Final salary pensions gives employers a competitive advantage

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A hard core of employers look set to keep their final salary pension scheme open to new employees because they believe it fits their organisational culture and gives them a competitive advantage.

According to a survey by Watson Wyatt, which advises over half the 100 largest corporate pension schemes in the UK, employees lucky enough to have access to such schemes agree.

By far the highest take-up proportion (amongst eligible employees) is for final salary schemes almost nine out of ten (89 per cent) compared with only two-thirds (65 per cent) for defined contribution schemes.

The survey, which looked at over 200 pension schemes, found that employers with final salary schemes had a range of reasons why they had retained them:

Three-quarters said that employees valued the quality of the benefits; two-thirds said final salary pensions fitted well with their organisation culture and overall employee reward strategy while just under half (45 per cent) said it gave them a competitive advantage.

Other reasons cited included pressure from trade unions and as a requirement to compete in Private Finance Initiative bids.

Of the 200 firms surveyed, 30 per cent had closed their final salary schemes to new entrants and introduced defined contribution arrangements, eight per cent had closed them to new entrants and introduced career average or cash balance arrangements, 16 per cent had kept them open to new entrants but reduced benefits or increased member contributions and 46 per cent had made no changes and kept their final salary scheme open to new entrants.

"While many employers have moved away from final salary to defined contribution or alternative, risk-sharing pension designs, there looks set to remain a hard core of employers who believe that in the long term a final salary scheme is the most suitable type of pension structure to meet their business strategy," said Colin Singer, a partner at Watson Wyatt.

"However, some employers have sought to keep a final salary structure but share more of the costs with employees by increasing employee contributions, reducing the accrual rate for benefits, raising the normal retirement age or making early retirement terms less generous."

According to Watson Wyatt, often such changes are introduced together as a package and, increasingly, employees are offered a choice of contribution and accrual rates. Some 27 per cent of final salary plans in the Watson Wyatt survey now offer employees such a choice.

"Some employees value pension benefits more than others and are willing to make higher contributions themselves," said Colin Singer.

"Employers are increasingly taking the view that there is more value to their business in providing higher pension benefits to those who most appreciate them than in having a one-size-fits-all approach."

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