Moves by Barclays and BP could signal the end of final-salary plans

DREAMS of a worry-free retirement were dashed for millions of employees in private industry last week, when Barclays Bank and BP became the latest household names to withdraw pension benefits.

Barclays, which stopped salary-linked pensions for new employees in 1997, is now ending the perk for most existing staff who thought their pensions were safe.

BP, that oil-rich, last bastion of the treasured, final-salary scheme for all staff, will no longer offer it to those who join from next April.

Given that a final-salary pension scheme requires employers to contribute up to 25 per cent of an employee's wages, removing the perk amounts to a significant pay cut, not least as employees will also be asked to contribute more.

It also widens the gap between private and public sector employees, raising questions about their sustainability.

Independent pension consultant John Ralfe predicts: "I'd say we have entered the third stage of the long, slow decline and ultimate demise of final- salary schemes for those working for private companies.

"Ten years ago they began closing schemes to new members. Over the last few years we have had the second stage, whereby benefits were cut back, with schemes switched to average salary arrangements or members' contributions significantly increased.

"We had seen a few firms already end future accrual, but now a big name like Barclays has moved, others will follow. It is not that Barclays has set this new trend. Other companies are already in the process, it's just Barclays got there first."

Roughly 27 per cent of employers intend to "do a Barclays" over the next five years, according to a recent survey of the National Association of Pension Funds.

Since 1991, the numbers of employees covered by a final- salary pension has fallen from nearly six million, to around two million today.

Over this period, the number of state employees enjoying the security of this attractive pensions deal has risen from four million to five million, presenting taxpayers with a trillion- pound bill.

Final-salary pensions were introduced when employees were expected to work for one company for their entire career, and die a few years after retirement.

They were a promise of a pension linked to final salary. But three factors combined to push up their costs to unaffordable levels. They were hit by wave after wave of regulations forcing them to guarantee a range of benefits which had not originally been intended, and staff began living much longer.

Finally, successive governments increased taxation on the funds, culminating with Gordon Brown's 1997 tax raid, which took more than £100 billion out of funds, currently suffering an £188m deficit.

When schemes are closed, not only are staff usually transferred to investment-style money purchase schemes, but companies slash their contributions at the same time.

Whereas the combined employee and company contribution to a salary-linked scheme is normally more than 20 per cent of salary, as little as seven per cent of salary is paid into the new arrangement.

If only a third of the money is going into these schemes, there should be few surprises when the final pension is only a third of that paid out by old-style schemes. Many employees, for example, are currently blissfully unaware they are heading for a pension of perhaps 20 per cent of their final pay.

In fact, Barclays is offering 18,000 staff a hybrid scheme which offers employees some guarantees, albeit very limited one. The bank guarantees that, at retirement, they will have an equivalent of 20 per cent of each year's salary in their pension pot, uprated for inflation. However, this will only buy them a pension of a third of average salary.

Staff must pay a 3 per cent contribution, whereas they paid nothing into their old scheme. To boost a pension further, they can make additional contributions, which Barclays will match up to a point.

BP is a long way behind the curve in only now closing its final salary scheme for new members. Around 12,000 existing employees will continue to enjoy two-thirds of final salary at retirement after 40 years' service without the employee saving a pension, or sooner if they contribute.

From April, new employees will instead be allocated 15 per cent of their salary, which they can invest in a money purchase-style pension. Or they may be able to take it in cash or use it for other benefits, such as medical insurance or a better car than their pay grade offers.

A BP spokesman said: "There may be times in their lives, for example when they are saving towards the deposit for a house, when the cash is more valuable in their hands than saving towards a pension."

What to do when the axe falls

Try to negotiate that your pension earned to date is based on your final salary at retirement, not your final salary when the scheme closes. This can make a big difference, particularly if your earnings rise prior to retirement.

Barclays staff will see their pensions pegged to their salaries today, uprated for inflation. This may not be a problem for branch staff, whose wages may not rise significantly out of line with inflation, but can cost more ambitious staff dearly.

After that, your course of action will depend on your age. David Cule, a senior actuary at Punter Southall, advises: "The important thing is that individuals face up to the change.

"At Barclays, the change will make little difference to those up to five years away from retirement. They have already built up a good pension, and the 20 per cent guarantee won't leave them much worse off.

"Those who are a few years younger may have to save a bit more than they intended. But 40-year-olds will have to completely rethink their pension planning."