Cash paid into staff pensions soars 50%

Published on Monday 7 February 2005 12:11

THE money paid by employers into final salary pension schemes for staff has rocketed by 50 per cent in the last year, new research revealed today.

Contributions made by employers increased from 5.5 billion to 8.2bn, according to pay analyst Incomes Data Services’ (IDS), which surveyed 284 pension schemes. And it found that companies facing the biggest deficits had raised their pension contributions by 100 per cent or more.

As costs rise and liabilities increase, more and more companies are having difficulty keeping this kind of scheme open. A final salary scheme, also known as a defined benefit scheme, guarantees a pension related to the salary the employee is on when they retire.

The rising costs of sustaining such schemes has led many employers to replace final salary programmes with less risky money-purchase, or defined contribution, schemes.

Under money-purchase schemes, employees put money into a pension fund, used to buy an annuity - a policy that pays out an income until death - on retirement. IDS said that, while some schemes were still in good health, in other cases firms were forced to top up funds to tackle "yawning deficits".

Helen Sudell, editor of the IDS Pensions Service, said the rise in contributions was the highest ever recorded by IDS and represented a "staggering" increase.

"We have warned before that the widespread closure of final salary schemes to new entrants is just the beginning of a much bigger movement away from paternalistic provision," said Ms Sudell. "With figures like this there can be little doubt many employers will have to reduce future benefits at some point for those staff still in these schemes."

Meanwhile, the Confederation of British Industry warned today that a flat rate "citizens’ pension" was not the solution to the retirement incomes crisis because the country could not afford a big increase in state provision.

In a submission to the Turner review on pensions, the group said a simpler system should be considered to support people earning less than average earnings who were not able to save enough for their retirement.

Director-general Sir Digby Jones said: "Although well meaning, supporters of a universal citizens’ pension are missing the point. A much larger state pension is unnecessary for everyone and frankly the country can’t afford it."