Warning over final-salary pensions

A NEW warning was issued today about supposedly 'safe' final-salary pension schemes. The schemes, usually regarded as the most generous and secure form of pension, are dangerously vulnerable when a company goes bust or winds itself up voluntarily, according to a Government watchdog.

The warning will add to the existing anxiety over the security of company pensions as final-salary schemes are usually seen as guaranteeing a level of income on retirement.

However, many pensioners are having to retire on much smaller incomes than they had planned for, despite decades of payments into the schemes, because of a lack of legal protection, says the annual report from the pension advisory service OPAS, which is published today.

OPAS chief executive Malcolm McLean warned that final-salary schemes are 'only as good as your employer is'. He added: 'The employer has got to be there and solvent.' The report highlights a number of examples where people were left with hugely reduced pensions or even virtually nothing at all.

In one particularly distressing case, 38 years of contributions were virtually wiped out when the employer folded. McLean said that there was 'a developing crisis of confidence' in pensions after the mis-selling and Equitable Life scandals amid growing concerns over pension security. 'It's all rather depressing news,' he said.

The report calls for increased protection of scheme members when their company goes bust. This usually results in people who have not yet retired losing out heavily, sometimes even being left with nothing at all.

In the case of a company being wound-up voluntarily, full pension rights do not have to be paid. Typically pensioners will get only 70% to 80% of their full entitlement. The OPAS report calls for the law to be changed to require schemes to meet pensions in full in the event of a winding up. It also says the independent-trustees of schemes should be better regulated, especially over the level of fees they charge schemes.

But people should still use pensions as the main way to save for their retirement despite some of the drawbacks of the schemes, according to consumer magazine Which?

The magazine said that the tax breaks and guarantees available on pensions and annuities meant they were still the best vehicles for producing a retirement income. It said recently some consumers had been put off pensions and this has led them to use tax-free ISAs to save for their retirement instead. But research by Which? indicates that pensions will leave savers with a higher fund in the long term.