Pension funds chief urges new law to protect private final salary schemes

PENSION funds have called on the government to secure the future of final salary schemes in the private sector by simplifying legislation.

It is estimated fewer than a quarter of private sector final salary schemes, which are based on salary and length of service, are open to new members.

Last week Taylor Wimpey became the latest blue chip to close its scheme.

But Nigel Peaple, director of policy at the National Association of Pension Funds (NAPF), told Scotland on Sunday that amendments to pensions legislation would arrest the decline in final salary schemes in the private sector.

Peaple, speaking ahead of the annual NAPF Investment Conference in Edinburgh this week, urged the removal of mandatory indexation, which protects final salary pension benefits against inflation.

"We advocate optional indexation, where employees could buy it through higher contributions or with some of their tax-free pension cash," he said. "Mandatory indexation is clearly desirable but not if it is so expensive that everyone moves to defined contribution schemes."

Peaple called for schemes to be able to raise the pension age in line with longevity and for changes to accounting standards that restrict pension fund exposure to equities. The changes would enable companies still offering final salary schemes to continue doing so and eventually persuade some firms to resume providing guaranteed pensions, said Peaple.

Amending legislation to encourage pension funds to invest more in equities would boost UK growth, he added. "Under the 2004 Pensions Act trustees are expected to invest prudently and they are also under pressure from the corporate accounting side to invest in steady, lower growth assets that are less volatile," he said.

After a surge of final salary scheme closures in recent years, the majority of private sector employees now pay into defined contribution schemes, which are not guaranteed but based on contributions and investment performance.

The acceleration in the decline of private sector final salary schemes could have been avoided if the necessary changes had been made five years ago, Peaple said. However, he believes final salary schemes, widely predicted to become obsolete, will continue to be offered by a core of private sector employers even without changes to legislation.

The NAPF, which represents 1,200 pension schemes, accused the government of overstating the savings it will make by slashing tax relief for high earners next year. The government last week closed its consultation on plans to restrict relief for those earning above 130,000 year from April 2011. It said the proposals would raise 3.6 billion for Treasury coffers.