Pensions relapse - companies close final salary schemes

Two FTSE 100 companies have followed the example of Rentokil in closing their final salary pension schemes, with another likely to follow.

Submitted by Freedom on January 4, 2006

Chiefs at the Co-operative group have expressed surprise as unions have threatened strike action after they announced the closure of their scheme.

The retail and banking group has said it will change the basis for payments on its pension scheme from 5th April to an average salary system rather than linking it to final-year pay.

The company does not currently have a deficit in its scheme but has said the measure is being taken to prevent a hole developing.

Arcadia chief Phillip Green meanwhile has fallen foul of the pensions regulator after the company failed to consult the governmental watchdog before changing its own scheme at the beginning of the year to force staff to pay more and work for five years longer before retirement.

In the middle of negotiations over the company pension pot in October 2004 Green paid himself £1.3bn, while the pension fund was £11.6m in arrears. The money he paid himself was more than five times Arcadia’s total profits that year and was raised through borrowing against the business.

The closures look likely to be the tip of the iceberg. A survey by the National Association of Pension Funds found that a quarter of all pension schemes expect to close their final salary schemes.

They follow the closure of Rentokil’s pension scheme, which was designed to save the group millions when it made the announcement to current employees in late December.

Rentokil’s decision will affect 3,000 people who will have their pensions frozen at current levels. The company already had plans which would see their pension deficit settled by 2012, but said it wanted to make sure there would be no more deficits in future.

The changes have been echoed in the US, where electronics giant IBM have closed their final salary pension scheme and made it clear that the 20,000 UK workers currently covered would be likely to suffer the same fate.

The company, which has a £4.2bn pension deficit, said it would stop contributing entirely to the scheme for its US members and move employees to poorer-paying ‘money purchase’ schemes, which bases retirement fund payouts solely on market performance rather than service time and pay.

Some companies have stated they will not reduce their pension schemes, such as Advertising group WPP, online directory, gas exploration firm BG Group and caterer Compass, who all had similar shortfalls to Rentokil.

Compass in particular is £532m in debt on its pensions, but has paid £1m bonuses into the pension funds of Chairman Sit Francais Mackay and Chief Executive Mike Baisely.