Rolls-Royce offers to pay £500m into pension schemes to cut £1.2bn deficit

Unions at Rolls-Royce have been told they must accept the closure to new staff of the aerospace engine manufacturer's two remaining final-salary pension schemes if they want the company to pay £500m into the plans.

Rolls-Royce announced yesterday the combined deficit of its three pension schemes, which have almost 120,000 members, totals £1.23bn.

The largest of the three final-salary plans, the Rolls-Royce Pension Fund, which has 70,000 members, has already shut to new staff, but the company now wants to close two other final-salary plans and introduce a money-purchase scheme - where pensions would not be guaranteed - in their place.

Existing workers' membership of the plans would not be affected, though the company is seeking to agree a new investment strategy with the trustees of the schemes. It wants to match the schemes' investments more closely to their liabilities, by switching from equities into fixed-income instruments.

If the Rolls-Royce workforce accepts the deal, the company would pay £500m into the three schemes, which would cover the deficits at the two smaller plans. The payment would also substantially reduce the £1bn deficit at the Rolls-Royce Pension Fund.

Peter Barnes-Wallace, Rolls-Royce's financial communications director, said: "We are anxious to close down the volatility of these pension schemes' deficits. In return, we are prepared to make a lump sum payment of £500m and are also prepared to increase annual contributions."

A spokesman for the TGWU, one of two unions representing Rolls-Royce staff, said it was concerned by the announcement. "This sort of thing does not only affect future workers because part of the lifeblood of any pension scheme is the income stream provided as new members join," he said. "There is also the fear in these situations that while it's new members today, existing members could be in the firing line in the future."

Rolls-Royce has been trying to address the mounting costs of its staff pension provision since 2003, when it promised to cut the deficit of its largest scheme by £567m. It has been hit by lower-than-expected investment returns and the fact that life-expectancy rates have risen by more than assumed. More than 60,000 of the pension scheme members have already retired, with just 21,400 active members currently making contributions.

Rolls-Royce is the latest in a string of companies to take action to cut the mounting costs of final-salary pensions. However, the pension scheme adviser Watson Wyatt said rising bond yields and higher share prices cut the combined pension deficit of FTSE 100 companies from £64bn to £44bn in March.

Pared-back pensions

BA

Has proposed paying £500m into the scheme but has asked pilots and cabin crew to increase their retirement age to 60 from 55 and accept an annual cap of 2.5 per cent on the increase in their pension incomes.

BAE SYSTEMS

Injected £600m into main UK scheme. Staff agreed to shoulder 40 per cent of future rises in mortality costs.

J SAINSBURY

Bond issue to raise £350m for pension scheme. Staff offered choice of higher contributions or lower benefits.

RENTOKIL INITIAL

First FTSE 100 company to freeze final-salary pension scheme for existing members. Has also closed it to new members and injected £200m.

ROLLS-ROYCE

Proposing to pay £500m into pension schemes while closing remaining final salary plans to new staff and agreeing low-risk investment policy.

SCOTTISH & NEWCASTLE

Retaining previously non-contributory final-salary scheme for existing members but staff contributions introduced at 6 per cent of pay

Source: Pensions Week magazine