Aviva’s final salary pensions scheme may become the latest casualty of the economic downturn, as Aviva has issued a proposal to close it in April 2011.
Unions are claiming that the move could slash the pensions income of employees by up to a third.
If it goes ahead, the Aviva move would further confirm a trend among many household-name companies in the UK, to shift from final salary pension schemes to defined contribution pension schemes. Similar steps have already been taken by Barclays, Vodafone, BMI, IBM and the Morrissons supermarket chain, in the last year.
Final salary pensions, also known as defined benefit pension schemes, provide a guaranteed payout to employees based on their salary at retirement and their number of years with the company. In harsh economic times, mediocre returns on the stock market investments underlying final salary company pension schemes can fall short of the schemes’ obligations for payouts to retired employees. However, because of the guarantees, the payments must still be made, leaving the company to stump up any shortfall from its own resources.
While only a third of Aviva’s UK staff are in the final salary pensions scheme, it was eating up two-thirds of Aviva’s contributions to UK staff pensions, the company revealed.
Aviva now proposes to move future employee contributions into a defined contribution pensions scheme, while protecting the funds already saved into the final salary pensions scheme.
In a defined contributions pension scheme, there is no guaranteed payout, and the employee’s retirement fund is dictated by how well (or how badly) the investments in the scheme have done. In other words, companies like Aviva no longer have guarantees to meet under a defined contributions pension, and as such the investment risk is transferred from the employer to the employee.
Aviva’s final salary pensions scheme includes the schemes of its own employees and those of the RAC motoring group, which it owns. The combined deficits of the two company pension schemes within the overall scheme are now £3bn, having risen from £1bn in March 2006, Aviva said. The closure of the final salary pensions scheme would affect 7,600 Aviva and RAC employees.
Aviva has stated that already-retired members of its final salary pensions scheme, or those who have frozen or deferred their pension in the scheme, will be unaffected by the closure.
Aviva has a total of 19,500 employees in the UK, of which 70% are already in defined contribution or money purchase pensions, compared to the 7,600 still in final salary pensions.
