Switch to cheaper pensions 'will not benefit companies short term'
Companies that have closed their final salary pension schemes and opened up defined contribution arrangements for new employees will not see any financial benefit in doing so for at least 20 years, according to a leading pensions actuary.
Giving evidence to the Work and Pensions Select Committee inquiry into the future of UK pensions yesterday, Ronald Bowie, a senior partner at Hymans Robertson, said that justifying the decision to close final salary schemes to new entrants to cut costs was a "scandal".
Companies have been moving to close final salary schemes, which guarantee staff a certain level of pension when they retire, at an increasing rate in the past year. New staff are made to join a defined contribution scheme, where the benefits workers receive when they retire are entirely dependent on the level of contributions going into the fund and the performance of the fund on the stock market.
Employers have blamed the growing cost in providing final salary pensions for their closure. The new accounting standard, FRS17, which shows a company's pension fund as a liability on its balance sheet, has also exposed the huge cost pensions pose to a company's earnings. More significantly, many companies have also used the switch to defined contribution schemes as an opportunity to reduce the amount they contribute.
Mr Bowie said companies "had their head in the sand" if they thought closing a final salary scheme and starting a new one would reduce costs in the short term. "Companies still have huge liabilities in their closed funds that they have to meet," Mr Bowie said, and questioned claims that companies could limit financial risks by closing schemes.
"It will be 20 years before the overall financial model changes under a defined contribution scheme. Companies have been a little disingenuous with employees and shareholders in making great claims that they will limit their financial risks."
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