'Death knell' for final salary pensions

Workers received a dire warning today that every final salary pension scheme in Britain will close within the next five years.

The National Association of Pension Funds (NAPF) predicted that the burden of government red tape and a costly new compensation fund would force employers to ditch current schemes.

The country's most influential pensions body, which represents pension funds worth £600 billion, made the claim as the industry's leading figures met in Docklands.

Amid increasing fears of a pensions crisis, Work and Pensions Secretary David Blunkett was expected to tell today's summit that the Government has not ruled out changing the law to automatically enrol workers in their employer's scheme. The change would mean employees would need to opt out of schemes and would affect the four million people who currently choose not to use their firm's system.

But the NAPF will overshadow Mr Blunkett's own message with its warning that most employers are saying "enough is enough" about the cost of final-salary schemes.

The schemes guarantee a certain level of income to staff on retirement, giving an average boost of about 25 per cent to most pensions.

About three quarters of firms have already closed such schemes to new employees, but NAPF chief executive Christine Farnish today told Mr Blunkett that existing members were in for a shock too.

She said final-salary pension members would find that they would be switched to less favourable money-purchase schemes whether they like it or not.

"The main reason is that a disproportionate amount of the cost and risk in the pensions system is now on employer's shoulders. Over the years, successive governments have increased the amount of responsibility, the level of benefits that employers are expected to provide," she said.

"Now employers are increasingly starting to reel back from the amount of liability they are carrying and are finding it unsustainable going forward.

"I think the next big wave of change will indeed be closure of those schemes to existing members," she told BBC Radio 4's Today programme.

In remarks that will be seized on by the Tories, the pensions chief blamed Labour's extra regulations and its new Pension Protection Fund (PPF), into which firms have to pay a levy to provide a safety net for those schemes that collapse.

"The impact of the new regulatory regime, the tougher funding measures, the cost of the PPF and the risk the levy going up in future are going to trigger a further wave of change," she said.

Whether a company can axe its final- salary schemes depends on its individual arrangements with staff and contracts of employment, but most can do what they like.

Other options are to raise the age at which payments are made or to cut benefits.