The Economist: Pension apartheid: Gap between British public and private retirement benefits is unsustainable (excerpts)
WORLDS APART — June 11th 2009
Britain's pensions apartheid looks unsustainable
COMPANY final-salary schemes were set on the path to extinction earlier this decade following a wave of closures to new recruits. Now BP, one of a handful of big firms that stood apart from the crowd then, is following suit. Even more strikingly, Barclays is planning to close the bank's scheme for its existing members.
Corporate Britain is abandoning final-salary plans because they have become too expensive and risky. By providing a defined-benefit (DB) pension based on end-of-career earnings and years of service, employers pay for investment shortfalls and rising longevity. By contrast individuals shoulder this burden under the alternative arrangement of defined-contribution (DC) plans, in which they build up a fund to purchase a pension. Employers generally pay much less into these than they do into DB schemes.
If any one British company seemed to be in a position to defy this trend and maintain final-salary pensions, it was BP. In deciding to close its scheme to new members from April 2010, the oil behemoth cited in particular its concern that liabilities were being driven up by greater life expectancy. Instead, new staff will receive a "flexible allowance" worth 15% of basic salary, which can be used either for a DC plan or for other purposes (such as paying off loans).
Until now most big employers closing their schemes to new recruits have kept them open for staff who had already joined. This meant that they continued to accrue extra pension for additional years of service. Rentokil, a business-services firm, announced in December 2005 that it would close its plan for such workers, but it was the exception. Now Barclays is proposing to stop future accruals for its 18,000 existing members from December.
The effect will be to freeze retirement benefits already earned, since they will be based on current salaries uprated for inflation. That will typically produce lower pensions than if the payout had remained linked to final salaries.
The accelerating demise of final-salary schemes provided by companies contrasts with their rude health in the public sector. As recently as 2000, there were more employees building up pension rights — "active members" — in private occupational schemes than in the public sector. Four years later the tables had been turned, even though public workers make up only a fifth of total employment. By 2007 the number of active members in the private sector had fallen to just 3.6m, of whom 2.7m were in DB schemes; of these just 1.3m were in schemes still open to new recruits. By contrast there were 5.2m active members in the public sector, overwhelmingly in DB plans.
