The closure of final salary pension plans has cost UK employees more than £1.7 billion this year, according to new figures, and will force many people to stay working for much longer than they might have expected.
Almost two-thirds of UK employers operating final salary schemes have now closed them to new entrants. They have been replaced with defined contribution (or money purchase) pensions, where the employee takes the investment risk rather than the company.
And according to a survey by Close Wealth Management, those with defined contribution pensions can be left with a pay-out about 30 per cent lower than those with final salary schemes.
Close said that increased life expectancies, minimum funding requirements and a new obligation on companies to state the cost of pension funds in their balance sheets have been the main stimuli for the closures.
But firms have also slashed the contributions they pay into their employees’ schemes. Between the beginning of 2001 and the end of 2002, Close found that the average contribution companies paid into final salary schemes was 13.5 per cent, almost double the 7.81 per cent paid into defined contribution plans.
According to Close Wealth Management’s Martin Smith: "around six out of ten defined benefit schemes are now closed to new members and the number of closures is growing.
"This explains why last year, there were three new members of defined contribution schemes for every two new ones of defined benefit plans.
"There are currently around one million people working beyond 65, but given the shift to DC schemes and the accompanying lower employer pension contributions that come with this, this number will surely grow."