Savings

Turmoil in the equity markets this week has pushed the UK pension deficit up by £20 billion to £70 billion. According to estimates from accountants PriceWaterhouse Coopers, deficits have more than tripled this year, sounding the death knell for the traditional final salary-type pension scheme that is now on its last legs, at least in the private sector.

Marc Hommel, pension’s partner, at PWC, said:

UK pension schemes are facing the triple pressure of declining equity values, lower income from dividends and increasingly cash-strapped employers.

It is no surprise that companies and their pension trustees are engaging with a greater sense of urgency to better understand the risks they are running and the actions needed to address unwanted risk.

Final salary pensions, which guarantee retirees a pension equivalent to a proportion of their leaving salary, determined by the number of years they have worked for a company, are already on the verge of extinction.

Four out of every five final salary schemes now shut to new employees.

Instead, most employers now offer money purchase schemes, which come with no guarantees. The pension paid out on retirement depends entirely on the performance of the stocks and shares in which the individual and employers contributions have been invested over the years.

Findings by Aon Consulting revealed that in the last year the number of private sector schemes open to new members dropped from 27% to a record low of 17%.

Laith Khalaf, of financial adviser Hargreaves Lansdown (LSE: HL.L - news) , said:

Employers offering final salary schemes will be looking at their pension books and thinking how they can unshackle themselves from this millstone. Volatile asset values is just one challenge they must face alongside increasing longevity and inflation.