Balfour, Carillion, Sir Robert McAlpine, Bovis, Mowlem, Travis Perkins and Rok close schemes to reduce deficits.
Seven major building companies have closed their final salary pension schemes to new employees to avoid tens of millions of pounds being wiped off their balance sheets.
City analysts believe that this is the start of a trend that will result in most major contractors switching to less generous pension schemes in the next two years.
Under accounting changes to be introduced in 2005 any pension deficit will have to be made up from shareholders’ funds, reducing the value of the company.
Carillion, ROK Property Solutions, Travis Perkins and Mowlem announced a combined deficit of £221.9m on defined benefit schemes in annual results this week. Balfour Beatty, Bovis Lend Lease and Sir Robert McAlpine have also altered their schemes because of pension deficits.
All seven companies have switched to defined contribution schemes, which transfers investment risk to the employee.
The value of final salary and defined benefit pensions have been hit by falls in the stock market and bond rates. This has meant that employers have been obliged to make up the deficits. Employees make up any shortfall in a defined contribution scheme.
John Messenger, vice-president of investment bank Morgan Stanley, said most companies in the industry would alter their schemes within two years. He said: “With accounting rules changing in 2005, pension deficits would have to be taken off shareholders’ funds. In theory companies could be reporting no net asset value at all. The risk will now be passed from employer to employee.”
Messenger added that construction firms had been slow to change their pension schemes, as they had been a factor that attracted newcomers into the industry. Now, however, firms had come to realise that the deficits incurred under defined benefit schemes were unsustainable.
Mowlem chief executive John Gains said: “We don’t see the rise in pension costs as a serious issue for Mowlem. We closed the main defined benefit scheme to new entrants at the end of last year. We are taking prudent steps on behalf of the company and pension fund. By closing the scheme we have capped some of our exposure.”
Carillion has closed two of its three defined benefit schemes to new employees from April this year. Chief executive John McDonough said: “Principally, the problem has been that the proportion of pension costs to profitability is quite high.”
Travis Perkins caused a stir by closing its defined benefit scheme to new entrants below management grade. The TUC criticised this decision and more broadly the trend to axe defined benefit schemes. Some unions have threatened industrial action over the issue.