BP and Barclays to close pension schemes

BP is reported today to have decided to close its UK DB pension scheme to new entrants from next April. New entrants to the company from that date will be offered membership of a defined contribution scheme which will have a member contributions structure of a minimum 5% up to 15%. The existing 12,000 members of the DB scheme will continue to accrue service in the scheme.

Connect members will be aware that BT took similar steps in 2001.

At the same time, Barclays has launched a statutory consultation exercise over its proposal to close its scheme to future service from December this year, having closed it to new members in 1997, and to offer existing scheme members membership of its cash balance scheme instead (a cash balance scheme offers a defined benefit related to the employee’s salary and length of service but which provides them on retirement not with a pension but with a cash sum with which to purchase an annuity). Unite condemned the move as a ‘break in the promise by Barclays to its workforce that the company will not put profits before people’ and urged the company to reconsider the proposal.

The news from both companies is especially disappointing given that there are increasingly few ‘blue chip’ companies now with open defined benefit schemes, and given that the BP scheme is reported to have at least an accounting surplus.

The reason for the closure in BP’s case is a decision to hedge the company against the risks of DB provision, on the grounds that the ‘growing number of pensioners [39,000 current pensioners plus 18,000 deferred pensioners] are being supported by a static workforce, and there is a belief that there will be difficulties in the future to fund the scheme.’

Mature, or increasingly mature, schemes do need to adopt different investment profiles but – providing actuaries have done their sums with a reasonable degree of accuracy – a pension scheme is not a pyramid scheme dependent on an increasing number of new members coming into the scheme. Occupational pension schemes are funded on the basis of the likely liabilities into the future of the current members and their dependants, so there is no reliance on the contributions of new members to fund the benefits of the established members.

The news of the prospective loss of major DB schemes is sad news by itself and sends further signals as regards the outlooks of those that remain. The increasing nationalisation of the UK’s private pensions system is an unedifying picture, as much as it is little understood just how much this will cost future generations. The CBI’s reinforcement a couple of days ago of the call for greater government action to preserve defined benefit provision in the UK is correct; the disappointment is that it has come at a time when the political structures of the country are more preoccupied with internal issues than with launching policy initiatives which meet the very real needs not least of UK workers.

Edited to include information about the Barclays closure consultation.