The recent decision by the Co-operative Group to close its final salary pension scheme, following the decision by Rentokil Initial to do likewise only a couple of weeks earlier, has proved to be an early New Year wake-up call for employees and trade unions alike.

Final salary schemes that pay a pension linked to length of service and calculated as a percentage of salary at the point of retirement have always been seen by workers as the gold standard of pension schemes, because the amount of pension is secure and not dependent on fluctuations in the stock market. However, employers have, in recent times, found them to be extremely expensive to run - for one thing, we are all living much longer than we used to.

The Co-op is proposing a move to a pension calculated as a percentage not of final salary, but of the average annual salary earned over the course of the employee's career. Other schemes have moved to a calculation based on the average salary earned in the last three years of employment.

Many employers are abandoning the formula altogether for something less certain - moving away from "defined benefit" schemes, where the employee can always calculate what their pension will be at retirement age, to "defined contribution" schemes, under which the employer diverts a proportion of salary, normally between three and five per cent, into a pension plan.

Often, the employee is required to match the employer's contribution.

Those contributions are then invested in the stock market which, as everyone knows, can go down as well as up.

Last year, a survey by the National Association of Pension Funds revealed that as many as 24 per cent of those questioned intended to close their final salary schemes, which is bad news indeed for the eight million or so workers who are still members of such schemes.

* Stephen Elliott is a solicitor in the employment team of North-East law firm Ward Hadaway. He can be contacted on 0191-204 4000 or by email at stephen.elliott@wardhadaway.com

Published: 17/01/2006