Bosses lining their pockets with pensions

MORTGAGE lender Abbey National is the latest in a line of companies to raise the drawbridge on its generous pension scheme. Ironically, for a business built on the virtues of long-term saving, Abbey's move is likely to make it harder for many of its own staff to save enough to achieve a comfortable retirement. Led by chief executive Ian Harley, Abbey is closing its traditional pension scheme, where retirement nest eggs are based on workers' final salary.

New staff members will instead be offered a less secure 'money purchase' pension, where returns depend on the vagaries of the stock market. It may not seem earth-shattering, but Abbey's action is part of a trend with vast potential to impoverish pensioners.

Companies, including BT, Marks & Spencer, Legal &General, Sainsbury's, Lloyds TSB and Barclays, are stampeding to slam shut the doors on their final salary schemes. Others, such as debt-ridden Marconi and fashion chain Arcadia, are reviewing their pension arrangements and may ditch their solid, traditional plans.

Frighteningly for employees, a handful are going further. Food retailer Iceland, led by chief executive Bill Grimsey, and accountant Ernst & Young are not only excluding new entrants to their final salary schemes, but also freezing out existing members.

Directors, cushioned by handsome pension arrangements of their own, claim there are good reasons why the old-style final salary scheme must go. Critics contend they are simply driven by the desire to cut costs - and it is ordinary workers who will pay the price.

RESEARCH by consultant Towers Perrin found that the average company contribution-into a new-style plan is only 6% of pay, only half that paid into a typical old-style scheme. Britain's workers face a 'massive savings deficit' as a result.

With final-salary schemes, staff can build secure pensions based on pay and length of service. People lose out with money purchase because contributions are usually smaller and returns are tied to the stock market.

Directors have rather different pension deals. The taxman allows mainstream pensions only on salaries up to £95,400 - a mere fraction of most top bosses' pay. Companies get round this by pouring millions into executive top-up plans known as 'FURBS' or funded unapproved retirement benefit schemes.

There is little evidence of directors tightening their belts. Take Iceland, where the treatment of shopworkers contrasts with the largesse shown to directors. In its latest annual report, Iceland disclosed that it pays 25% of basic salary up to £95,400 into directors' pension pots - five-times more than it says it contributes to the employees' final salary scheme. It also pays 25% of directors' salary over £95,400 as extra salary.

Former boss Malcolm Walker had built up an annual pension of £443,627 when he left last year. In his few short months at Iceland, Stuart Rose, now chief executive of Arcadia, built up an annual pension entitlement of £3,187 and received a payment of £60,123 to his FURBS. The accounts do not disclose how much Bill Grimsey has accumulated in his pension pot since joining in December 2000, but he is unlikely to need his free bus pass.

Similarly, Abbey National's switch to money purchase need not trouble Ian Harley since he has already built up an entitlement of £293,307 a year on retirement.

The story is similar at BT, Britain's biggest pension fund, which closed its doors to new members in April last year. Thanks to his FURBS, however, former boss Sir Peter Bonfield is in line for an annual pension of £235,000 a year. Ex-chairman Sir Iain Vallance is receiving a pension of £344,177.

Longer life expectancies and poor stock market performance have undeniably made final salary schemes more expensive. New accountancy regulation FRS17, which reduces companies' scope to smooth out pension costs over time, has also been a blow. Chancellor Gordon Brown must shoulder a huge chunk of the blame for scrapping the tax credit on dividends in his 1997 Budget, costing funds a total of £5bn a year.

But claims by directors that they have no option but to shut down schemes should be taken with an enormous pinch of salt. Investment returns are suffering because the stock market has had two bad years, but that is untypical. Employers fail to mention that only a tiny handful of employees get the maximum benefit of final salary, because they switch jobs. These so-called 'early-leavers' are less of a burden because their entitlement is upgraded only in line with price inflation up to 5%, not salary growth.

For much of the Nineties companies basked in pension fund surpluses and contribution holidays. Trustees have a duty to safeguard their members' interests. It is time for them to ask some searching questions of companies that want to ditch their long-standing pension plans the minute the going gets tough.