Michelin May Slam Brakes on Pension Scheme

By Graeme Wearden, Guardian Unlimited

United Kingdom

May 1, 2007

Michelin today outlined plans to close its UK final salary pension scheme, which is currently hundreds of millions of pounds in deficit.

The tyre maker is proposing to close the scheme at the start of 2009 and transfer employees to a defined contribution scheme, under which they would build up a pension fund through payments from their salary and from Michelin.

Existing funds in the final salary scheme will continue to be linked to employees' final salaries when they retire.

Michelin, whose UK operations are based in Stoke-on-Trent, explained that its pension liabilities has risen to £260m, from £57m in 2002. Under today's proposal, it would pay off this deficit over the next 10 years.

A consultation process over the future of the scheme will begin in June and run for three months.

Michelin closed its final salary scheme to new workers three years ago. UK managing director Jim Rickard explained that increased life expectancy had forced it to conclude that the scheme should be closed altogether.

"Our employees ask how we can have run up a deficit, given the rise in the stock market over recent years. The fact is, our assets have increased healthily, but our liabilities have increased faster," said Mr Rickard.

He added that the company needed to protect itself from fluctuations in pension fund assets, as well as safeguarding the existing funds.

Defined contribution schemes give employers protection from a drop in the value of investments such as shares, but transfer that risk to pensioners. If a company offers a final pension scheme, it would have to make up the shortfall in an employee's scheme if the stock market were to slide.

Under Michelin's defined contribution scheme, employees pay in on a sliding scale based on their age, with the company contributing 150% of the employee's contribution.