Pension payout cuts to hit millions

MILLIONS of workers face cuts to their pensions after a 50% rise in the cost of providing traditional final salary schemes, researchers have warned.

Employers will be forced to reduce payouts to deal with the ballooning bill for pensions linked to final salaries.

That will leave many facing retirement on a pension lower than they had planned and add to concerns of a deepening crisis.

It will almost inevitably mean people having to work longer or save more, according to the analyst Incomes Data Services. The organisation pointed to a near 50% rise in the amount that employers paid into final salary schemes between 2003 and 2004.

Employer contributions soared from £5.5bn to £8.2bn a year. This rate of increase is by far the highest ever recorded by Incomes Data Services. The research looks at employer contributions paid into more than 280 major pension schemes.

Almost a third of the cost was for special payments, those on top of the normal ongoing contributions. These were up almost 100% on a year earlier. In many cases the payments were made to help tackle gaps between what schemes promised to pay out and their value.

Falling stock markets and greater life expectancy have left companies struggling to meet their pension promises. Many firms have already tackled the burden by closing their schemes to new employees, slashing benefits by replacing final salary pensions with variable, stock market-linked pensions for new staff. A small number have closed their schemes to existing staff.

Many firms will simply be forced to cut back on what they have promised, warns Incomes Data Services. A growing number will change the way they calculate pensions, cutting the amount workers can accrue for each year of future service. That leaves workers facing significantly smaller pensions than they had expected.

Other companies will redesign their schemes to spread the risk between employers and staff. Those facing the greatest problems may even decide it is time to close their pensions to existing savers.

Helen Sudell, editor of the Incomes Data Services pensions service, said: 'A 50% rise in pension costs in just 12 months is a pretty staggering figure.'

The TUC will today renew its call for compulsory pension savings as the solution to the retirement crisis.