As Vodafone becomes the latest large employer to announce it will close its final salary pension scheme, the National Association of Pension Funds has published a new report which paints a gloomy picture for the future of the gold-plated schemes.
Only 23% of final salary schemes are still open to new members, and of those, three out of ten will close completely in the next five years, moving their members over to defined contribution schemes.
The higher costs of final salary schemes, which provide a guaranteed retirement income to employees, have been crippling for many larger employers in recent years. The income guarantee means that if a scheme’s underlying investments fail to perform, the company must stump up to meet the shortfall, in order to fulfil its commitment to former workers.
With defined contribution pension schemes, there is no such guarantee, so that the risks of underperformance and investment volatility are transferred from the employer to the employee.
Contributions to final salary schemes are much higher too, according to the National Association of Pension Funds.
Companies pay an average of 19% of a member’s pay into defined benefit schemes, with staff paying in 5.4%. With defined contribution schemes costs are much lower, with companies paying on average just 7.5% and staff paying 4%.
With this week’s announcement, Vodafone joins a number of large employers who are now running down their final salary schemes, including Costain, Barclays, IBM, Fujitsu, Morrisons, Dairy Crest, and Pirelli.
