Fears over company pensions

The Government was today accused of "putting its head in the sand" over the growing crisis in company pensions - with one in three firms scrapping their company schemes in the last 10 years.

Pensions watchdog Opra says a staggering 58,000 company schemes have been wound up and 30,000 of the remaining 110,000 are at risk.

A separate report by financial consultants KPMG warns that millions of employees could see their pensions cut in half - with the grim prospect that an entire generation faces a poverty-stricken retirement.

Opra - the Occupational Pensions Regulatory Authority - says many companies closed their schemes because they faced financial trouble or difficulty paying out the promised pensions. Other firms simply went into liquidation.

But an even larger number could simply no longer afford the costs of running pension schemes, especially as people are living longer than ever before.

Today MPs and trade union leaders warned the Government of a "tragedy in the making" if firms continue either to opt out of finalsalary schemes or switch to schemes with considerably less benefits for their employees.

Tory shadow pensions secretary David Willetts said: "Every day that passes we see more evidence that Britain's pensions are in crisis. Every time a company closes a scheme it means people face poverty in the future. The Government created this crisis and now it is putting its head in the sand and pretending it does not exist."

The Government came under further attack when its former welfare reform minister, Frank Field, accused Chancellor Gordon Brown of contributing to the collapse of final-salary schemes by introducing a 1997 tax on pension funds - which have cost the schemes £5 billion a year - together with a raft of red tape and complex accounting structures. Mr Field, now a backbench Labour MP, warned: "By the end of the year we will have witnessed a mega-tragedy for people unless the Government acts."

Companies typically contribute 10 per cent of a worker's salary to final-salary schemes. The vast majority of firms which close their final-salary schemes allow existing staff to continue as members, but all new employees are barred from joining. These include Abbey National, Lloyds TSB and ICI.

Others - including Nationwide and Tesco - now base their pensionson the employee's average salary instead of final salary.

But some, including frozen food chain Iceland and financial consultants Ernst and Young, are closing their schemes to both new and existing members. Firms are turning to riskier, stock-market-based schemes - known as money-purchase or defined-contribution pensions - for new employees. But typically these are worth a third, and sometime a half, less than final-salary schemes.

KPMG's report warns today: "It is vital that employees make much higher levels of contribution and are aware of the risks inherent in not doing so. Many could otherwise face lean retirements."

Roger Lyons, joint general secretary of the Amicus trade union, has written to Tony Blair saying: "There is a silent revolution going on in the world of work. Employers are turning back a century of progress in pension provision."

Meanwhile the Chartered Institute of Personnel and Development warns that abolishing final-salary schemes will cause "serious damage". If the Government is later forced to increase benefit payouts for those without adequate company pension incomes, it is the taxpayer who will foot the bill.

Comment: A disaster waiting to happen
City & Business