Banking on a pension? Hard times for tellers

While salaries for traders and executives soar, the humble bank tellers are finding their pension rights being whittled away
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High-flying traders at Britain's biggest banks are threatening to cripple the pensions of their less fortunate colleagues as their salaries soar.

At least one pension trustee at a major bank is said to have contacted the board to sound alarm at the trend, which is set to put the final salary pension schemes under fresh pressure.

Final salary schemes guarantee up to two-thirds of a staff member's final basic salary when they retire. Bonuses are not usually included, but increases in basic salary can cost schemes a huge amount of money when they are given to highly paid individuals.

John Ralfe, the independent pensions consultant, explains: "There is a huge gearing effect when you increase basic salary. Let's say your basic salary is increased by 10 per cent and your pension pot is worth £1m. That means that as well as the increase in salary, there is an increase in your pension. In this case, there is an increase in the pension of £100,000."

It is this that is worrying pension schemes – bonus payments are not usually pensionable; basic salaries almost always are.

The Financial Services Authority recently wrote to Britain's banks demanding that they scrap the practice of paying stars lucrative guaranteed bonuses. It believes that these encourage risky behaviour. The regulator wants rewards for traders and senior managers linked more closely to banks' long-term performance, and for up to two-thirds of bonus payments to be deferred and paid in stock. The action follows the recent financial crisis, which saw banks involved in making hugely risky bets that would have resulted in several bankruptcies were it not for taxpayer-funded bailouts.

However, the FSA's move has led banks to increase basic salaries as a way of compensating and retaining those who would have otherwise enjoyed guarantees, with some estimates putting the rises at up to 20 per cent. And the rates are increasing. This month, Morgan McKinley, the recruitment consultancy, released the results of a survey showing that the average pay for star performers rose by 6 per cent between June and July.

With competition for stars hotting up as investment banking profits boom again at a time when other business units continue to struggle, rising basic salaries has become one way of keeping staff from heading to the bank down the road.

Royal Bank of Scotland provided an example of the problems they face at its results this month, when it said that the rate of attrition among its top performers had doubled. It has had little choice but to look at increasing pay to retain those seen as key to its future success.

But sharp rises in basic pay, as Mr Ralfe warns, put pension schemes under pressure.

All the big four banks have closed their schemes to new members. HSBC, traditionally seen as one of the more parsimonious of the world's leading financial institutions (although some recent packages it has been offering suggests that this reputation is not always deserved), shut its scheme to new entrants in 1996, and staff still in it have to make a contribution, whereas previously the bank covered all the costs. As a result, its scheme is probably able to cope reasonably well, because many of its stars will have been hired since the closure, and so will not be eligible to join it.

Barclays shut its scheme to new members in 1997, but is now trying to close it to fresh accruals from new members – making it by far the most radical of the banks. It is not just the rise in basic salaries for top earners that has forced its hand – the tables that actuaries use to calculate longevity have been giving its finance department sleepless nights. There are still people in their late twenties and early thirties in the scheme, people who might live 20 or 30 years after retirement. That represents a heavy financial burden.

If Barclays's reform plans go through, those in the scheme will keep the benefits they have already accrued, but they will not be able to pay in any more, and will be switched into what the bank calls "a hybrid scheme". It is, in effect, a jazzed-up version of a money purchase pension scheme, where the income a member receives when they retire depends on annuity rates. In other words, members bear the risk, rather than the bank.

The change will affect all bank staff, from £25,000-a-year bank tellers to £250,000-a-year traders, and even, as Barclays notes, the chief executive, John Varley, pictured left, who is on £1m a year. Unions have pledged to fight the plans, and are threatening a strike ballot. Unite says pensions are "a deferred part of basic salary", and describes the changes as "a stealth pay cut", but Barclays remains unmoved.

For others, the problem would appear even more acute than it is for Barclays. Lloyds Banking Group has several schemes in the wake of its creation from the shotgun marriage between Lloyds TSB and Halifax. Of them, the Lloyds scheme was the first to close, in 1998, but Bank of Scotland remained open until 2003.

Lloyds is primarily a retail bank, but there are still plenty on large salaries in its higher echelons. The company is known to be closely watching developments at Barclays as it reviews staff pension arrangements following completion of the merger.

However, the difficulties appear to be most acute for Royal Bank of Scotland, with a final salary scheme that has been closed only since 2006, and rising basic salaries for top bankers. It has so far said it has no plans to change its pension arrangements.

But while salaries have been frozen across much of the bank since its near collapse, RBS has admitted that it is having to work hard to retain its key staff, and will have to pay up. That means salary rises combined with rising longevity that will put the scheme under pressure.

A spokesman said he could not comment on behalf of RBS pension trustees. "They are separate from the bank," he said.

But is there a way to ease this? Mr Ralfe thinks there is. "What is the answer to making sure that this [basic salary rises] is not a disguised increase in remuneration over and above the headline figure? It is to move to basing pension payouts on an employee's career average earnings rather than their final salary," he said. "The people in the branches, their salaries increase a little bit more than inflation. They will probably not lose too much if there was a transfer from basing pension on final salary. The amount they would be out of pocket would be smaller than an average trader."

New staff, of course, have to make do with money purchase schemes, where their retirement pot depends on investment returns and income depends on annuity rates.

The unions' rearguard action is to preserve the benefits of existing staff. Those ordinary, hard-working bank staff are already quietly furious at the behaviour of the "casino-style" risk-takers whose actions have nearly broken their employers and dragged them into the mud of public opprobrium. If their pensions go down next, financial insult will be added to that injury.