Pension schemes close
The Michelin man faces a slimmer retirement after this week’s news that the French tyre company is ending its final salary pension scheme. The closure will affect 4200 workers in the UK at three tyre factories and the ATS garage chain. The scheme closed to new members three years ago. Now it says all existing members will be transferred to a ‘money-purchase’ scheme from 1 January 2009. These schemes make no promises about the pension that will be paid.
Michelin is just the latest in a string of companies closing schemes that promise a pension related to earnings. Two weeks ago the new owner of the emergency services radio firm Airwave O2 announced the end of its scheme just an hour after it bought the company for £2 billion. Debenhams, the AA, and W H Smith are three high profile businesses which have closed their schemes. The recent take-over of Boots by private equity firm KKR has led to fears that its pension scheme will also be shit down affecting 70,000 workers.
Michelin blames longer life (of employees not tyres) and – despite putting in an extra £100 million recently – a continuing deficit in the scheme of £250 million
Companies normally close down these schemes to save money. It costs a great deal to guarantee a pension related to your salary at retirement and pay it for life. The average amount paid into a final salary scheme by companies is 16.4% of earnings with another 4.6% by the member – a total of 21%. But once the scheme switches to a ‘money purchase’ scheme – where the contributions are just saved up in an investment account and which gives no guarantee of the final pension – average company contributions fall to 6% of pay and 3% from the member, a total of 9%. Less than half the money going in means less than half as much coming out at retirement.
There’s no magic in final salary schemes – they just take a lot of money. If companies put the same amount into their replacement we could all look forward to a better retirement.
Paul Lewis
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