Public & private

Pensions were big news in 2003. their increasingly high media profile is, of course, a result of continuing problems with provision.

Arguably the biggest cause of these problems has been three consecutive years of stock market falls. These have slashed the value of pension funds, creating an expectation gap between what members want and what their schemes can provide.

The stock market freefall has led to many employers closing their final-salary schemes, opening instead new money purchase pensions. Such a move causes problems of its own: there are administrative issues to deal with, financial balances to achieve, not to mention the task of communicating changes to scheme members. But invariably, the move to money purchase provision continues.

Across UK industry, the majority of final-salary schemes – perhaps as many as 80% – are now closed to new entrants. Increasing numbers are also changing future benefits for existing members.

However, across the registered social landlord sector, the picture appears to be quite different. Far more final-salary schemes remain open.

One explanation given for this difference is that RSLs – due to the nature of their business, ownership and management – are more "paternal" employers, therefore more likely to retain final-salary pension schemes. However, some commentators say cost stability is vital to the sector, therefore volatile final-salary schemes cannot be sustained.

RSLs are seen as more ‘paternal’ employers, therefore more likely to retain final-salary pensions

Another factor for the sector's stance could be the pensions accounting standard, FRS17. The standard has been avoided by members of some of the industry-wide schemes in which RSLs participate. This has certainly enabled association pensions to stay off finance directors' radar screens for longer, but the loophole is far from universal.

In terms of whether many RSLs will retain final-salary schemes, it's probably too early to say. As consultants, we are certainly seeing increased interest from many organisations in switching away from final-salary schemes. This suggests that there may be considerable change still to take place.

Some commentators have suggested that final-salary schemes will always be feasible in organisations where staff costs represent a small proportion of overall costs, so that volatility can be absorbed if it is small in relation to other non-staff outgoings.

Analysis of published accounts suggests that for an "average" RSL, salaries represent about 15 to 20% of turnover. Across other sectors of UK industry, a range of between 10% and 60% can be found.

Although this shows a favourable comparison, these figures alone do not make the case for maintaining a final-salary pension scheme.