Final salary pension schemes close as deficits soar

A sharp increase in pension scheme deficits made 2009 the worst year on record for private sector company pension schemes, leading to the closure of many final salary pension schemes. Many more schemes are set to close in 2010. Pension schemes in the public sector, including those in local government and universities, are coming under similar pressure. The quality of alternative pension provision remains in doubt despite new pension regulations.

Worst year on record for pension scheme deficits

During 2009, pension scheme deficits rose sharply largely due to reduced investment returns. According to estimates (21Kb PDF) published by pensions advisers Pension Capital Strategies (PCS), the deficit for all UK private sector defined benefit or final salary pension schemes (FSPSs) on 31 December 2009 was GBP 212 billion (€246 billion as at 8 May 2010) compared with just GBP 37 billion (€42.9 billion) a year earlier. PCS describes the year’s performance as the worst on record. This pensions crisis has seen the bank Barclays, the global energy group BP and the supermarket chain Morrisons all close their FSPSs to new members in 2009.

In addition, on 4 January 2010, the final results of a pension trends survey (53Kb PDF), conducted by the Association of Consulting Actuaries (ACA), revealed that only 6% of employers believe that the government’s policy of supporting quality workplace pension schemes is working. This figure is down from 32% in 2008. According to the survey, almost nine out of 10 FSPSs are now closed to new members, with 18% closed to further contributions from existing employees – double the proportion of four years ago.

Public sector schemes under pressure

In the public sector, a revaluation of the Local Government Pension Scheme (LGPS), which was due to be undertaken in March 2010, is expected to show a GBP 70 billion (€81.2 billion) deficit, with the scheme only about two thirds funded – constituting a worse position than for many private sector FSPSs. However, unlike corporate schemes, the LGPS is guaranteed by the government, effectively leaving tax payers to cover the costs.

Elsewhere, the University of Warwick is planning to close its FSPS (which covers 1,500 non-academic staff) to new entrants, replacing it with a money purchase or defined contribution pension scheme (UK0301109F). This follows moves by several other universities, including those at Sussex in the southeast of the country, Birmingham and Keele in the West Midlands, and Leicester and Nottingham in the East Midlands, which have either closed FSPSs for non-academic staff to new entrants or switched staff to less costly career-average schemes. Academic staff pensions are covered by the nationally run Universities Superannuation Scheme (USS). More than 120,000 professors and lecturers have been warned by USS that the scheme will become unaffordable and that changes to the scheme are inevitable during 2010.

Regulatory changes and employer reaction

On 12 January 2010, final pensions regulations under the Pensions Act 2008 were published. From 2012, companies must either offer their employees a National Employment Savings Trust (NEST) – a simple, low-cost pensions savings vehicle aimed at those currently without access to a workplace pension scheme – or automatically enrol all eligible workers into a ‘good quality’ workplace pension scheme (provided that they are not already in such a scheme) and give a minimum contribution.

The ACA survey showed that 59% of employers intend to review their existing pension scheme arrangements in light of these changes. Some 15% of employers are thinking of closing their schemes altogether in favour of lower cost NESTs, a figure that rises to 41% for smaller employers with a workforce of fewer than 250 employees. A further 24% of employers expect to reduce the benefits that they provide in order to cut the cost of automatic enrolment and still meet the minimum contribution requirement. Only 32% of employers stated that they had budgeted for the costs.

Commentary

The demise of FSPSs will have a negative effect on the finances of future pensioners. According to ACA, employers funding FSPSs contribute an average of three times the amount contributed to the defined contribution or money purchase schemes which replace them. While the government’s NEST initiative may eventually bring on board more pension savers, these arrangements were only ever intended to provide low-level pensions. It is difficult to disagree with the majority of employers who feel that the government’s current approach to pensions is failing to support quality workplace pension schemes. Moreover, regardless of the outcome of the UK general election on 6 May 2010, the reform of public sector pension schemes will be high on the agenda of the next government. All three major UK-wide political parties are committed to taking tough decisions on public sector pensions to ensure their long-term sustainability and limit taxpayers’ liability.

Helen Newell, IRRU, University of Warwick