Three-quarters of UK final salary pension schemes will close within five years, according to the head of one of the City of London's leading pension fund mangement firms.

Tony Watson, chief executive of fund management group Hermes, has urged the government to ease the tax burden on pension funds to support final salary schemes.

My estimate is that in five years time three quarters of all defined benefit (final salary) pension schemes will have closed,

Tony Watson Hermes chief executive

The dire warning comes a matter of days before the government releases its Green Paper on the future of UK pensions.

Additional pressure will be heaped on pension policy makers by a City watchdog report which reveals that personal pensions are declining in popularity.

Closure countdown

Mr Watson told BBC Business Today that the end was in sight for most final salary schemes.

"My estimate is that in five years time three quarters of all defined benefit (final salary) pension schemes will have closed, at least to new entrants and possibly to new contributions as well."

When asked why companies were abandoning their final salary schemes, Mr Watson said that the pension funds were overburdened by taxes.

In particular, Mr Watson believes the government's 1997 decision to levy a tax on dividends earned by pension funds was a watershed in making final salary schemes less viable.

"Tax is very important. Removing �5bn plus a year was a much bigger factor than was recognised in 1997," Mr Watson told BBC Business Today.

Payment holidays

Trade unions, though, have dismissed the arguement that the tax on dividend credits is to blame as a red herring.

In their view, employers' decision to take substantial holidays from contributing to schemes during the years of strong stock market performances in 1990's has made funds vulnerable to falls in the stock market.

Inland Revenue figures recently revealed that during the boom times for stock markets employers took payment holidays worth �18 bn.

The view that prospects for personal pensions schemes are not looking bright is supported by new research from the Financial Services Authority (FSA).

The FSA has found that the number of people allowing their personal pensions to lapse within the first four years of the policy term has increased by a third since the mid 1990's.

The watchdog blamed negative publicity - following several mis-selling scandals - for the shift away from personal pensions.