UK employers have saved themselves around £4.5bn a year by closing their final salary pension schemes, enhanced annuity provider, MGM Advantage, estimates. They say that there are two million less people in final salary schemes than there were some 14 years ago, and that most will now be in cheaper defined contribution (DC) schemes instead.
Using data from the Trades Union Congress (TUC) and Office for National Statistics (ONS), MGM estimates that employers’ pension contributions have been massively cut, from around £7.77bn to just £3.24bn. Final-salary pension schemes are moving towards extinction, claims Aston Goodey from MGM Advantage, adding that employers are increasingly looking to move their staff on final-salary pension arrangements to the cheaper option of DC plans.
This year has seen a fresh spate of larger UK companies proposing to close their final salary schemes to their existing members, not just to new staff. Among them have been Barclays, Morrisons, and, most recently, Dairy Crest.
The accountancy firm PricewaterhouseCoopers (PwC) recently carried out research identifying another 55 UK companies who said they planned to close their final salary pension arrangements for existing members some time over the course of the next five years. When this happens employers usually offer their staff the option of joining a DC scheme. In these, the contributions are invested and the eventual pension fund is used to buy an annual pension via a pension annuity when the employee retires.
Official figures show still that employers typically contribute far less to these replacement DC schemes than to the final salary ones that have been closed down. According to the ONS, employers pay contributions to DC schemes worth, on average, 6.5% of salaries, and that is much less than the 15.6% of salaries employers typically used to pay into final salary schemes.
Trade union members, along with pension scheme trustees, have been warned by the TUC’s general secretary, Brendan Barber, to be on their guard against attempts by some employers to use the current recession as an excuse to “slash and burn” pension schemes and pension entitlements. He staed that a ”populist and deliberately misleading campaign” was being waged currently against public sector pension arrangements, as well as those in the private sector, and, unless we act now, there is a possible danger that ordinary people could pay a severe price in their retirement for the monumental mistakes of City bankers.
There is a nagging suspicion that some employers, including many that took pension contribution holidays in the 1990′s, are using the current recession we are witnessing as a convenient excuse to adopt a slash and burn approach to their occupational pension schemes.
In 2007, the last year for which ONS statistics are readily available, total contributions to non-state pension arrangements, from both employers and staff, stood at around £85.2bn, and that was only 2% higher than in the previous year, but followed what the ONS described as probably five years of strong growth. Within that overall figure for 2007, contributions made by employers to their funded occupational pension arrangements did drop slightly, from £38.7bn to around £37bn.
So what does all this mean? Well, all these people now going into these lesser DC schemes have two things to worry about. The first is that when they come to retire they have a big enough pension fund, and secondly, that when they check out annuity quotes for the best annuity rates, they can buy themselves a big enough retirement income.
