Development of Salary Schemes

Salary pension schemes

A growing number of high-profile companies are closing the doors on their generous final salary or defined benefit pension schemes for employees.

Firms blame longer life expectancy, low inflation, falling stock markets and an increased regulatory burden for the move, saying it has rendered this type of scheme too costly to administer.

In 1997 the Minimum Funding Requirement was introduced forcing pension fund managers to invest in gilts, which deliver lower returns on average than equities. This has made it more likely that companies will be left with a black hole in their pension fund, which they have to fill.

Also, in the current low inflation environment, investment returns have fallen and are expected to stay low. According to consulting actuary* Gassings, the average return from equities a year making it easy for many final salary schemes to meet their liabilities. Some schemes, including BT's were so flush with cash that they felt able to take contribution holidays.

Equities are expected to produce only single-digit growth over the next few years making it more difficult to fund final salary schemes.

All pension benefits you have accrued to date in a final salary scheme are safe - as long as the company is liquid. In most cases companies are closing final salary schemes to new members, but existing members will continue to receive the same final salary benefits while they work at the company.

Some companies, however, could wind up the final salary scheme altogether, meaning any more pension accrued after a certain date will be on a less generous money purchase basis.

Further advice - how safe is your final salary scheme?