Analysis
By Andrew Verity BBC personal finance correspondent

Trade unions are preparing to challenge the British Government over pensions amid mounting concern that final salary pension schemes are under threat - in the public as well as the private sector.

Unions will table a resolution at Labour's annual party conference urging the government to review its stance on pensions, as increasing numbers of employers close final salary schemes to new members.

The unions say they are determined to hold ministers to promises made a year ago that pensions would be protected.

At the top of their agenda is protecting the rights of workers who are switched from one employer to another.

Partial protection

Under so-called Tupe regulations (transfer of undertakings, protection of employment), pay and pensions are protected when employees transfer from the public to the private sector.

However, pensions are not protected when a private company outsources one of its functions to another private company.

Already Amicus-AEEU, the engineering union, is preparing a ballot of members working in the East Midlands for Powergen, the privatised electricity generator.

Powergen is set to outsource the service and maintenance of its distribution network in the East Midlands to a number of companies, some of which have refused to set up pension schemes matching those workers can already join.

Union fears

While the trade and industry secretary Patricia Hewitt said at last year's Trades Union Congress (TUC) conference she thought this wasn't right, unions now fear the government may back away from plans to change the law.

After the conference a consultation was held on how to change the law.

But it closed in February and unions have heard nothing since.

"The concern is that it's now causing problems with plans to privatise, so it's being quietly dropped," one union source said privately.

Closed doors

Separately, unions have been alarmed by signs that the government may follow the private sector by closing schemes to new members or watering down the benefits.

Unison, the public sector union, says its members are increasingly prepared to take action to defend pension schemes.

Fears that the schemes will be undermined have been fuelled by comments from the Deputy Prime Minister's office, saying the Local Government Pension Scheme "did not adapt well to current needs of local authority employment."

Striking success

Confidence that industrial action can prevent schemes being closed has been boosted by the first strike to be held purely on the issue of the closure of a final salary pension scheme - which ended in a union victory.

Earlier this week Caparo, the steel manufacturer whose chairman is the Labour peer Lord Paul, brought a strike by steel workers in Scunthorpe, Wrexham and Tredegar, south Wales, to an end.

The firm brought in a new pension scheme with benefits based on final salary to replace the old version which is being scrapped.

Ken Penton, of the ISTC steel union which co-ordinated the strike, said: "In two of Caparo's sites, staff only found out their pension scheme was being closed by reading it on the noticeboard.

"And even the trustees [nominated by staff] only found out by letter - they never discussed it with them."

Make them listen

After the announcement in March, members threatened industrial action.

"We had to do that just to get them to consult us. That was just to get management to the negotiating table," said Mr Penton.

Caparo's old scheme resembled many similar final salary schemes - widely acknowledged as the best sort of scheme. Staff were given a defined benefit linked to their final salary.

Each year members accrued one sixtieth of their final salary.

If they worked for 40 years, they would have two-thirds of their final salary. So a member of staff who had worked for 40 years and finished on a salary of �30,000 would receive an pension worth �20,000 a year, protected against inflation.

Tighter money

After initial talks, Caparo offered a scheme based on hundredths instead of sixtieths.

So after 40 years of service, members would have two-fifths of their final salary, giving the same member of staff a private pension of �12,000, rather than �20,000.

The union declined. Action was to be stepped up to two-day strikes when Caparo made another offer.

Although this was still only based on 90ths, rather than 60ths, another arrangement meant that many members would end up better off than before.

This was the fact that the new system would be "contracted in" rather than "contracted out".

In Britain's pension system, employers who set up pension schemes can "contract out" of Serps, the state earnings related pension scheme (soon to become the state second pension).

The national insurance contributions that would have gone towards Serps go into the employer's pension scheme instead, in the form of a rebate.

In exchange, the employer promises those rebates will produce a benefit similar to what Serps would have provided.

Balancing act

Most employer's pension schemes are contracted out. But it is becoming increasingly difficult for them to replicate the benefits of Serps - not least because their investments on the stock market are performing poorly.

When a scheme is contracted in, it no longer has to provide the benefits Serps would provide - but simply acts as a top-up.

Members return to relying for a large part of their pension on the state.

In the Caparo deal, the new scheme is based on ninetieths - but it is contracted in. A member who worked for 40 years would have forty-ninetieths - or 44% - of final salary.

This time the pension private pension on a final salary of �30,000 would be �13,333 - still much less than the �20,000 under the previous scheme.

But Serps would make up the difference, taking the pension back above the �20,000 thresshold.

If the deals like Caparo's became more common, the burden of pension provision will be shifted heavily away from employers and towards the state.