewer people in final salary schemes than there were 14 years ago.

Most will now be in cheaper, defined contribution schemes instead.

Using data from the TUC and Office for National Statistics, MGM estimates their employers' pension contributions have been cut from £7.77bn to £3.24bn.

"Final-salary pension schemes are moving inexorably into extinction," said Aston Goodey of MGM Advantage.

"Employers are increasingly looking to move staff on final-salary pension schemes to the cheaper option of defined-contribution plans."

Renewed closures

This year has seen a fresh spate of companies proposing to close, or considering closing, their final salary schemes for existing members, not just to new recruits.

PENSION SCHEMES EXPLAINED

• Occupational scheme - one organised by an employer
• Active member - a worker making contributions
• Final-salary scheme - guaranteed pension based on earnings at end of career and length of service
• Defined-contribution scheme - investment fund, determined by contributions and investment returns, used to buy an annual pension

Among them have been Barclays, Morrisons, Fujitsu and, most recently, Dairy Crest.

The accountancy firm PricewaterhouseCoopers recently carried out research identifying another 55 companies who said they planned to close their final salary pension schemes for existing members some time in the next five years.

When this happens employers usually offer their existing staff the option of joining a defined-contribution scheme.

In these, the contributions are invested and the eventual pot of money is used to buy an annual pension when the employee retires.

Official figures show that employers typically contribute far less to their replacement schemes than to the final salary ones that have been shut.

According to the ONS, employers pay contributions to defined-contribution schemes worth, on average, 6.5% of salaries.

That is much less than the 15.6% of salaries employers typically pay into final salary schemes.

'On guard'

"Some firms... are using the current recession as a convenient excuse to adopt a slash and burn approach to occupational pensions"

Trade union members, and pension scheme trustees, have been warned by TUC general secretary Brendan Barber to be on their guard against attempts by employers to use the recession as an excuse to "slash and burn" pension entitlements.

He said a "populist and deliberately misleading campaign" was being waged against public sector pensions, as well as those in the private sector.

"Unless we act now, there is a very real danger that ordinary people could pay a severe price in retirement for the monumental profligacy of City bankers," said Mr Barber.

"There is a nagging suspicion that some firms - including many that took contribution holidays in the 1990s - are using the current recession as a convenient excuse to adopt a slash and burn approach to occupational pensions," he added.

He described recent announcements of impending closures as alarming.

"It means millions of the pensioners of the future facing poverty - their well-being suffering and all at an extra cost to the taxpayer," Mr Barber said.

In 2007, the last year for which ONS statistics are available, total contributions to non-state pension schemes, from both employers and staff, stood at £85.2bn.

That was only 2% higher than in 2006, but followed what the ONS described as five years of strong growth.

Within that overall figure for 2007, contributions by employers to their funded occupational pension schemes dropped slightly, from £38.7bn to £37bn.

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