Is this the last nail in the coffin of private final-salary pensions?

Experts warn of fresh crisis as chasm yawns between newly downgraded corporate schemes and gold-plated public plans. James Moore reports
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The Independent Online

Emergency measures to stimulate Britain's recession wracked economy could put the final nail in the coffin of final-salary pension schemes, one of Britain's leading pension experts has warned.

And Ros Altmann also fears that the economic crisis will act as a catalyst for a pensions crisis that could see the end of final-salary pension schemes for private-sector workers within a few years.

Just five years ago, around 40 per cent of companies offered final-salary pensions to new employees. Now, Ms Altmann says, there are just four FTSE 100 companies which do so – Shell, Tesco, Cadbury and Diageo.

This is set to lead to a political crisis as the gap between what private- sector employees are offered and the gold-plated pensions enjoyed by public-sector workers turns into a chasm.

Last week the pensions crisis was given fresh impetus as a string of companies announced plans to downgrade the benefits offered by their staff pension schemes.

Barclays closed its final-salary pension scheme to new contributions from 17,000 staff, while supermarket group Morrison moved 4,500 workers who had enjoyed a scheme guaranteeing a percentage of their final salary to one whose payout is based on career average earnings. BP said it would close its final salary scheme to new recruits in 2010. Ms Altmann says the pension cuts were at least partly forced on companies by the Bank of England's emergency "quantitative easing" measures in March which have been likened to printing money, and which were brought in to stimulate Britain's crashing economy.

This, she says, caused company pension deficits to balloon because it artificially inflated their liabilities by depressing the yields on government bonds at the same time as share prices hit multi-year lows.

As many as half of Britain's pension schemes had their statutory "triennial" valuations – designed to gauge their financial strength – at the end of March and so they were effectively hit by the double whammy. Ms Altmann says: "We will have to wait for figures to be collated but Britain's pension black hole will have then stood at hundreds of billions of pounds."

She also criticises ministers for heaping burdens on company pension schemes, saying they had made a bad situation worse. Gordon Brown's withdrawal, while he was Chancellor, of the dividend tax credit pension schemes enjoyed – dubbed his "smash and grab" raid – could alone have contributed as much as £100bn to the black hole. The UK's pension liabilities could be at least £200bn. And one of the single biggest black holes is at BT, the telecoms group, which has pension liabilities of £45bn and a deficit of £7.6bn.

"There has been a successive addition of burdens on these schemes which have weakened them beyond repair," says Ms Altmann. "The best that can be done now is for the Government to help employers with an orderly run off. But that means the issue of Gilts [government bonds] that help employers meet liabilities which the Treasury has so far refused to do."

Ms Altmann says successive governments have effectively been passing responsibility for social welfare to employers and final-salary schemes. "The problem is that the model has fallen down. They encouraged schemes to invest in the stock market in the belief that it would keep rising and help meet liabilities. But the stock market was never going to do enough."

Ms Altmann thinks ministers need to upgrade the basic state pension so it provides a decent base, together with the launch of an education campaign to show people the true cost and risks of saving for extra retirement benefits. She also calls for an independent inquiry into the sustainability of current gold-plated public-sector schemes.

Tom McPhail, head of pensions research at financial adviser Hargreaves Lansdown, also says he believes the Barclays move will be replicated by others – and soon. He highlights the new taxes on higher earners' pensions as a measure that will accelerate the trend. He says: "The one factor that has changed recently is the Budget and the Government's recklessly irresponsible decision to tax highly paid employees on their pensions; not surprisingly, company executives have become somewhat less enthusiastic about supporting company schemes."

Mr McPhail's view is backed by a poll commissioned by consulting actuary Hymans Robertson. It found that seven out of 10 respondents believed that company pension schemes could be closed to all workers as a result of the increase in tax on pension contributions for high earners. The survey was carried out by Opinion Matters/Tickbox.net last month.

Patrick Bloomfield, a partner at the firm, says: "There is a perception that the general public is not clued up on pensions issues, but our survey shows otherwise .... people are aware that the Government's increase in taxation for high earners will affect us all, as key company decision-makers are less likely to keep a pension scheme open if they themselves stop paying into it because it is not tax effective."

Mr McPhail, however, says that problems for final-salary schemes started some time ago: "The rot set in back in the mid-Nineties when companies – particularly financial services firms employing actuaries – started to appreciate the impending costs of tighter regulation, for example the Pensions Act 1995 coming off the back of the Mirror Group pensions scandal, improving longevity and falling investment returns.

"Up until the early years of this century though, most schemes were still open to new members. The market collapse of 2001-03 really shook them up and many closed to new entrants in subsequent years.

"What we are now seeing is the next phase of this trend – the capping off of future liabilities by terminating future benefit accrual for all members. Retirement is very expensive ... so company directors, on behalf of their shareholders, have decided enough is enough.

"Final-salary schemes are indeed toast .... The sooner we can get individuals to accept the reality that pension provision is their own problem, the better." Mr McPhail also says he believes an increased focus on public-sector provision is inevitable.

John Ralfe, another independent pensions expert, also agrees with the gloomy forecasts. He believes that there could be no private-sector final-salary schemes at all within two years.

Mr Ralfe famously moved Boots' £2.4bn pension scheme from equities to long dated bonds in 2001 to reduce the risks to both company and members. But he argues that such pensions were always too risky for companies to offer – it is just that the accounting rules only forced them to detail the true scale of the cost when the FRS 17 accounting standard was brought in during the early part of the decade. It forced companies to publish their pension liabilities with every results statement.

Mr Ralfe said: "A lot of companies have been considering doing what Barclays has done for a long time. The issue they face is what to replace their final salary schemes with and how best to do it without angering a large swathe of middle management, causing finance directors to panic.

"If you look at the reaction to Barclays' move it was neutral, if not positive in some cases. That will prompt finance directors who have delegated others to look at this to ask where they have got to. It will cause something of a domino effect."

Mr Ralfe believes this will create a political crisis for any incoming government. "Gordon Brown will be gnashing his teeth about [the Barclays move]. Government does not want anything that highlights the growing gap between private and public-sector pensions. If there are no private schemes left in two years the situation will be unsustainable. Something will have to give, but there are no easy solutions to the problem of public-sector pensions."



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