The private sector’s commitment to final salary pension schemes is shrinking rapidly, says a report published today.

The study, by the National Association of Pensions Funds (NAPF), found that, in the next few years, a quarter of private sector companies expect to close their final salary schemes to existing members. Nearly three-quarters of the 8,490 private sector schemes have already closed their doors to new members.

Final salary schemes, where pensions are determined by salary and length of service, are regarded as the best type for employees, because their benefits are guaranteed and the employer shoulders the liability for providing them.

With money purchase pensions, the main alternative, the employee’s pension is dependent on the investment return obtained on the contributions and so the employee shoulders the risk.

Employers have become increasingly reluctant to continue providing final salary schemes because of the risk that they will have to plug deficits in their schemes caused by falling stock markets. In December the Pension Protection Fund reported that company final salary schemes faced a combined deficit of nearly £200 billion.

Tom McPhail, head of pensions research at Hargreaves Lansdown, the independent financial adviser, said: “Today’s study by the NAPF clearly shows that employers have had enough of final salary pension schemes.

“The stock market falls of the past two years have exacerbated the problem by opening up huge deficits in many schemes and forcing employers to make additional contributions to these schemes when they are already being squeezed hard by the recession and the credit crunch.

“But even in good times, companies are tiring of the costs and risks involved in offering final salary schemes to their employees. They didn’t come into business to run pension funds.”

As more company final salary schemes are closed to existing members the 2.7 million people in them face a harsher future. While their existing pension rights and savings will be protected, future contributions will have to be made via a new, money purchase scheme, which will typically be cheaper for the employer but riskier for the employee.

Mr McPhail said: “The average total contribution to an individual’s final salary scheme is 22 per cent, made up of 16 per cent from the employer and 6 per cent from the employee. With a money purchase scheme this total contribution falls to 10 per cent.

“If, as seems inevitable, there is a continuing switch from final salary to money purchase schemes, the message is that both employer and employee need to increase their contributions to money purchase schemes to ensure a decent pension in retirement.”

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