Million workers face losing final salary pensions

Research finds half of the remaining final-salary plans will close to existing staff

More than a million people will lose their final salary pension schemes between now and 2012, research out yesterday warned.

Watson Wyatt, the global business consultant, found that half the British companies with defined benefit (DB) pension schemes, which guarantee income on retirement, will close them to all employees in the next year.

The company also warned that there was probably nothing that could be done to put a brake on the trend.

Rash Bhabra, head of corporate consulting, said: "We've done research like this before but haven't put a number on the people affected. The fact that more than a million people will be affected really brings this home.

"We're not at the death of the final salary scheme yet, but closures to all future accruals by existing members – not just to new members – is now becoming commonplace."

The findings are based on 250 survey responses, many of them from Britain's biggest employers – three-quarters of the respondents had schemes with assets of £100m or more. The research found that only 9 per cent of schemes had closed to future accrual by existing members, but 50 per cent expect to be in that position by 2012.

Three-quarters of companies, however, have by now closed their final salary schemes to new entrants without closing them to existing members, although half of these expect to close schemes to future accruals from existing members in two years.

Nearly a third will keep them open but seek to downgrade the benefits they offer. The most common tactic is to base pensions not on a percentage of final salary but instead pay a percentage based on lifetime earnings.

Watson Wyatt said the main factors driving the closure programmes are the economic environment, new valuations showing big deficits in scheme funding, and the fact that these two trends tend to be self-perpetuating.

Mr Bhabra said: "The fact is much of the legislation surrounding final salary schemes has been written to benefit the consumer rather than the employer. This increases their costs and risks and has accelerated the trend."

According to the Office for National Statistics, around 2.4 million private-sector employees were still adding benefits to DB schemes in April 2008, although this figure is likely to have fallen since then.

The trend of pension benefits being cut is becoming the focus of industrial unrest. Unite is to ballot Barclays staff on strike action over its plans to axe its final salary scheme, while IBM has been warned that it will face industrial action over its plans to cut pension benefits.