The writing has been on the wall for final salary schemes for some time. The guaranteed nature of the benefits implies that employers can be forced to stump up additional contributions if, say, investment performance falters or scheme expenses rise. Under such circumstances, the money purchase concept where pensions depend solely on how well the contributions have been invested looks increasingly attractive to employers, especially smaller companies employing under 250 staff.
The 1995 Pension Act provided a major stimulus to the flight out of final salary schemes. Measures such as the indexation of benefits in retirement and the appointment of member nominated trustees added cost and administrative burdens, and persuaded many employers to abandon occupational schemes (both final salary and money purchase) in favour of Group Personal Pensions, which are essentially personal pensions masquerading as a company scheme.
A recent survey by the Association of Consulting Actuaries (ACA) finds that a third of responding companies offering final salary schemes are even more likely to switch to money purchase schemes now that ACT credit has been abolished, a quarter would close their schemes to new entrants, or wind up their schemes altogether if they were required to offer payroll deduction for contributions to a Stakeholder Pension, and nearly 50 per cent would do the same if employers were also required to contribute to Stakeholder Pensions.
There is a delicious irony in all of this. On the one hand, the Government rages against insurance company agents and Independent Financial Advisers for luring employees out of final salary schemes into Personal Pension Plans. On the other, its own initiatives appear to be driving employers to abandon their final salary schemes in favour of Group Personal Pensions.
The employer has three options when changing from final salary to GPP. The final salary scheme can be wound up. A transfer value is paid over to the GPP for each member, reflecting the capital value of guaranteed benefits earned to date. The final salary scheme can be left in a paid- up form, and future contributions directed into the GPP. Or the final salary scheme can continue to operate for existing members, but be closed to new prospective members.
Strictly speaking, an employee cannot be compelled to switch from a final salary scheme to a GPP. In practice, however, the employer can always wind up the final salary scheme. There are however two pitfalls to watch out for, the level of employer and employee contributions, and the level of charges.
The evidence on contributions is not heartening. Mr Martin Slack, Chairman of the ACA says: "It is of particular concern that our survey found that joint contributions are significantly lower into GPPs than into final salary and company money purchase schemes run by smaller companies." Lower contribution rates mean lower pensions!
On the question of costs, the GPP is likely to be more expensive than the final salary scheme because it is administered as a collection of individual plans, and because of higher commissions paid to intermediaries. Nevertheless, there are economies of scale in running GPPs. There is therefore little point in refusing to join your employer's GPP and going it alone, as your individual PPP will be even more expensive to run, and you may forego the employer's contribution.