End in sight for final salary company pensions

RISING pressures on final-salary private sector pension schemes are likely to force most of the dwindling band of companies that provide them to “throw in the towel” in 2016 and switch to cheaper defined contribution (DC) models.

This is despite an independent report yesterday from pensions’ specialist JLT Employee Benefits which also revealed the deficit covering all UK private sector defined benefit (DB) pension schemes fell by £20 billion to £228bn last year, down from £248bn in 2014.

The pension deficit for businesses in the FTSE 100 index was £70bn as of 31 December, 2015, against £82bn a year earlier. The funding shortfall at businesses including the Footsie and the next biggest 250 companies fell £13bn to £81bn.

However, Charles Cowling, director at pensions services provider JLT Employee Benefits, said: “2015 has been another difficult year for companies with DB pension schemes [also sometimes known as final salary].

“In particular, those pension schemes with actuarial valuations this year will likely have seen record high pension deficits and will probably still be negotiating on new funding and investment strategies. This could see some painful rises in company funding ­contributions coming through in 2016.”

Cowling said the situation would be exacerbated this year as the pensions industry sees the end of contracting-out and further tax changes to pensions, namely the reduction in the annual and lifetime allowances.

“These changes mean that even with deficits and soaring costs aside, [defined benefit] pension provision is looking less and less attractive in the private sector,” he added.

“We have already seen many large firms, from Tesco to United Utilities, close down or announce the closure of their DB pension schemes in 2015.

“It is no surprise therefore that we expect 2016 to be the year that, within the private sector at least, those last few companies still hanging on to their DB schemes will finally throw in the towel and switch over to [defined contribution] entirely for employee pension provision.

“This final closure of private sector DB schemes means that 2016 will also see yet more end-game strategies – from liability management to buy-outs – all heading towards eventual wind-up.”

A final salary scheme promises a specific income in retirement. By contrast, DC benefits on retirement depend on factors including the amount you pay in, the fund’s investment performance and the choices you make at retirement.

JLT said that the introduction of new pension reforms, by which members of DC pension schemes may now cash in savings rather than buy annuities, had seen a “surge of interest” from members looking to transfer DB funds into a DC scheme to access their retirement savings.