Another nail in the coffin for final salary pension schemes

By Tom McPhail | 29 Sep, 2008 

I think we are about to witness the last stages of final salary pension provision in the UK. Insurance works on the basis of paying a small premium up front, in order to pass the risk of a catastrophic event on to someone else: it won’t stop the bad thing happening, but it means that someone else carries the cost.
 
Fine, but take as an example, the aftermath of the recent flood problems experienced in some parts of the country is that people in high risk areas are finding it increasingly difficult to get insurance for their houses. You can hardly blame the insurance companies for charging a high premium, or even refusing to insure new customers, given the high probability of future claims.

Anyone lucky enough to still be a member of a final salary scheme has enjoyed similar protection. They have been protected against the volatile stock markets which in the past year and particularly the past few weeks, have caused some investors to incur substantial losses.

The difference with final salary schemes is that ultimately it is the sponsoring employer who plays the role of the insurance company. It is the sponsoring employer who carries the financial risk and has to make up the shortfall in the event of losses. It is clear that recent market losses are starting to push final salary scheme deficits up again (it is somehow typical of our times that the Lehman Brothers scheme was in deficit when the company went bust).
 
There is no suggestion that schemes and employers are about to renege on their promises. Their members continue to enjoy the promise of a retirement income based on someone else’s risk exposure.
 
In the past few years though, employers have increasingly been closing their final salary schemes to any new members coming in and even to any future accrual of benefits for existing members. One fall-out of this recent market turbulence which I believe is pretty much certain is that this employer trend away from final salary schemes will accelerate.