Stunning fall in final salary pensions

THE spectacular demise of final salary pension schemes, which guarantee workers pensions linked to their earnings, is revealed in a Financial Mail survey.

More than half of Britain's biggest companies have now shut down their final salary schemes, or never set up one in the first place, the study shows.

This suggests that millions of employees will face increased financial uncertainty in old age, and that those entering employment will have to save a much higher proportion of their pay to ensure a comfortable retirement.

Our survey of FTSE 100 companies showed a growing number abandoning final salary schemes because they fear being exposed to massive liabilities.

With company profits under pressure, staff retiring earlier and living longer and investment returns shrinking, many of the firms we questioned told us the costs simply looked too great.

Final salary schemes promise employees a percentage of their salary for each year they work.

This means that, no matter how poor the investment performance of a pension scheme may be, the company must top up funds to ensure payments are made.

A rising tide of firms are closing entry to these schemes and are putting new staff into money purchase schemes, in which the contributionsof companies and employees are used to buy an annuity. Retiring employees then receive whatever their individual pension fund will buy.

The survey identified only two big corporations, British American Tobacco and Unilever, that still have non-contributory final salary schemes, though employees in Imperial Tobacco's scheme are having a 'contributions holiday'.

Meanwhile, giants such as BT, Marks & Spencer, Tesco, Sainsbury, Lattice, GlaxoSmithKline and Legal & General are closing their final salary schemes to new staff.

The stark findings of our survey will be underlined on Wednesday when the National Association of Pension Funds publishes its own annual survey of pension schemes, which will include details from about half its 1,000 members.

The NAPF said: 'The move from final salary schemes to money purchase has been striking. The number of schemes being closed has escalated sharply this year.'

It is expected to show that more than 40 final salary schemes have closed in the past year - up from 18 the year before.

John Ralfe, who masterminded the switch by the Boots pension scheme from equities into bonds, said: 'If people are changing jobs or joining the labour market, they can no longer rely on being paid a proportion of their final salary.

'For most people, the difference in pension offered would not be a deciding factor in choosing one job over another. But all other things being equal, it could stop people moving jobs or it could be the deciding factor between two competing offers.'

Financial Mail contacted every member of the FTSE 100 index last week and received replies from 58.

Those who had closed final salary schemes outnumbered those keeping them open. And a small group of mainly new tech firms such as Sage, Logica and Arm, had never started group final salary schemes in the first place.

Our survey shows that almost all the High Street banks have also abandoned final salary schemes for new joiners, claiming that cheaper money purchase pensions give their staff greater flexibility if they want to change their jobs.

Firms that still have final salary schemes include Abbey National, BAA, BAT, BG, BP, Centrica, Compass, Daily Mail & General Trust, Diageo, Electrocomponents, EMI, Enterprise Oil, Friends Provident, Hilton, Imperial Tobacco, International Power, Innogy, National Grid, Pearson, Prudential, Royal & SunAlliance, Royal Bank of Scotland, Reckitt Benckiser, Shell, Smiths and Unilever.

But final salary schemes are closed to new staff at Alliance & Leicester, AstraZeneca, Barclays, BT Group, BA, Boots, Cable & Wireless, Capita, GlaxoSmith-Kline, Hays, HSBC, ICI, Lattice, Legal & General, Lloyds TSB, Marks & Spencer, mmO2, Next, Northern Rock, Reuters, Sainsburys, Schroders, Tesco and WPP.

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