Big changes for majority of final salary pension schemes

Jul 12 2004 by Brian Amble Print This Article

More than half of companies that were still operating final salary pension schemes in 2002 have made changes to them in the past two years, according to a survey by specialist pensions consultants.

Watson Wyatt, which advises over half the 100 largest corporate pension schemes in the UK, has found that while switching from final salary to defined contribution for new entrants remains the most popular choice, the most interesting trend has been the increase in risk-sharing pension scheme designs.

Albeit from a low base, this type of pension scheme has been the fastest growing over the past two years, and the firm believes many more employers may well consider this option over the next few years.

Under career average plans, the benefit at retirement is a pension based on average salary over each individualís entire career. It is also common for earlier yearsí salaries to be revalued to offset the effects of inflation. Typically, these plans are less generous than final salary plans but are more predictable than defined contribution pensions.

Under cash balance plans, members are allocated a cash sum payable at retirement, which is usually expressed as a percentage of current salary for each year of service. On retirement, the cash sum is converted to pension by securing an immediate annuity.

Watson Wyatt's biennial survey of more than 200 UK pension schemes found that of those employers who had final salary pension schemes open to new entrants two years ago, three out of ten have since closed them to new entrants and introduced defined contribution arrangements.

Around 45 per cent of those employers that made alterations either retained their final salary formula, but introduced higher employee contributions and/or reduced member benefits, or introduced some form of 'risk-sharing' defined benefit scheme.

One in seven (16 per cent) have kept them open to new entrants but reduced benefits or increased member contributions while eight per cent had closed them to new entrants and introduced career average or cash balance arrangements.

Fewer than half (46 per cent) made no changes and kept their final salary scheme open to new entrants.

"The pace of change to employer-sponsored pensions has been incredibly fast," said Colin Singer, a partner at Watson Wyatt.

"But while the well-documented trend away from final salary pensions and towards defined contribution continues, perhaps the more significant finding is the number of employers who are moving to alternative, risk-sharing designs, such as career average and cash balance," he said.

Mr Singer added that while the benefits under these plans are typically less generous than those under final salary schemes they are nevertheless popular with employees, with eight out of ten employees eligible to join doing so compared with just two-thirds under defined contribution plans.