Paying more and working longer for a final salary pension


Employees with final salary pensions are being asked to pay more and work for longer for the privilege of remaining in what is an increasingly rare type of pension scheme, according to new research.

The study by consultancy Watson Wyatt has found that the trend towards closing final salary schemes to new members is continuing, with only a third of employer's schemes still open to new members.

Some companies are also now moving to closing final salary schemes to existing members.

"While closing final salary schemes and halting accrual for existing members remains extremely rare, our survey reveals that many employers would be likely to consider this option if the costs, risks and the regulatory burden continue to increase," said Kathryn Armitstead, a senior consultant at Watson Wyatt. "What their competitors do will also be a factor."

Nearly 50 per cent of all final salary plans now require members to pay over five per cent of their salary towards their pension, compared with a quarter who did so just two years ago.

The average member contribution rate had risen over the same period from 4.6 per cent to 5.2 per cent, it added.

There was also an increasingly wide range of member contributions, with rates of 10 per cent or more being introduced over the past two years.

"Companies believe the upward trend in member contribution rates will continue," said Armitstead. "We can reasonably expect the average to rise by a further percentage point to 6 per cent over the next two years."

Employees are not only being asked to pay more but to work longer. Some 78 per cent of companies polled predicted that their normal retirement age would be 65 or over in two years' time, compared with the 65 per cent just two years ago.

Changes to pension schemes over the next two years were likely to include reducing the rate of pension increases, limiting the future growth in pensionable pay and changing early retirement terms.

"Companies are taking advantage of a wide range of opportunities to reduce the cost and risk of their final salary schemes, and we fully expect this trend to continue," added Armitstead.

"Most employers in our survey are keen to provide quality pensions but the twin pressures of cost and risk continue to bear down on them.

"Companies are responding to these pressures in a variety of ways, though the trend continues to be towards less generous pensions generally, and more of the responsibility and cost being shifted towards the employee," she concluded.