Last FTSE 100 firm closes DB scheme to new members - Jan '12

We’d barely shared our New Year tidings before Royal Dutch Shell announced the closure of its Defined Benefit (DB) scheme to new members from January 2013[1]. And in so doing, it became the last of the UK’s largest private firms to quit the final salary scene.

Yet this is merely another, albeit significant, milestone in the slow death of final salary schemes – a demise that began in the 1990s and was partly triggered by two legislative changes – one by the Tories and one by New Labour – within a couple of years of each other.

1995 Pensions Act – introduction of mandatory inflation guarantees

Following the death of Robert Maxwell, John Major’s government introduced a number of measures to protect schemes and their members. Included in this was a provision for guaranteed, inflation-linked increases in occupational pensions in payment. The Pensions Corporation[2] estimates that this move has made final salary schemes 12% more expensive.

1997 Finance Act – abolition of dividend tax relief for pension schemes

In his first Budget, Chancellor Gordon Brown did away with the advance corporation tax (ACT) relief previously enjoyed on dividends earned by scheme investments. According to papers recently released under the Freedom of Information Act[3] the Treasury acknowledged that the move “would make a big hole in pension scheme finances” and that “some schemes would be pushed into actuarial deficit by the loss of tax credits”. Nonetheless, the 20% tax credit was removed in one fell swoop.

But what of the remaining DB schemes?

At the end of December 2011, the Pension Protection Fund’s 7800 Index[4] shows that the 6,533 DB schemes covered had a combined deficit of £255.2 billion – up nearly 15% from £222 billion a year previously. Worse still, only 16% of the schemes – 1,060 – are in surplus. And these are schemes that are still being actively managed.

Another tranche of schemes have already failed and been rescued by the PPF. And the rate of rescues seems to be accelerating. After four years of operation, the PPF looked after 109 schemes. In 2010 another 95 were added, with 2011 seeing a further 176 schemes join the rescue fund, taking the total to 377 covering some 104,000 members.
 

So, do DB schemes have any future?

As things stand, private sector employers have all but turned their backs on DB schemes. Despite some Government noise that inflation guarantees might be reconsidered and despite the switch from RPI to CPI inflation measures, there is little likelihood, or need, for private firms to reconsider. Indeed, many may well believe that their employee benefits packages can be more effectively enhanced in much more visible and less costly ways.

Yet the public sector appears somewhat different and more resilient to the winds of change. And perhaps that’s not surprising since the very heart of the public sector, Parliament itself, still rewards its ministers, members and staff with generous salary-related pension benefits.