Where you can still find a final salary pension

by Cliff D'Arcy on 14 January 2012  |  13 comments
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As Shell pulls its final salary scheme to new entrants, we look at the very short shortlist of employers still offering one!

Until the mid-Nineties, starting a new job with a big organisation also meant being offered a final salary pension scheme.

With such pension schemes, your income after retirement is calculated on how long you've been a member of the scheme, plus your salary when you retire or depart the scheme. For example, 20 years in a 1/60th scheme, based on a final salary of £30,000, will generate a yearly pension of 20/60 x £30,000, which is £10,000.

Pensions get pounded

Alas, rising life expectancy, together with falling interest rates and investment returns, made these pensions increasingly costly for employers to run. What's more, two stock-market crashes in the Noughties left some schemes with huge shortfalls, to be covered by employers.

Hence, from the late Nineties onwards, companies started taking an axe to the costs of running these guaranteed pension schemes. While some employers trimmed benefits by increasing retirement ages and reducing accrual rates, most opted to close their final-salary schemes to new entrants altogether.

As a result, the vast majority (more than 90%) of all private-sector final salary schemes have been closed to new members. Just last week, global oil giant Royal Dutch Shell announced the closure of its guaranteed pension scheme to new joiners.

What's the big deal?

Why should we be concerned at the closure of final salary pension schemes? The simple answer is that these plans are incredibly valuable, simply because they provide guaranteed, company-backed incomes to ex-workers.

Unlike personal pensions, all the risks of managing and funding these schemes are borne by employers. All that final salary members must do is to contribute a percentage of their salary (usually between 5% and 10%) to help fund these schemes.

On the other hand, the returns from personal pensions and work-based money-purchase plans depend on the level of contributions from employer and employee, tax relief from the Government, investment returns and charges over the long term, and the annuity rates paid to pensioners surrendering their pension pots to insurance companies.

Therefore, the benefits provided by final salary pension schemes will almost always outweigh those from money-purchase schemes, even for the same level of contributions.

This explains why thousands of workers at Unilever are set to stage a series of strikes this quarter, following the company's decision to replace its final salary pension scheme with a hybrid plan offering lower benefits to all workers.

'A broken model'

Despite the mass closure of final-salary pensions by large corporations, a few employers still offer final-salary schemes to new workers.

Although it's been widely reported that no FTSE 100 firm has a final salary pension scheme open to new joiners, it appears that defence/aerospace group BAE Systems does offer one to its new employees. However, instead of the customary 1/60th accrual rate seen historically, this pension offers 1/100th (1%) of salary for each year of service, in return for employee contributions of 4% of salary. In addition to this, BAE has a money-purchase scheme, into which it pays a further 2% of salary.

The only other well-known business I can find which provides a final salary pension scheme to new starters is the John Lewis Partnership (JLP), owners of John Lewis department stores and Waitrose supermarkets.

The reason that JLP can do this is that, unlike its rivals, it is not a private business or PLC (public limited company). Instead, it is a partnership owned and run by its employees, all of whom are partners in this business.

With no shareholders to pay dividends to, JLP offers a generous package of benefits to its workers. As well as an annual profit-sharing bonus, it provides a non-contributory, final salary pension scheme after three years’ service. For their first three years, employees can pay into a defined-contribution pension scheme, to which JLP also contributes.

Within the private sector, final salary schemes are becoming as rare as hen's teeth!

Trouble for taxpayers?

Then again, final salary pension schemes are alive and well within the public sector, where cutbacks have been cushioned by taxpayer support.

Of roughly six million Government workers, more than five million are members of currently open final salary pension schemes. Alas, as I warned in The secret truth behind public sector pensions, the ever-rising costs of public sector pensions are largely borne by British taxpayers.

For example, civil servants and judges get taxpayer contributions of £12 to £18 for each pound they pay into their pensions. What's more, the pension scheme for members of parliament is obscenely generous, as I revealed last month in The UK's best pension plan.

In order to curb these costs, the Government has asked its workforce to pay, on average, an extra 3.2% of their salaries into their pension schemes. No doubt this modest proposal will lead to yet more strikes in 2012, as happened last year.

In summary, if you fancy the security and comfort of a final salary pension, then start looking outside of the private sector. To stand any chance of joining the most generous schemes, you need to become a civil servant, judge or MP! Alternatively, you can be brave by risking your life with a career in the Armed Forces...

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