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Nearly 75% of Final Salary Schemes Shut to New Entrants

By Nicholas Timmins, Financial Times

March 24, 2003

Almost three-quarters of final salary schemes are now closed to new entrants, or even to future contributions from existing employees, the Association of Consulting Actuaries said yesterday.

But virtually no employers believe the pensions green paper last December will succeed in boosting occupational pension provision. Almost all believe the state system needs reform at the same time. And some of the government's own proposals - for example a requirement that employees are consulted before scheme changes - appear to be accelerating the rate of closure as employers act before they are required to consult.

Government response to the pensions crisis risks being "too little, too late", said Gordon Pollock, ACA chairman. "Their actions now need to be both bold and brisk, otherwise the scale of the move away from occupational provision might become irreversible."

His comments are based on a survey of more than 300 companies covering 1.8m employees, which show 72 per cent of final salary schemes are now closed to new entrants. Nine per cent of them are also closed to further contributions by existing members.

Eleven per cent of companies have put one or more of their schemes into wind-up - final closure. Six per cent have increased member contributions and 29 per cent of employers say they have reviewed their scheme in the past six months.

On current trends, fewer than one in seven of final salary schemes will still be open to new entrants in two years' time, the ACA said.

Despite the big changes that have already taken place, 42 per cent of employers say they are still trying to reduce pension spending and 51 per cent want to reduce forward liabilities. At present employer contributions to final salary schemes are rising sharply - up from 11.5 to 13.1 per cent as they try to plug deficits.

The government's pension proposals, however, will not reverse the trend of closures, according to the survey.

The huge simplification planned in the tax treatment of pensions is welcomed, although employers want more generous contribution limits for the higher paid. But 95 per cent of employers believe the state system also needs reform, alongside better incentives for employers to provide occupational pensions.

The current state system of basic and second state pension, with a minimum income guarantee and pension credit, is "highly complex, riddled with means-testing" and "remains a mess", the ACA said. It needs "massive simplification if it is to be understood by a wider public".

Fifty-five per cent of employers say they would support higher state pension contributions to provide a better base on which to build private pensions. Three-quarters support compulsory employee contributions of say 4 per cent, and two-thirds would even back compulsory contribution by employers of say 5 per cent of earnings. A remarkable 84 per cent of employers also back "fairer" rules when schemes are wound up, so existing, non-retired scheme members get a fairer deal at the expense of retirees who currently scoop the pool.