Pensions crisis is deepening

THE GROWING scale of the crisis in pensions is exposed today as figures show one in three company schemes has been scrapped in the last decade. The revelation adds to fears that an entire generation is facing a cash-strapped retirement.

An astonishing 58,000 company schemes have been wound up, according to watchdog the Occupational Pensions Regulatory Authority (Opra). Some 110,000 still exist - but Opra believes a further 30,000 are under threat as the crisis grows.

Many companies closed schemes because they hit financial trouble or faced difficulty paying out the pensions promised. Some companies have gone bust. But a large number simply could no longer afford the costs of running a scheme, especially now people live much longer. The Government has been blamed over the crisis. Ministers introduced a raft of red tape which hampered pension schemes, including tougher accounting laws.

Separate research by consultant KPMG has revealed that millions could see their pension cut by half as companies switch from safe schemes based on final salary to riskier plans which invest in the stock market. The vast majority of firms which close final-salary schemes allow exisiting staff to continue as members, but all new employees are barred from joining.

MPs and unions warned of a 'tragedy' in the making as firms switch to pension schemes less beneficial to workers. 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 it is now putting its head in the sand pretending it does not exist.'

When some schemes are wound up, the pension fund is taken over by an insurance company which administers the pension payments. This option is becoming increasingly common, but most people will receive a considerably smaller pension. Cuts of 40% can occur. And those already receiving a pension will get the most while those a long way from retirement will get much less.

At the same time, many companies are ditching traditional pension schemes based on final-salary because they cost too much. They are turning to riskier stock market-based schemes, called money purchase or defined contribution pensions, for new employees.

Companies typically contribute around 10% of a worker's salary to final-salary schemes, but only about half that to money purchase schemes. As a result, money purchase schemes produce pensions that are up to 50% less than those workers in final-salary schemes can expect, KPMG said. On average they are a third lower.

KPMG said: 'More and more companies are closing down their final salary schemes, some even to existing members, and switching to defined contribution. It is vital that employees make much higher levels of contributions and are aware of the risks inherent in not doing so. Many could face lean retirements otherwise.'

It could also mean taxpayers being hit as the Government acts to beef up benefit payments for pensioners without adequate incomes.

Many firms, such as Barclays, Abbey National, Lloyds TSB and ICI, have shut their final salary schemes but allowed existing members to carry on saving. New staff are offered money purchase schemes. Nationwide and Tesco have decided to base their pensions on average salary not final salary.

A growing number of companies - such as Iceland and Ernst & Young - are closing their schemes to both new and existing members. And companies setting up pension schemes are choosing money purchase rather than final salary.

Experts blame not only soaring costs of running such schemes but also falling investment returns as stock markets have fallen amid the economic slowdown.

Labour MP Frank Field, former welfare reform Minister, said the Government's pension strategies had contributed to the collapse of final salary schemes. He highlighted a tax on pension funds imposed by Chancellor Gordon Brown in 1997 which has cost schemes £5bn a year.

And he attacked increasing red tape on pension funds, including a new accounting standard FRS17. This forces companies to report year-by-year the value of their pension funds, making clearer any shortfalls that firms must make up to pay employees' pensions based on their final salary. In the past they have been able to mask these by smoothing out variations over many years.

Field said: 'We have begun to live through, and by the end of the year, we will have witnessed, unless the Government acts, a mega-tragedy for people.'

Staff have little protection from the law if a company closes its final salary scheme. Existing savings must be safeguarded and the company has a duty of good faith to employees, but as long as bosses have a good reason for their decision staff can do little, experts said.

Roger Lyons, joint general secretary of the Amicus union, called on the Government to strengthen workers' rights to a decent occupational pension. He said in a letter to the Prime Minister: 'There is a silent revolution going on in the world of work. Employers are turning back a century of progress in pension provision.'

The Chartered Institute of Personnel and Development warned that abolishing final salary pension schemes could cause 'serious damage'. The Government hopes its flagship stakeholder pensions will encourage people to save for their retirement, but experts say they have failed to attract people to put money aside. Pensions experts said some of the schemes which have been wound up had one member who may have retired and thus closed the pension fund.

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The Money Mail Pension Manifesto
'A shameful betrayal of all our futures'