Aviva and RAC axe final salary pensions

Aviva and the RAC became the latest employers to signal an end to their final salary pension schemes yesterday, saying that their current arrangements are "unsustainable".

The insurance giant, Aviva, which owns the RAC, said that the existence of the final salary scheme was both inequitable and unsustainable, and that it would start consultations on closing the plan in the middle of June. Since June 2006, the company's pension deficit has ballooned from £1bn to about £3bn.

"Our proposal would enable us to protect the final salary pension benefits that employees have already built up," said Aviva's UK chief executive Mark Hodges. "It would provide a competitive alternative for them and simultaneously reduce the volatile impact of the final salary pension deficit on our business in the long-term.

"It's also crucial that whatever we do is equitable and sustainable for all UK employees, and the current pension arrangements are neither. Our proposals are in keeping with the continuing trend for companies to move to money purchase schemes – these schemes are now the norm, rather than the exception."

The decision to close the scheme will come as a blow to the 7,600 people, a third of the combined groups' UK employees, that have a final salary pension. The proposals are also likely to draw the ire of the Unite union, which represents 22 per cent of Aviva's British workforce.

"Aviva remains a highly profitable company and what they have done today is stab hard-working staff in the back who could now lose thousands of pounds in pension benefits to live on during their retirement," Siobhan Endean, Unite's national officer for finance, said.

"It is a betrayal as employees regard a final salary scheme as deferred pay for years of loyal service. Unite calculates that a typical member can expect to see the pension they earn in future reduced by a third and their overall career pension reduced by a fifth. The reduction in the pension paid during their retirement will be equivalent to the loss of three years of their current salary."

Aviva posted pre-tax profits of £1.3bn last year. The group said yesterday that it would inject £130m of employer contributions into the pension scheme this year, and had spent £365m on the deficit in recent years, which it says it cannot maintain.

The final salary scheme has been closed to new entrants since 2001. Aviva said that only a third of its staff now benefited from the final salary scheme, which soaked up 65 per cent of all contributions, "which we consider both inequitable and unsustainable". Under the new proposals, all employees will move to a money purchase arrangement from April next year, assuming that the pension plan's trustees and unions vote through the new proposals.

A spokeswoman for Aviva said that the changes will affect all its UK general and life insurance staff, including its executive staff. The spokeswoman confirmed that none of the company's executive board members are part of the final salary scheme.

The move from Aviva follows that of several companies that have opted to curtail pension benefits in recent years. Some, such as BT and Royal Mail, also have huge pension deficits.