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Final salary pension schemes could close in 12 months

29 April 2010 / by Lois Avery

Pension savers enrolled in final salary schemes could see their money transferred following a prediction that they will close within a year.

New research from Hewitt Associates has shown that 30 British companies plan to close their final salary pension plans over the next 12 months.

Hewitt surveyed 154 pension schemes during January 2010, from companies largely based in the private sector. It discovered that 28 of the 154 had plans to close their existing final salary schemes to not only new members, but existing investors too.

Final salary pension schemes are being phased out across British industry with companies blaming life expectancy, low inflation and falling stock markets for making this type of scheme too costly.

Although they have been closing to new members for the last 10 years, only a handful have been shut down entirely – creating huge losses on their investments for some pension savers. Those who have had their money transferred from a final salary scheme have found themselves saving in less lucrative money purchase arrangements.

Jackie Daldorph, managing principal at Hewitt, said: "The vast majority of pension schemes have now closed to new entrants, but the pace of closure to existing members is accelerating, with the number of ‘frozen plans’ expected to double in the next 12 months. For companies now embarking on a plan freeze, the issue becomes how to do so, while still keeping the members, their unions, and trustee boards onside."

Freezing schemes by closing them to new members is one of a number of ways that companies are phasing final salary pensions out. Other savers are finding that their money will now will be transferred to a less lucrative pension fund as a replacement.

Other means being considered by companies in the Hewitt survey included retaining a final salary scheme but capping growth in pensionable pay, or moving to a career average (CARE) scheme.

However, Hewitt advises that schemes should proceed with caution and avoid the temptation to try to short-cut the process. 

Tony Baily, principal consultant at Hewitt, said:”There are often good reasons for freezing plans. However, the recent wave of plan freezes potentially puts pressure on other companies simply to follow suit without really understanding whether this best meets their business objectives and constraints.

“For some companies the driving factor to freeze is to achieve equality of terms between DB and Defined Contribution (DC) members; for others it might be one of risk management. Whatever the reason, it is important to have a solid business case to help the workforce or trustee board understand the reasons for change.”

The news comes just weeks after Britain’s largest pension provider Aviva announced that it was closing its final salary pension scheme in 2011, spelling huge losses on retirement funds for some.

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