THE pensions crisis will deepen in Scotland this weekend when more than a thousand oil processing workers at Grangemouth are due to walk out on strike over proposed changes to their pensions.
The move is a significant one, as the oil industry was
thought to be among the last bastions of generous final salary pensions, and one of the few sectors rich enough to be able to afford them.
However, Grangemouth's owner Ineos stresses that as a 'downstream' operator (involved with post-production oil) rather than an 'upstream' one (exploration and production), its costs are high and the rewards lower. Furthermore, the company says it needs to invest £750m to secure the plant's future, so savings must be made.
A senior actuary, Donald Duval, has warned that the development illustrates the extent to which no employee can any longer consider their salary-linked pension as safe. Duval, chief actuary at Aon, predicted: "In the long term, no group of employees can buck the trend or be singled out for special treatment; not the oil industry, public sector employees nor politicians."
The 1,350 Grangemouth staff are angry about plans to rewrite their pension provision because they claim the move is unnecessary. Ineos is proposing to close its scheme to new employees and move them instead to a money purchase arrangement, which is generally considered inferior. Existing employees will be forced to contribute 6% of their salary to the scheme, which was non-contributory for many, and the retirement age will rise to 65.
But the union Unite claims the company is not under financial pressure to reduce pensions costs, because the scheme has a surplus of £24m. Its assets are valued at £249m, covering £225m liabilities.
The company counters that the pension is currently costing Ineos 25% of its wages bill and it cannot afford to continue on this basis.
But a spokesman for Unite said: "However you look at it, this is a 6% pay cut for our existing members, which is completely unnecessary. The scheme does not suffer from a deficit. It has plenty of money. It is simply about cutting costs for the employer. Other schemes which have closed have been in shortfall and nursing black holes. This is not the case here."
Employers and unions met for two days at Acas last week, but the talks broke down despite Ineos effectively taking all its pensions proposals off the table.
The Unite spokesman argued: "The company says it has taken the proposals off the table, but this is simply about renegotiating. They have not gone away. They are determined to close the final salary scheme to new members and we see this as the thin edge of the wedge. The next thing will be closure for existing members."
Duval believes the unions have probably left it too late to fight the tidal wave of scheme closures, and predicts more pensions will come under pressure.
He argued: "If the unions wanted to stop this trend they should have fought bigger battles sooner. Final salary schemes will continue coming under pressure, not least public sector schemes.
"The gap between private and public sector pensions is widening and at some stage this problem will have to be faced up to."
However, without substantial employee investment, future staff will be poorer in retirement. Pensions experts at Hargreaves Lansdown said that contributions of more than 26% of annual salary would be needed to provide a pension equivalent to Grangemouth's current arrangements.
Meanwhile, the Scottish Parliament has asked Faculty of Actuaries President Stewart Ritchie to act as an independent expert if both sides agree to carry out a study to clarify the issues which are in dispute.
The offer has been made to the company and the union, and Ritchie said he is ready to step in the moment they indicate his service might be of value.
Ten tips to help soften the blowIf your employer threatens to close your pension scheme:
Explore all options and negotiate hard to achieve the best terms you can.
Any guarantee is better than none. If your employer is considering scrapping your final salary pension, try to persuade him to opt instead into either a career average or hybrid scheme.
Be prepared to increase your own contributions to protect your salary-linked pension.
Resist moving to a defined contribution scheme, because you will take all the risk of adverse stock markets and annuity rates. But if there is no alternative negotiate the highest contributions you can – a 15% salary contribution should provide a salary of slightly less than half retirement earnings.
Work longer.
Move to a smaller house to free up cash.
Keep an eye on how much you will get from your state pension from the Pension Service. A forecast is available from their website.
Read annual company statements carefully to monitor how your pension is performing.
If you are looking at a shortfall when you add state and company pensions together you must increase the amount you save.
Boost employer contributions further by asking for salary sacrifice arrangements. This can save the employer significant National Insurance contributions.
