Fears as Rentokil closes pension scheme

Pension experts predicted today that other large firms could follow Rentokil Initial's lead and close final salary schemes to existing members.

The forecast came after the support services company became the first FTSE 100 Index business to propose shutting its scheme to current members, freezing their guaranteed pension benefits at the level they have already built up.

Around one in 10 smaller companies are so far thought to have made a similar move, although a much larger number of firms have moved to control rising pension costs by closing final salary schemes to new employees.

Rentokil's proposal for tackling its £349 million deficit is still subject to "comprehensive consultation" but could affect around 3,000 current employees. It does not impact on 15,000 deferred pensioners who have left Rentokil or the 8,000 pensioners already being paid.

Union leaders expressed dismay at the development, which they promised to challenge.

Neil Derrick, from GMB Yorkshire Region, said: "We are studying the position and our pension experts are exploring the terms and conditions of employment of GMB members and the pension fund trust deed to see what scope for action we have in the courts."

An estimated 89% of all final salary schemes are currently in deficit, faced with collective shortfalls of £130 billion - of which around £40 billion are spread among FTSE 100 Index companies.

Experts said they expected other firms to follow Rentokil's lead, although firms concerned over the impact on staff morale may be tempted to wait until the number of members affected has been reduced to a more manageable level.

Andy Fleming, spokesman for the National Association of Pension Funds (NAPF), said: "Rentokil is probably the first FTSE 100 company to close its final salary pension scheme to existing employees but we don't think it will be the last.

"We think it will happen increasingly over the coming years just because employers are under so much cost pressure from running final salary schemes."

Charles Young, chairman of the pension schemes committee at the Association of Consulting Actuaries, said: "It has a slight smell of desperation about it but there are some companies where the pension scheme is just so large in the context of the company that they will consider doing it."

As well as increased life expectancy, he said developments such as the Pension Protection Fund and the new Pensions Regulator were all putting an extra burden on pension schemes.

Rentokil's chief financial officer, Andrew MacFarlane, said the firm wanted to control the present pensions cost and safeguard against the risk that costs could soar in the future.

He told the Financial Times: "In relative terms, we have one of the largest deficits in the FTSE 100.

"Although we have the financial capacity to deal with the deficit now, we had to make sure that another deficit does not arise in the future."

Mr MacFarlane said the company was concerned about the impact of rising life expectancy on its finances.

Donald Duval, chief actuary at Aon Consulting, said keeping the scheme open to some members but not others had created a two-tier workforce.

He said: "The problem is having two people doing the same job but in very different pension schemes, which usually cost very different amounts. So, in effect, you are paying longer-serving workers more."