The group yesterday announced plans to close its final-salary pension to both new and existing members in a move that will affect some 7,600 employees at Aviva and subsidiary, the RAC.
Aviva is just the latest in a long line of large employers to close their final-salary schemes, following on the heels of blue chips including Barclays, Morrisons and Vodafone. The number of people in private-sector final-salary schemes, which are based on salary and length of service, has plummeted in recent years as more employers have been forced by escalating costs to slam the door on both existing and new members.
The Aviva pension scheme closed to new members in 2001, but the RAC scheme, which has some 2,000 members, is still open to new entrants. The combined deficit of the schemes has trebled to 3 billion in the last four years, according to Aviva, which said that while its final salary scheme accounts for two thirds of its contributions to employee pensions, just a third of its UK staff were in the final salary scheme.
Consultation with employees over the proposals will begin in June. Aviva, which pledged to protect the final-salary benefits already accrued by members, will offer affected employees access to a defined contribution (DC) scheme from next April. Around 14,000 Aviva UK and RAC employees are already in DC arrangements, which are based on contributions and investment performance.
Mark Hodges, UK chief executive at Aviva, said: "Our proposal would enable us to protect the final-salary pension benefits that employees have already built up. It would provide a competitive alternative for them and simultaneously reduce the volatile impact of the final-salary pension deficit on our business in the long-term."
Under a quarter of private-sector final-salary schemes are now open to new members, according to the National Association of Pension Funds, with employers forced to take action in the face of soaring funding costs. Funding liabilities have increased due to lower corporate bond yields – used to calculate the accounting value of scheme liabilities – and rising expectations of future long-term inflation.
With final-salary pension benefits linked to inflation, higher inflation expectations mean companies have to put more aside to guarantee future payments.