From the envy of the world to a basket caseBRITAIN'S private pensions were once the envy of the world. They were popular with employees, holding out the expectation of a comfortable retirement funded by a pension based on your earnings during your working life, writes Teresa Hunter.
Successive governments liked them too, as it enabled them to keep the state pension much lower than in comparable developed economies.
However, the cost of these pensions soared as we all began living longer, and companies were left wondering how the promises could be met. The final nail in the coffin came with the decision by Chancellor Gordon Brown to increase the tax paid by these funds by £5bn annually when he scrapped the tax credit they had received to reimburse them for the tax paid on dividends from the shares they invested in.
Since then, four out of five companies have closed their final salary schemes to new members, reducing the number of employees covered by such arrangements to fewer than one million. Recent closures to new members include Unilever, while BAA is currently negotiating over similar plans with its staff.
But having pegged their costs by excluding new employees, companies are turning increasingly to the benefits they are due to pay existing staff. So far this year, thousands of employees have watched their pensions security disintegrate.
At the beginning of the month, Royal Mail stopped future final salary benefits accruing for existing employees, following a similar move by Siemens earlier this year. Rentokil, WH Smith, Debenhams and the Co-op have already closed final salary arrangements for current staff, as will Michelin early next year.
Lucky employees are switched to a scheme which still provides a measure of certainty, where the company and staff share the burden of supplying the pension. This might include a pension based on your average rather than final salary at retirement, or some kind of hybrid arrangement.
However, many find a defined contribution or money purchase scheme as their only pension option. This places all the risk with the employee, and contributions are normally too low to provide anything like the pension paid by a final salary arrangement.
This has led to resentment building in the private sector towards public sector employees who, if this trend continues, will soon be the only workers eligible for a gold-plated pension. Civil servants, teachers and politicians still enjoy the guarantee of a pension linked to their salary, and have accrued a £1 trillion bill for taxpayers in the process.
According to David Craig in his book Squandered, paying the pensions of retired state employees is costing taxpayers £20bn each year, compared with £17bn saved towards their own pensions annually. And 20% of our council tax now goes directly to pensions.
Nobody's fuelled: Ineos offers a far poorer deal INEOS employees enjoy a non-contributory pension, paying two-thirds of final salary at 60 after 40 years' service. They can take a pension at 55 after 30 years with the company without any actuarial reduction, writes Teresa Hunter.
Alternatively they can contribute to enable their pension to accrue at a faster rate. A 15% of salary contribution will allow the pension to accrue at one-35th of final earnings for each year worked, allowing retirement after 23 years; 10% gives a pension after 26 years; 5% earns a pension after 30 years; a 3% contribution earns a pension after 34 years and 2% earns a pension after 36 years.
Any pension is based on salary at retirement, with a two-thirds spouses pension should the employee die. Those on the non-contributory scheme currently enjoy a three times salary death-in-service benefit.
Under Ineos proposals, the scheme will be closed to new members, who will instead be offered a defined benefit arrangement.
For existing employees, past service will remain unaffected and pension already accrued will earn a percentage of an employee's salary as currently.
However, employees on the non-contributory scheme will have to pay 6% of their salary towards its costs. Those already contributing will also have to pay an extra 6%.
Ineos also plans to scrap the options for a full pension to be built up after 23 or 26 years. The other options remain.
These new contributions will be phased in at 1% a year from 2009; 2% in 2010 and 6% in 2014.
The pension will be based on an average of final three years' salary, not earnings at the point of retirement.
The retirement age is effectively rising to 65. Pensions will be cut for early retirement. However, this too is being phased in. The over-50s could still retire at 60; those aged 45-49 at 62; age 40-44 at 63; aged 35-39 at 64. Only members currently under 35 will have to wait until 65 for a full pension.
Death in service benefit will be increased to four times salary for all.
A defined contribution scheme for new employees offers an employer contribution of 5% of salary, against an employee's 2%, giving a 7% total, which would not provide much towards a pension.
However, the company will match a further 4% employee contribution. Yet even this would only provide a pension of roughly 40% of final salary for a 30-year-old who began saving today and retires at 65.
