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UK pensions: final salary pension schemes opting to play it safe

27th January 2006
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UK final salary pension programs are turning away from investing in shares.

With final salary pension schemes generating black holes in the finances of companies across the UK, many trustees have decided to switch from investing in equities to safer bonds to try to minimize exposure to market volatility. The move comes alongside a raft of closures of such schemes to new workers altogether. The twin developments point to the ultimate demise of the final salary pension.

According to a survey by the National Association of Pension Funds (NAPF) reported by the BBC, three out of ten final salary pension schemes have moved away from investing in shares to invest in bonds because they are considered a safer option. The NAPF research indicated that schemes were becoming "more risk-averse" to ensure they had enough cash to pay member benefits.

The current pensions climate is marked by major shortfalls in many companies' provision, leaving employers feeling the pressure on their final salary schemes and realizing that this is not sustainable. Increasing longevity has compounded problems faced by pension funds after years of poor investment performance. As a result many such schemes have been closed to new members in recent months.

With the government insisting that there is a need for employers to take responsibility for the pension provision of their workers, companies need to find an alternative. Most employers have already moved to defined contribution schemes which do not have the uncertainty that is associated with final salary schemes. Group stakeholder products have also grown in popularity and there are predictions of high take-up rates for several group SIPP products that are being launched after A-day in April.

It is likely that the government will suggest the adoption of the employer based NPSS, recommended by the Turner Commission in 2005. If this is the case then employers will be forced to contribute to their employees' pensions. The days of the final salary pension scheme are indeed numbered but employers will always have a role to play in pension provision.

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