The end of 'gold-plated' pensions

New analysis from the Department for Work and Pensions suggests that final salary schemes will likely peak this year at more than £7,000 per annum, then fall every year for the next 40 years.

In fact, by 2060 your average defined benefit pension may be worth as little as an average £2,400 a year: a huge fall.

Not affordable?

Many company defined benefit schemes have already closed down and those that still exist are likely to be steadily closed to newcomers within the next few years. Concern about the axing of final salary schemes increased when Shell and Unilever both announced the end of their own schemes recently.

It's particularly significant as both companies continue to be highly profitable. The issue is poignant for Unilever: the company's Victorian founder, Lord Leverhulme, made a point of not just providing pensions from the profits of his company but also homes and a local school (he also went on to successfully help bring on the nationwide state pension).

So why are high profitable companies saying they cannot afford to continue the existing arrangements? The issue is about increasing life spans, higher costs and a loosening of corporate social responsibility ties.

High risk

Pensions expert Tom McPhail from Hargreaves Lansdown told AOL Money, "BT has just had to throw £2 billion pounds at its own scheme and it still will be in deficit for the next nine years. Once you close the final salary pension scheme, you still have thousands of existing members, so you're exposed to that longevity risk."

Perversely, McPhail says a closed pension scheme will then have no new members to transfer some of the risk and cost. "So closing a scheme to new members can actually drive up the cost of the scheme."

The bottom line is that a decent final salary schemes now typically costs an employer contribution of 20% of earnings. A (much) cheaper defined benefit costs a company half that - and that cost the market now regards as normal.

Contrast this behaviour with exec pay...

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