Pension experts last week said that final-salary schemes were “finished” after three big British firms moved to reduce members’ benefits.

BP said on Tuesday that it would close its final-salary scheme for anyone joining after April 2010. A day later, Barclays said existing members would stop accruing benefits in its scheme, a move expected to hit 18,000 employees. On Friday, Morrisons, the supermarket group, said it would scrap its final-salary scheme for 4,500 existing members.

“These are just the latest major companies to throw in the towel: the writing’s been on the wall for many years,” said Ros Altmann, a pensions expert and former Treasury adviser.

Here, we look at ways in which employers could cut your final-salary benefits.

Close to existing members

Many schemes have already closed to new members: just five years ago, about 40% of companies still offered final-salary pensions to new joiners, but today there are only four that do so — Shell, Tesco, Cadbury and Diageo.

A growing number offer existing members defined-contribution plans instead, under which individuals shoulder the risk of investment lossess and rising life expectancy. About 15% of 160 final-salary schemes are expected to close to future accrual by the end of 2010, and 40% in the next decade, a survey for Watson Wyatt, the actuary, shows.

Switch to career average scheme

Morrisons is replacing final-salary with a career-average plan. This means payouts will be based on average earnings during an employee’s time with the group, rather than their pay immediately before retirement. Those likely to have a long career at the company will be the worst affected.

Say you joined at age 25 earning £25,000 and retired at 65. Assuming your earnings grew in real terms at 1.5% a year, you would have a salary of £45,350 by 65. Based on the final-salary scheme (under which members accrued benefits at 1/60th of final salary a year), you would be entitled to a pension of £30,235 a year, said John Lawson at Standard Life.

However, with a career-average scheme, your pension would be just £23,367.

Lower the rate of benefit accrual

Marks & Spencer has said it would cap the percentage of pay rises that count towards its final-salary pension at 1%, or the rate of inflation, whichever is lower. Hewitt Associates said 28% of companies were thinking about capping pensionable pay rises, and 34% were considering changing the accrual rate — switching to a scheme that gives 1/80th of final salary instead of 1/60th, for example.

Raise contribution rates

A final-salary pension adds more than 20% to payroll costs and 41% of companies are considering asking workers to pay in more, effectively reducing the value of their payouts relative to what they’ve contributed.

Raise retirement age

Shell’s scheme may be one of the few open to new members, but in January it made changes for new joiners, including increasing the retirement age from 60 to 65.

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