Warning on pensions timebomb

MILLIONS of workers who thought pensions had secured their future could find themselves facing poverty in retirement. A report from the pension industry's own experts has warned that changes in company schemes could leave a generation not saving enough for their old age.

Staff in company pension schemes have traditionally been guaranteed a retirement income of two-thirds of their final salary. But many firms are abandoning these schemes, which have become too expensive as staff live longer and retire earlier. In their place, they are introducing riskier and more unpredictable schemes that rely on the fluctuating performance of the stock market to fund pensions.

Those already signed up to the traditional 'final salary' schemes are mostly unaffected. But staff who have recently joined company schemes - or are planning to do so - will have to contribute much more of their salary towards their pension if they are to enjoy a comfortable retirement.

Yesterday the energy group Lattice, which was part of British Gas, became the latest big firm to axe its final salary scheme. It joins companies including Sainsbury, Tesco, Barclays Bank, Lloyds TSB and ICI. The report yesterday, from the respected Association of Consulting Actuaries, showed many smaller firms are also following suit.

Figures from the ACA show an employee typically saves 3% of his annual salary into a stock market linked scheme, on top of an employer contribution of around 6%. But he would have to save a massive 12% of his salary to get a pension as large as he would have under the final salary scheme.

Final salary pensions are a long-term liability because the employer guarantees the pension and must usually make up any shortfall in the pension fund. But with a stock market pension it is the employee rather than the company who takes the risk. These schemes leave the pension dependent on how much is contributed and the performance of the stock market. Most employers cut costs further by contributing far less to stock market-based pensions.

Employers tend to pay 15%-20% of an employee's salary to a final salary scheme but just 5%-10% to a stock market scheme. Another crucial difference is the fringe benefits attached to the pension. If an employee dies a final salary scheme will typically pay a lump sum of between two and four times salary to any spouse. The spouse will also receive a pension based on expected earnings to retirement. There will usually also be a pension for any dependent children and a lump sum to cover funeral expenses.

A stock market scheme will pay a lump sum if an employee dies but that is likely to be it. ACA chairman Mike Arnold said: 'We are very worried about levels of contributions and what these will produce in terms of pensions. We are also concerned that the move away from good occupational arrangements is accelerating.' Colleague Matthew Demwell added: ' The savings gap is gargantuan. We are not talking about a few pounds to make up the gap.'

Staff living longer and retiring earlier is not the only problem for those offering final salary schemes. Experts also blame falling investment returns and a tax on pension funds imposed by Gordon Brown in 1997.

The result has been a massive switch to the riskier schemes. The ACA survey found the number of final salary schemes have fallen by 15% in the last four years.

Is this the end of the cottage by the sea?