Final salary pension schemes being ditched as costs and red-tape rise

The number of companies closing their final salary pension schemes has more than doubled amid concerns over costs, increasing red-tape and the impact of new accounting standards.

Some 46 companies – among them British Telecom, J Sainsbury and Marks & Spencer – closed their final salary scheme to new members during the year to October, compared with 18 the year before. There were 13 switches from final salary to money purchase schemes, against six last year. The findings came from a study by the National Association of Pension Funds of more than 800 of the UK's major employers.

Final salary schemes guarantee a level of retirement income, but increasingly the preferred option among employers is to guarantee only a level of contribution to a fund whose prospects are linked to investment returns. The move away from so-called defined benefit schemes towards defined contribution schemes mimics a more mature trend in the US.

The NAPF warned that the shift meant thousands of people were in for lower incomes during retirement. Chris Armitage, a researcher on the study, said: "The implication is that final salary schemes won't be around long-term."

Nine out of 10 schemes expected the cost of providing an occupational pension to continue rising over the next five years, while more than three-quarters said the proposed FRS17 accounting standard would make it less attractive to employers to offer a final salary scheme. FRS17 will force companies to register pension fund deficits on their balance sheets from 2003, creating an incentive for them to shift the burden on to employees.

British Telecom is among several companies that have disclosed hefty exceptional charges aimed at bolstering pension portfolios left underfunded following the weakness of the stock market over the last 18 months. "Falling investment returns combined with longer life expectancy undoubtedly account for much of this pressure being felt by pension schemes. But the volume and complexity of red tape has clearly weighed heavily enough with some schemes to drive them away from final salary scheme provision," said David Cranston, NAPF's director general.