Pension scheme re-alignment has no impact on financial risk, says actuary chief

The discontinuation of final salary pension schemes for employees will not, as many companies assert, reduce financial risk, according to Ronald Bowie, chairman of the pensions board of the UK Faculty and Institute of Actuaries.

Bowie told members of the British Parliament yesterday that the closure of such schemes, a move increasingly prevalent in the UK pensions market in the past 12 months, would make no material difference to a company's financial risk outlook over the next 20 years.

Popular sentiment in the market at present suggests that closing final salary schemes enables companies to immediately tackle liabilities. It is widely argued that in replacing these plans with money purchase schemes, investment risk is shifted from employers to employees.

But Bowie told the House of Commons Work and Pensions Committee that regardless of current and future levels of investment in increasingly preferred money purchase pensions, employers will still have significant obligations arising from defined benefit schemes. As a result, they will be encumbered with the resulting financial risk far into the future.

Bowie added that companies that suggested otherwise were acting in a "scandalous" fashion. If, he claimed, a company discontinued a final salary scheme but continued to invest in equities, any reduction in risk would be largely insignificant. At best, the problem would remain in the background.