Pilkington pensioners feel the freeze

More than 12,000 pensioners in the Pilkington pension fund are bracing themselves for a freeze in their payout this year after the bear market in equities wiped out the fund's surplus.

The historic glass maker is attempting to persuade credit rating agencies that it is its pensioners who shoulder the risk of falling investment returns, rather than the company. Pilkington is arguing that its own debt should be taken off the agencies' critical list.

Pilkington operates a unique hybrid pension scheme which it describes as "having aspects of a defined-benefit scheme". Although pensions are related to final salary, the company's annual contributions to the fund are fixed and capped, leaving the trustees to distribute surpluses or prevent a deficit.

Although this year's actuarial review has not been fully completed, it is believed that pensioners will be expected to forego the usual cost of living rise.

Members received a 1.3 per cent rise in 2002, when the fund was £261m in surplus, but pensioners are warned that future rises can be vetoed by the fund's actuaries. The fund's major equity holdings – which include BP, HSBC and GlaxoSmithKline – plunged in value during 2002.

Iain Lough, Pilkington's finance director, said he planned to meet Standard & Poor's, the rating agency which numbered Pilkington among five UK companies whose debt was in danger of being downgraded because of pension liabilities.

The issue has sent Pilkington shares to a 20-year low and is set to dominate Pilkington's trading update, due at the end of the month. Mr Lough says S&P misunderstood the UK fund's unique status.

It was set up in 1961 and stands in contrast to traditional final-salary schemes which are being shut down across British industry as the potential liabilities to companies increase and investment returns decline.

"Pilkington makes a defined contribution to the fund, worth 10.5 per cent of someone's salary," Mr Lough said. "There are no holidays – if there is a surplus it stays in the fund. But the trustees have to manage the liability side based on the number of pensioners they have got, the number they will have, and the benefits they are going to promise those in the fund and those to come."

The S&P report last month warned that Pilkington's debt could be downgraded to within a whisker of junk status. As well as the UK pension fund at issue, the company also has a US fund in deficit and unfunded healthcare liabilities.

Pilkington shares fell to a new low on Friday as analysts began to anticipate the trading update.