Extinction beckons for quality pensions

The number of salary-linked workplace pensions will fall to zero unless action is taken to make the schemes cheaper for employers, the Pensions Minister Steve Webb warned today.

The government has unveiled proposals to remove legal obligations to gold-plate traditional salary schemes and to improve the lower grade pension arrangements which most companies are moving to instead.

Only 1.7 million private sector employees are contributing to a scheme which promises to pay a proportion of salary on retirement, compared with over 5 million in 1995.

Under new laws employers would no longer be required to give pensioners annual inflation increases. Nor would they be expected to provide pensions for spouses after the former staff member has died.

Pension rights already earned would be secure. But the hope is that by giving bosses the flexibility to cut back future benefits, some of the remaining salary-linked schemes will survive and remain open to new employees.

The legislation could be in place before the next election in 2015, according to Mr Webb.

Millions of workers are being enrolled automatically in new workplace pension arrangements, but for the most part these are not linked to pay.

In many cases the contribution levels are so low that the eventual pension income is likely to be disappointingly meagre.

The forthcoming legislation will encourage companies to provide income guarantees in these schemes, in the hope that people will regard pensions as less of a gamble and contribute more.

The government is also planning to change the law to to allow "Dutch-style" pensions. Employers would be able to band together to offer large-scale schemes which targeted a particular level of pension income.

Ministers have been persuaded that these "Collective Defined Contribution" schemes would be cheaper to run and could provide savers with more certainty about their retirement.

£2bn for BT pensioners

330,000 current and former employees of BT have been reassured that their pensions are safe after the company said it would pump £2bn into its pension scheme.

BT says a significant improvement in cash coming in had enabled it to tackle the huge shortfall in the scheme more quickly.

A lot of these big salary-linked pensions schemes have enormous shortfalls - that means there's not enough money in there to pay off all the people who are owed pensions.

In BT's case, it was a colossal £9bn short at the previous count in 2008 and the good news is that the deficit has come down to £4bn.

One reason is that the stockmarket's gone up since the recession - by 50%.

Now BT's putting in another £2bn, its scheme is getting closer to being fully funded and with more payments the company expects to get there 4 years earlier than planned.

Unfortunately this doesn't mean pensions linked to employees' salaries are getting a new lease of life. Companies are closing them down as fast as they can because they're so expensive to run.

In fact, BT closed its scheme to new staff ten years ago.

However, it is one of the biggest private sector pension schemes and what BT's saying today shows how they've all benefited from a bit of recovery in the stockmarket.

So if you're lucky enough to be in one of these high quality pensions, that's a bit of good news.

Looking ahead, the picture isn't quite so rosy.

Pension funds invest a lot in gilts (government bonds or IOUs), which have a large bearing on valuations.

The Bank of England's policy of Quantitative Easing - a process of buying back huge amounts of gilts while still issuing more - has distorted the market and cut the returns the funds can forecast.

BT says "it is very difficult to assess the underlying position...due to the dislocation in the gilts market".

It's a predicament which is making the whole pension fund industry squeal.

Shell closing pension scheme

Shell UK is to close its £13bn final salary pension scheme to new joiners.

It is believed to be the last of the UK's top 100 publicly listed companies to pull out of offering gold-plated final salary pensions to new recruits.

Final salary schemes promise a guaranteed proportion of salary to members on retirement, depending on the number of years worked.

As employers look to cut costs, 90% of the schemes have been closed to new members, according to research from the Association of Consulting Actuaries.

From early 2013 new staff at Shell will be offered membership of a scheme without a guaranteed level of pension.

Existing members of the Shell scheme will be allowed to continue contributing and building up their salary-linked pensions.

The National Association of Pension Funds says that nearly a quarter of private sector final salary schemes are now closed to both new joiners and further contributions from existing members.

Millions under pressure to leave gold-plated pensions

EMPLOYERS TO TRY TO PUSH 2.5m OUT OF FINAL SALARY PENSIONS

More than 2.5m million employees in reliable but expensive final salary pension schemes are likely to be offered inducements to leave by their employers over the next few years.

750,000 are likely to accept the up-front cash on offer, leaving them at risk of  being left with second-rate pensions.

Final salary schemes promise a pension based on your pay when you finish working. Generally, the alternative on offer is a stockmarket-based scheme with no guaranteed pension amount.

The figures come from the accountancy firm, KPMG, which questioned financial advisers being used by companies to offer pensions advice to staff.

Of 91,200 employees offered payoffs to leave their schemes over the last 3 years, one in four have taken the money and moved their pensions.

They were given an average of £65,000 to transfer into another pension arrangement.

The pensions minister, Steve Webb, warned in May that employers must stop tricking people into giving up valuable pension rights.

Putting your feet up later

Which makes most difference: making you pay more into a pension, making you wait before you can take it or giving you measly increases?

With thanks to the pensions consultant John Ralfe, here is a closer look at the impact of Lord Hutton's recommendations for nurses, teachers and other public sector workers and their pensions.

Keep this big number in mind: £30bn.

It is the is the amount of unfunded public sector pension costs which build up each year, adding to the long term bill for the taxpayer. The official figure is £14bn but that is widely regarded as an underestimate.

This is reduced by:

£6bn from the switch to the meaner CPI measure of inflation from RPI to calculate annual pensions increases, implemented this year and unrelated to Hutton.

£6bn from aligning the normal age for taking a public sector pension (still 60 for many) with state pension age (rising to 66 in 2020, then to 68).

£3bn from making public sector workers pay another 3% of wages into their pension schemes.

£2bn from no longer offering Final Salary Schemes and providing Career Average pensions in future.

So the loudly fanfared switch to Career Average pensions has the least impact. The most significant Hutton reform by far, according to these figures, would be the tactic of keeping people in work longer.

Of course, it makes sense. Imagine someone who retires at 60, expecting at least 25 years on a pension. Take 5 or 6 years off that and you see a 20% reduction in the number of years the pension is paid. And there'll be another few years of contributions.