Employers cap final pensionable pay in closed schemes
Growing numbers of employers with closed defined-benefit (DB) schemes are considering introducing a cap on final pensionable salary, often as part of a wider restructuring designed to curb costs and future liabilities.
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RBS imposes 2% or RPI
cap
Redrow caps at 2.5%
Archant also caps salary
Two-tier
membership.
In the past few months, three employers, including Royal Bank of Scotland (RBS), have announced plans to cap salary used to determine pensions, and one prominent Labour MP, Terry Rooney, has called for similar limits to be applied to the pensions of senior civil servants and local government officers. These latest moves follow similar decisions to cap pensionable pay earlier this year at Marks & Spencer and pub group Mitchells & Butlers.
RBS is the largest of the latest crop of employers to announce that it plans to apply a cap on pensionable salary for its closed DB scheme to tackle growing pension costs. RBS head of human resources, Neil Roden, stresses that only one-third of staff are active members of the bank's UK final-salary scheme, which closed to new members in 2006. The bank argues that the arrangement is an expensive one for shareholders to fund and is generous in comparison with other schemes in the financial services sector. Under the proposed changes, the amount of future salary increase that is pensionable is capped at 2% annually, or the rate of inflation, whichever is lower. The cap applies to future service only.
Unite, the union representing many workers at RBS, described the bank's plans as a "body blow" to members of the scheme, and drew inevitable parallels between the situation facing the current workforce and RBS's former chief executive. "Against the background of Sir Fred Goodwin's bumper pension these planned changes add insult to injury to the workers paying the price for a crisis for which they hold no responsibility," Rob MacGregor, Unite national officer, said. He added that RBS staff, many of whom already face job uncertainty, "now face a future with severely reduced retirement benefits".
Unite is planning to meet RBS in the coming weeks and MacGregor says that the union will "support its members in any action they choose to take to defend their pensions". RBS expects to complete consultations with the union before the end of November 2009.
Construction firm Redrow announced that it planned to implement a cap on final pay for pension purposes from July 2009 in its preliminary financial results for the 12 months to 30 June 2009. In future, increases in pensionable salary will be limited to the lower of basic salary increases, inflation or 2.5% per annum. Indeed, the "significant pension credit" arising from the planned change to the DB scheme was the one bright spot in an otherwise bleak financial picture painted by the firm in its results (reported revenue fell by 53.6% in 2008/09). Redrow's actuary calculates that a "pension curtailment credit" of £14.5 million will result from the capping of increases to pensionable salaries.
The preliminary company results for 2009 show a £2.8 million surplus in respect of the final-salary pension scheme (under the accountancy standard IAS19), compared with a £0.2 million deficit in 2008. The saving produced by the capping does not directly affect the company's financial position, but is reflected in reduced liabilities in the DB section of the group's pension scheme, which is closed to new entrants. There were also redundancies over the year, which led to a significant fall in the active membership of this part of the scheme, down from 240 in July 2008 to 157 by the same month this year.
The Redrow capping move is a response to the financial pressures facing the final-salary section of the pension scheme and the continuing challenges facing the construction industry during the recession. A triennial valuation of the DB section of the scheme as at 1 July 2008 was concluded in July this year and highlighted a familiar toxic cocktail of falling interest rates and investment returns on the one hand and rising life expectancy on the other, making future funding "potentially … unsustainable", according to Redrow's preliminary results.
Archant, a magazine and newspaper publisher, has also announced plans to consult with active members on introducing a cap in its closed DB scheme. The proposal is to cap final pensionable salary at the current level, and to allow active members to make contributions for defined-contribution (DC) benefits on salary above the capped amount in future years. The final-salary scheme closed to new entrants 11 years ago and has fewer than 270 active members, compared with the DC option, which has 900. It had liabilities of around £150 million at the end of December 2008, and was 71% funded, with a shortfall of £43 million. The company said the proposed changes will not affect accrued benefits.
Dr Deborah Cooper, a principal at Mercer UK specialising in pensions research, says that growing numbers of employers sponsoring closed final-salary schemes, which still provide future accrual to active members, are looking to cap final pensionable pay as a way of controlling costs. Also, organisations see it as a way of tackling a growing gap between members of DC and DB pension arrangements within the organisation: "Employers are keen to avoid creating two tiers of pension scheme members - one group where the risk of deficit is picked up by the employer and the other which has to pick it up themselves - and are looking at how sustainable it is to continue providing future accrual in closed schemes."
The final-salary schemes currently proposing to introduce a cap intend applying it to future service only, which means any impact on the liabilities (including a deficit) will be minimal, Deborah Cooper explains, particularly if the scheme has been closed for some time, as the majority of the liabilities are wrapped up in accrued benefits. However, she points out, capping does aid the management of ongoing costs and cash flow.
