Death of the company pension scheme?

Jun 28 2004 by Brian Amble Print This Article

Almost two-thirds of UK employers operating final salary schemes have closed them to new entrants, replacing them with defined contribution (or money purchase) pensions, where the employee - rather than the company - takes the investment risk

But now a shock survey by actuaries Towers Perrin has found that almost a quarter (24 per cent) of the UK's largest companies are considering abandoning occupational pensions altogether and offering employees cash instead.

And 14 per cent of the 186 FTSE 350 companies quizzed for the survey said that they were considering making the move as a company-wide policy and replacing direct pension contributions entirely.

Towers Perrin said that it was surprised by the findings and suggested that they signalled a "final stage" in employers' attitudes to their pension liabilities.

Peter Routledge, partner at Towers Perrin, said: "If stage one was to close pensions to new hires, and stage two is to close defined benefit to existing employees, we are already seeing evidence that the final stage might simply be to replace corporate pension plans with a cash allowance and let the individuals take full responsibility for planning for an income in retirement."

The move would cause political consternation at a time when the Government is desperate for people to save more for their retirement Ė even though its policies have systematically dismantled almost all the tax incentives to do so.

With no guarantee that employees would use the cash to save for their retirement, it is almost inevitable that such a move by big employers would make the pensions problem significantly worse.

It would also provoke the anger of their employees, many of whom have already seen final salary schemes that guarantee a fixed pay-out replaced by defined contribution schemes.

As last weeks threatened national rail strike demonstrated, the pensions issue has now moved to the forefront of industrial relations in the UK. Any further erosion of workers' pension rights is unlikely to be accepted by unions, particularly given the RMT union's success in forcing Network Rail to back down on its plans to close its final salary scheme to new entrants.

Last month, research by Close Wealth Management found that the closure of final salary pension plans has cost UK employees more than £1.7 billion this year, while the amount paid into schemes by employers had fallen by almost half between the beginning of 2001 and the end of 2002.

Companies will doubtless attempt to present the straight cash option in terms of giving their employees greater choice to plan their own retirements. But the millions who are fearful of what awaits them in their old age are unlikely to swallow the spin quite that easily.