Not a week goes by at the moment without a news reference to the demise of private sector final salary pension schemes. The reasons for their demise are not always conveyed well. Here are 13 good reasons:

1. We are living longer and so scheme liabilities are increasing well beyond original expectations.

2. There is no way to accurately predict the liabilities of the scheme so they are actually a danger to the parent company.

3. Underfunding in the past (and present) by the employer has led to deficits so it is clear that the costs are higher than many employers would like or can afford.

4. Poor investment returns have created or increased deficits.

5. Misguided and risky investment strategies formulated during boom years have created deficits and a lack of correlation between liabilities and investments.

6. 1997 Budget imposed a draining tax credit on dividends.

7. FRS 17 rules which made employers put (burgeoning) pension liabilities on the balance sheet for all to see.

8. Three-yearly statutory funding statements were valued at the end of March 2009 when both the stock market and gilt yields were low (the latter encouraged by Quantitative Easing) brought the scale of the problem to everybody’s attention.

9. The difficult economic environment has resulted in companies choosing to pay down liabilities and remove risks such as final salary pensions.

10. Cheaper alternatives exist – money purchase schemes are cheaper to run and the risk is all on the side of the employee rather than the company.

11. It’s not fair to have a scheme which is closed to new members but still subsidised by non-members of the scheme.

12. There is a growing trend of closing final salary schemes and this makes it easier for others to follow suit without losing staff or gaining bad publicity.

13. If a lot of schemes go bust there’s every chance the Pension Protection Fund will not be able to compensate all of the members, resulting in a huge lack of faith in this type of pension.

Don’t mourn for the death of final salary pensions – they are a huge and unpredictable liability that has been shown not to work. And don’t get me started on public sector pensions…n