MONEY COMMENT
Beating Pension Scheme Closures

By Stuart Watson (TMFTiger)
March 25, 2003

A recent report from the Association of Consulting Actuaries has focused attention once again on the increasing numbers of final salary pension schemes being closed to new members.

According to their latest pension trends survey, 63% of schemes are closed to new entrants. This figure has risen rapidly from the 46% registered as recently as last August. The Association predicts that within two years, around 85% of schemes could be closed to new entrants. The Government's efforts, such as last year's Green Paper, are not expected to reduce the rate of closures.

If you're not being offered a final salary scheme, you have to be a lot more active about your retirement plans. The table below, illustrating the percentage of salary contributed to the typical schemes, shows why.

                       Employer    Employee   Total
Final salary              13.1%        4.5%   17.6%
Money purchase             5.2%        3.5%    8.7%

All else being equal, twice the level of total contributions in the case of final salary schemes means the pension paid out will be twice as valuable. For example, it could mean the difference between retiring on the equivalent of £20,000 a year, or £10,000.

What is particularly concerning is that we, as employees, are putting less into money purchase schemes than we are into final salary schemes. The level of employee contributions is similar for group personal pension schemes and stakeholders as well. It simply isn't anywhere near enough, given that many people only start putting money into a pension after they have been working for a number of years already. However, these figures don't take into account any other provisions people have made for their retirement, in ISAs for example.

The table also illustrates what a valuable perk a final salary scheme is. On average, it's equivalent to a 13% increase in your salary. No wonder employers are looking to cut down on the numbers of people such schemes cover.

If you're faced with a money purchase scheme, then it's best to concentrate on the three issues that you have most control over:

• Start contributing as early as possible. The initial contributions will be the most valuable to your pension pot as they have had the longest time to grow.
• The amount you put in will have a direct effect on the pension you get. It's best to overcompensate (see 'how much you should be saving').
• The amount that gets taken out, i.e. the level of charges, will also have a direct effect on your pension income. The lower the costs, the better.

More: What Everyone Must Know About Pensions | Pension Centre | ISA Centre