Pension worries: An increasing British concern

According to the new head of the National Association of Pension Funds (NAPF), Terry Faulkner, only one in five UK companies offers its employees the opportunity to join a final salary pension scheme.

Faced with poor stock market returns, increasing life expectancy and poor tax incentives, many companies are drastically reducing their pension liabilities.

But the new-style schemes firms are introducing in place of final salary schemes are often inferior, and transfer investment risk from employer to employee.

Schemes propped up

Final salary schemes are sometimes called "defined benefit" schemes.

This is because the benefits are set out by the employer before a member joins the scheme.

The stock market falls of recent years have meant that the total assets held by many company schemes have shrunk.

I think over the next couple of years there will be an explosion in scheme design which will move some companies back to the defined benefit design again Terry Faulkner, NAPF

If assets fall below liabilities then employers are duty bound to prop up ailing final salary schemes in order to ensure that members are paid their benefits in full.

As a result, many employers have closed their schemes to new recruits, increased employee contributions, or simply wound schemes up.

Lower contributions

Nearly one-quarter of firms have now set up defined contribution or money purchase schemes, which do not guarantee the final pension sum and are therefore less risky for companies.

Contributions into a typical defined contribution scheme are also much lower.

According to a recent Association of Consulting Actuaries report, the combined employee-employer contributions into these schemes average just 8.7% compared with 17.6% paid into final salary schemes.

Key members of the pensions industry are gathering in Glasgow for the annual conference of the NAPF to discuss the state of retirement provision, following the Government's recent Green Paper.

Paper critics

In the Green Paper the government set out a host of measures to tackle the UK pension crisis.

Workers will be encouraged to work longer and save for retirement through a simplified pension structure.

But the Green Paper has attracted some criticism for not adequately addressing the issue of the mass closure of employee pension schemes.

Mr Faulkner told the BBC that employees were unlikely to be moved wholesale to a defined contribution system indefinitely.

"I think over the next couple of years there will be an explosion in scheme design which will move some companies back to the defined benefit design again."