Why final salary schemes could soon be pensioned off

Jul 1 2009 by Peter McCusker, The Journal

THERE are around 100 companies in the North East still providing final salary pension schemes, but for how long will that situation last? Peter McCusker reports.

LAST year Northumbrian Water closed its final salary pension scheme to new employees over concerns about its burgeoning cost, and it may not be too long before some of the remaining North East companies who offer such a benefit will follow suit.

One such firm is Sunderland-based transport group Arriva which says it is unable to give any long-term guarantees on the longevity of its final salary pension.

A spokesman said: “In the UK Arriva operates five defined benefit schemes (final salary) and one defined contribution scheme.

“Increased life expectancy is a real challenge when determining a fair and sustainable balance between future retirement benefits, on the one hand, and the affordability of contributions for both employers and employees on the other.

“It is hard to judge the long-term sustainability of final salary schemes and no open-ended guarantees can be given. We are committed to consultation with our employees over pensions provision as with other aspects of employment terms, pay and benefits.

A new report from accountancy firm PricewaterhouseCoopers also highlights the rapid retreat currently taking place from final salary commitments.

The survey of 157 UK employers, of which 65 have more than 5,000 UK employees, including 33 from the FTSE100, showed that of the 17% of companies still offering final salary pensions to new employees, only a quarter intend to retain them.

Sean Bottomley, director in human resource services at PricewaterhouseCoopers in Newcastle, said: “Our research also shows fewer than 1 in 20 employers expect their defined benefit pension scheme to be open to new members in five years’ time.

“The collapse of future service defined benefit provision is occurring against a backdrop of super-protection for benefits already earned. Future generations will have to do far more for themselves relative to those people who have been lucky enough to belong to a fast-disappearing, defined benefit scheme.”

Recent research from the Pension Protection Fund, which showed the shortfall in the UK’s 7,400 final salary schemes stood at £179.3bn.

Steve Bennett, Northumbrian Water Group pensions manager explained why it changed its position. He says: "Like most companies we face increasing pension costs, which we need to manage carefully.

"We changed our pension arrangements at the end of 2007 after consulting with employees and unions. Our aim was to get to a position where the pension scheme remains affordable for both employees and the company for as long as possible.

"Our defined benefit scheme continues for employees who joined prior to January 1, 2008. New employees have the opportunity to join a defined contribution scheme. We currently have no plans to make further changes."