More final salary schemes to shut as pension values plummet £12bn

Published on Saturday 27 June 2009 13:54

MORE Scottish companies will close their final salary pension schemes this year as they struggle to cope with the strain of the recession and a £12 billion fall in value.

Towards the end of last year, professional services firm KPMG reported that 10bn had been wiped off the value of Scotland's private sector pension schemes during the economic downturn. Its latest research has found a further 2bn has been lost this year.

Donald Fleming, head of pensions at KPMG in Scotland, warned that more Scottish companies will shut their final salary or defined benefit schemes, because of growing liabilities and a drop in the value of assets. The situation has been exacerbated by recent changes to tax rules making traditional pensions less attractive to high earners. Many companies will also close schemes to ease pressure on cash flow.

BP is among a number of high-profile companies to recently announce that it is shutting its final salary pension to new members. KPMG said a new development is for firms to close schemes to existing members. Earlier this month Barclays proposed taking that step to cut costs.

Fleming said: "Such a move is becoming an increasingly attractive option for financial directors in the current economy. The credit crunch is forcing financial directors to review their companies' cash flow and reducing pension outlay is one option. A final salary scheme is a big drain on cash and it can get to the extent that some companies are paying in more than they can afford."

Fleming added that once a scheme is closed it stops further liabilities being built up.

He said there are a number of factors increasing the pressure on final salary schemes. One of the biggest issues is uncertainty about whether the economic situation will improve or worsen in the next few months. Another is the difficulty some firms are facing when trying to refinance their business. The increased levy for the pension protection fund, the industry safety net, has also hit firms.

But KPMG warns there are a number of factors to consider before taking such a drastic measure, including the impact on industrial relations and the company's reputation. Fleming explained it can lead to "real conflict" between the firm and trustees who are legally responsible for ensuring businesses meet their pension requirements. A compromise must be reached between trustees with the interest of scheme members at heart and financial directors looking secure the future of their companies.

While no big Scottish companies have closed their scheme this year, Fleming warns this is likely to happen as the effects of the recession are being felt north of the Border as much as they are in other parts of the UK.

He said: "Financial directors in companies in sectors like finance and construction, which are well-represented in Scotland, will be under pressure and may decide its time to wind up their final salary scheme completely."