Firms look to alternative ways of reducing pensions costs

August 15, 2003

Firms look to alternative ways of reducing pensions costs

Final salary scheme closures are slowing, as firms consider alternative ways of reducing the costs and risk of running a pension scheme, new research claims.

Less than a quarter of firms reviewing their pensions plans have decided to close their final salary schemes to new members and offer instead a defined contribution (money purchase) plan.

Although the most popular choice of arrangement for a third of organisations surveyed that have decided to move away from final salary provision in the last year has been some form of defined contribution arrangement, the proportion opting for defined contribution provision has fallen from 97% in Watson Wyatt’s 2002 survey to 73% in the latest survey.

Firms are looking to alternative ways of reducing pensions costs “such as increasing member contribution rates, reducing the level of benefits or using alternative structures such as career average or cash balance plans”, said Colin Singer, a partner at Watson Wyatt.

Tesco, Cadbury Schweppes, Nationwide and Safeway have introduced career average schemes. In these types of schemes, members’ benefits are defined as pension amounts, calculated as a percentage – typically between 1% and 2% – of pensionable earnings.

The crucial factor that differentiates a career average scheme from a final salary scheme is that earnings received in each year of pensionable service count within the formula. Increases on the pension earned in each year are either guaranteed or granted on a discretionary basis, or a mixture of the two.

The survey also found that 1 in 10 respondents with final salary plans have changed the rate of member contributions. The average member contribution has risen from 4% to 6% with the majority of new contribution rates moving away from rates of 0% to 5% to rates of between 5% and 8%.

Complaints about company pensions have risen by nearly a third during the past year, to their highest level ever, according to the Pensions Ombudsman. The most common cause for complaint was that pension benefits had been calculated incorrectly.