Why are employers closing pension schemes?

There has been much talk of a pensions crisis in recent times. Many employers have closed their pension schemes to new members. Some have even closed their final salary schemes altogether.

There can be no doubt that some schemes face real difficulties. There are a number of reasons.

First there was a sharp fall in the value of stock markets. Although they have recovered somewhat over the last year or so, many schemes did lose a significant amount.

Secondly pension schemes are not allowed to run a deficit. Until September 2005 schemes have to meet something called the Minimum Funding Requirement (MFR). If a scheme's actuary says that it cannot meet its future obligations then the employer needs to make good the deficit or the scheme has to find a way of reducing its obligations.

The MFR rules were strongly criticised for sometimes exaggerating the likely problems a pension fund might have. This was therefore replaced by a "scheme specific funding" test in September 2005. This requires the scheme actuary to work out whether a scheme can meet its future obligations to pay pensions. The new rules make it easier for some schemes to pass the test, but it also means that if your scheme fails the test then there is a real problem.

One factor that is making these tests more stringent is the longer life expectancy of people retiring today or likely to retire in the future.

But you should not always believe employer cries of pain. Many employers took long contributions holidays, on the back of unsustainable stock market bubbles, when they should have been building funds up against more difficult times.

There has also been pressure from the City and investors to cut back pension benefits. Too many of them now see shutting a pension scheme as a sign of a lean and mean management prepared to take costs out of the business.

Boardrooms are not just trying to deal with current problems but save money in the future. Frequently they have not only closed a salary related scheme to new members, but cut back their contribution to the replacement money purchase scheme. Employees therefore lose out twice. They now have to shoulder all the investment risk, and have less money going into their pension.

If your employer is talking of cutting back on pensions then you need to work out how much this is a real problem - or how much of a boardroom trend. After all a cut in your future pension is little different from a cut in your wage packet.

If it's a real difficulty, it's better to negotiate changes that can save a good scheme than close it altogether.

Examples of this that have been agreed include:

• higher employer and employee contributions
• a reduction in benefits, such as ending early retirement schemes or a lower accrual rate
• replacement of a purely salary related scheme with a hybrid scheme that includes both salary related and money purchase elements

This is not to say that employer moves to reduce pensions benefits should be accepted without question, but when staff accept there is a real problem discussions should start with how to save the pension scheme, not about closing it.