Half of final-salary schemes set to close

Friday, 23 January 2009 12:00

Over half of the remaining final-salary pension schemes are set to close to existing members as a result of the economic crisis, an industry body has warned.

The National Association of Pensions Funds (NAPF) found 52 per cent of defined benefit, or final salary, pensions schemes still open members could close as costs escalate.

Over the next five years, employers expect 1,000 of these schemes to close.

Workers are also feeling more pessimistic about their pensions amid record falls on the stock market.

NAPF’s pensions confidence index has fallen from 22 per cent in September to just one per cent in December.

NAPF chief executive, Joanne Segars, said: “With so many schemes set to close to new members and employee confidence in pensions evaporating, this is a now or never moment if we want to see defined benefit schemes remain a key part of the UK’s pension landscape.”

Defined benefit schemes, also known as final salary pensions, are guaranteed by employers to pay a fixed amount at retirement, based on the worker’s salary.

However, as people live longer into retirement, costs for these types of pensions have soared, leading many companies to switch to cheaper and less risky defined contribution pension schemes.

NAPF is urging the government to help the pensions sector as it has helped the banking sector.

The association is calling on the government to make itself the ultimate guarantor of the Pension Protection Fund (PPF), issue more long-dated gilts to ease pressure on scheme sponsors, and allow schemes more flexibility on issues of retirement ages and indexation.

Employers looking to close their schemes to existing members may hit legal problems, however.

“The current financial climate is causing many employers to consider closing membership of their defined benefit pension schemes to existing members. While in most cases it will be possible to do so, there are legal hurdles to be jumped,” Robin Simmons, partner at pensions law firm Sacker and Partners, warned.

“Some pension schemes’ rules prevent closure to existing employees – so employers should check first whether this can be achieved at all. But where it can, employers will need to consult with affected employees for at least 60 days and give proper consideration to employees’ views.”

Despite the difficulties, action must be taken now, according to the Centre for Business and Economic Research (CEBR). The firms has warned the UK pensions system is a “doomsday machine waiting to bankrupt the entire corporate sector” as the latest data from the PPF shows defined benefit schemes are now in deficit by £195 billion.

“The falling asset values plus the drop in yields on long-dated stock have caused the enormous losses made by the funds in such a short period,” the CEBR said.

Some businesses will not be able to support these deficits and will go bankrupt, forcing the PPF to cover the schemes and charging other firms more as a result.

“The alternative will be politically unpopular but is the right thing to do – to force the recipients and potential recipients of defined benefit schemes to take a cut in their benefits to bring the funds back into solvency.

“Our rough and ready estimates are that if benefits were cut by ten per cent across the board and if companies were to pay up to cover the rest of the deficit a rolling collapse into bankruptcy for UK plc could be averted,” the CEBR added.

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