Final salary pensions at 'tipping point'

Thursday, 13 August 2009 12:00

Final salary pensions have reached a ‘tipping point’ and schemes will close over the next few years unless better ways of funding can be found, KPMG has predicted.

A survey from accounts KPMG found 22 per cent of FTSE 100 companies will not be able to clear their pension deficits.

Mike Smedley, pensions partner at KPMG in the UK, said: “Unless companies and their pension scheme trustees can work together to ensure that pension funding can be managed in a way that does not impact on companies’ wider financial flexibility, this is likely to result in more and more companies opting to close defined benefit schemes altogether.”

For the first time, KPMG added, FTSE 100 companies are likely to spend as much on paying past employees’ pensions as they are paying in contributions to current staff.

If this trend continues over the next five years, £4 of every £5 spent on defined benefit pensions will be for past liabilities, not new benefits, the report predicted.

Most blue-chip firms have already closed their final salary schemes to new employees but more will scrap them altogether as pressure increases.

Plunging stock markets, increasing longevity and higher administration costs have led to massive deficits for the remaining schemes and recent figures estimate the gap in funding for the top 100 UK companies at £96 billion.

With cash flow restricted in the financial crisis, many firms are reconsidering the benefit of maintaining a costly pension scheme.

“This is really death by a thousand cuts,” said Ros Altmann, pensions policy adviser.

“If employers put the money into the pension schemes, they suffer competitively in their business.”

The government needs to step in and make pension rules more flexible, and issue longevity bonds – a kind of insurance that people will live longer than expected – to take on some of the risk, Dr Altmann said.

“I think that it is vital that members know what is going on,” she added.

“You are on your own – you can’t rely on your employer anymore.”

There are some 8,000 final salary schemes in the UK, with just a handful still open to new employees. Barclays and Wm Morrison were the most recent FTSE 100 companies to close their schemes to existing members.

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