Final farewell - BP closes DB scheme to new entrants

It used to be thought that sheer, raw competition for talent among the oil majors, which constantly poach each other’s staff, would make them the last bastion for final salary pension schemes. However, BP’s decision in June to close its defined benefit (DB) scheme to new entrants has blown that theory out the water.

On 2 June, BP told staff that, from April 2010, all new joiners in the UK would be signed up to a defined contribution (DC) scheme ­ despite the fact that BP also claims its UK scheme is $1.6bn in surplus, with assets of $18bn. The logic of the closure is hard to fathom; one report quoted a company spokesperson saying the closure would not save money in the short term, but might save " maybe a couple of hundred million dollars", within 10 years.

A tiny upward twitch in the highly volatile price of oil would “save” BP vastly more than that, so actual costs are clearly much less of a factor than the constant, nagging concern over mortality risk, interest rate risk, inflation risk and asset valuation risk.

Following suit
The BP move was accompanied by similar moves at household name companies. On 4 June, supermarket group Morrisons told 4,500 staff their final salary scheme would be replaced by a career-average scheme. Under the new arrangements, which Morrisons is reported to have agreed with staff unions, the new scheme will pay a pension worth around 50% of an employee’s career average earnings.

The thinking behind the move is that a career average scheme tracks inflation, rather than being determined by the vagaries of a final salary. Rival supermarket chain Tesco already operates a career average scheme.

On 3 June, Barclays Bank provoked uproar from unions and staff when it announced it plans to close its final salary scheme. The scheme was closed to new members as long ago as 1997, but now the proposal is to switch everyone to a DC scheme, with existing pension entitlements being frozen.

The scheme is reported to cover 247,000 people, including 51,000 existing pensioners, 57,000 current employees and 139,000 deferred members (people who have left the bank, but are not yet retired).

The final straw in Barclays’ case appears to be the appearance of a £2.2bn deficit following the financial meltdown which wiped billions off scheme assets across the UK and around the world. In a letter to staff, Barclays CEO John Varley warned that, unless the scheme was changed, the bank’s ability to stand behind its pension scheme into the future would be put at risk.

Fujitsu Services, the IT services company, had announced in May it was closing its final salary scheme in a move that impacts around 4,000 staff. The scheme was closed to new entrants in 2000. Fujitsu is in the process of starting the mandatory 90-day consultation period with staff over the closure. The company called the move "regrettable, but a prudent step to enable us to manage the pension risk".