Pensions: employers slash contributions

Jan 06 2003 by Brian Amble Print This Article

Companies that have axed final salary pension schemes have cut the amount they pay into their replacements by a third, according to new research for Union Pension Services, a firm of consultants that supports trade unions in their pension negotiations.

The survey looked at 272 company pension schemes to see how they compared with a hypothetical two-thirds final salary scheme.

Many companies have closed their final salary schemes that guarantee a certain level of pension, claiming that they have become too costly in the current stock market climate and with longer life expectancy.

The pension from money purchase schemes depends on the returns made on the stock market. In these schemes, individuals shoulder the investment risk themselves.

Around a quarter of companies surveyed have now closed their final salary schemes to new members, a significant increase on the 10 per cent three years ago when the research was last carried out.

In the process of switching to money purchase schemes, some firms have reduced the amount they pay in to their pension schemes by as much as a half, according to the survey.

The report's author Bryn Davies said: "Many employers remain committed to final pay schemes. But if they switch to a money purchase basis most take the opportunity to cut back on the value of their employees' pension benefits.

"As a result, their workers not only face a higher risk from their new scheme, but are also likely to have a much lower income in old age."

The lowest ranked pension plans in the survey were all money purchase schemes. The survey found that the retail group Kingfisher provided the worst plan. Its money purchase plan provides only a quarter of the benefits of the ideal scheme.

Insurer Aviva's defined contribution scheme was the only non-final salary pension to make it into the top 10.

The best scheme, offering benefits some 24 per cent better than the surveyís hypothetical ideal plan, was offered by oil giant BP. British American Tobacco offered the second best, 19 per cent better than the ideal.