MONEY COMMENT
What Pension Closures Mean To You

By Cliff D'Arcy
May 22, 2003

When I left my comfortable financial services job last year, I gave up a package that included a salary (naturally); bonus; shares and options; company car or travel allowance; final-salary pension scheme; income protection; life, medical, critical illness, dental and accident insurance. But I gave this all up to become an impoverished writer - I did it for you, my fellow Fools!

Seriously, when you move jobs, it's important to weigh up your new salary and benefits against your current package, in order to estimate how much you stand to gain (or lose) from your move. This decision is a lot harder these days, especially with companies rushing to close attractive final-salary pension schemes (also known as defined-benefit schemes).

According to a leading industry body, the National Association of Pension Funds (NAPF), only one in five UK companies now offers membership of a defined-benefit scheme to new starters. Thanks to pensioners living longer, falling stock-market returns and the removal of tax credits on pension funds' income, many businesses have decided that final-salary schemes have become prohibitively expensive to run.

So, if you switch employers, there's an 80% chance that your new employer won't offer you membership of a final-salary scheme. Instead, it will probably invite you to join a money-purchase plan (also known as a defined-contribution scheme).

The usual routine is that your employer will pay in a percentage of your salary and you contribute as well. These contributions are invested for the long term, so your retirement income depends on how much you pay in, the length of time you contribute, and your investment returns. Thus, the investment risk is transferred to you, making your pension less of a liability for your employer.

An even greater problem is that, according to this report, the total annual contribution into a typical final-salary scheme is a juicy 17.6% of salary. For company money-purchase plans, this figure is more than halved to a measly 8.7%. Clearly, companies are putting less away for employees but, even worse, we aren't paying in enough ourselves.

So, bear in mind that pensions are just a form of deferred pay and you really do lose out by giving up membership of a final-salary scheme. Make sure you factor this in when accepting a new job offer.

More: Beating Pension Scheme Closures | Company Pension Transfers Are Frozen | Pension Centre