The demise of the final salary pensions

New measures could speed up further closures

Government proposals could mean an acceleration in the already worrying rate at which final salary pension schemes are closing in the UK. The Pensions Regulator’s proposed measures, if they come into force as expected, will mean UK companies having to contribute billions of extra pounds into their pension schemes to meet the Government’s proposed stricter rules when it comes to estimating how long workers live.

The proposals could push up pension costs by some 6 per cent to 8 per cent for the majority of firms but for some it could be even higher.

The Pensions Regulator is concerned that firms are making overly optimistic assumptions when it comes to investment returns and that they are ignoring the fact that people are living longer and the extra cost that they will incur as a result.

In 2007 the actuarial regulator cautioned that the most conservative standard used by pension schemes for forecasting life expectancy was seriously outdated and that schemes are significantly underestimating how long people will live in the future.

The suggested benchmark for those retiring today at 65 assumes that men, who make up the vast majority of those in final salary schemes, will live into their high 80s, about two years longer than the presumption in more than 50 per cent of current UK company schemes.

With final salary schemes, also known as defined benefit plans, employees receive a pension based on their earnings at retirement. Many ’gold−plated’ final salary schemes have already been shut down. Last year Aon Consulting concluded that half of employers in the UK with defined benefit schemes could be closed to future accruals by 2011, trebling the number that have already done so.