Companies closing final salary pension schemes to their employees may be accused of playing Scrooge, but in 2004 few firms will be able to afford such generous pension schemes
Contractor YJL has joined a growing list of construction firms that have closed their final salary pension schemes. Parent group Montpellier announced this week that it its final salary scheme will only be on offer to staff retiring within the next five years.

Montpellier blames falling stock markets, new accounting rules, and low interest rates and inflation for the decision, which has bumped up the cost of running the schemes. It currently has a deficit of £7.8m on its final salary scheme, a rise of 65% on last year.

Companies across all industries are suffering. Many dipped into their pension funds when shares were riding high in the mid-nineties and made no provision for a fall in stocks. Over the last two years the stock market's poor performance has reduced the average value of pension funds in the UK by 15%. It is estimated that UK firms are facing a £100bn pension deficit: BT's shortfall alone stands at £4bn.

In an effort to free themselves from the financial burden many companies are transferring staff to safer money purchase schemes. This moves the risk of pension provision to the employee. Companies still contribute towards pensions, but if plummeting stocks erode the value of the fund the employer does not have to make up the shortfall.

According to a Building survey 15 of the top 25 contractors have now ended their final salary schemes. More are likely to follow, as in June 2003 a new accounting rule will force companies to reveal the state of its pension fund. This will be difficult to contemplate for companies with large deficits and they will look to wind up their final salary schemes before then.

Firms should act quickly. In the recent green paper on the future of pensions the government said it would be looking to offer greater protection to workers in final salary schemes. A new regulation will replace the government "minimum funding requirement" which was introduced in 1997 to ensure that firms kept underfunded schemes topped up.

The new legislation will make it harder and probably more costly for a firm to wind up a final salary scheme. Until the rules change there is likely to be a rash of companies abandoning final salary schemes for money purchase pensions.

The new schemes won't necessarily be any cheaper but they will offer companies certainty in the long run. And with the commercial sector facing the chill winds of a recession, companies will be keen to put a lid on their spiralling pension costs.