Why final salary schemes are bad for you

June 3, 2009

REUTERS — Neil Collins is a Reuters columnist. The views expressed are his own —

So you’d like to work for BP? A fine company, recognisably the same business as half a century ago, and likely to be around in half a century’s time — yup, it’s a fine choice for a career.

It’s going to be an even better one for the ambitious twenty-something, because no-one joining after next March will be able to join its final salary scheme.

These schemes are comfort blankets for pen-pushing civil servants (and, of course, snouts-in-trough British MPs) so if getting into one is the height of your ambition, then perhaps BP can manage better without you.

Schemes where the employer undertakes to pay a pension linked to your salary when you retire, whatever that is, are dying, and quite right too.

Imagine you had joined BP at 25, and at 45, stuck in a cul-de-sac inside this vast company, you got an attractive offer from a small competitor.

You’d love to do it, but matching the current value of your accrued pension rights would ruin the prospective employer. You must either walk away from your biggest asset outside your house, or resign yourself to 20 more years buried inside The Organisation.

These schemes damage the employer too. The cost of shedding our 45-year-old against his will is high, because he remains a deferred member of the scheme.

From next year, BP’s recruits will be invited into a defined contribution scheme, where employer’s and employee’s contributions are used to buy a growing pool of assets which belong to the employee. The employer has no future liability to fund, and the employee can consider a mid-life career change without penalty.

Of course, ensuring a comfortable old age is expensive, which is why BP expects to contribute 15 percent of salary into the scheme for new employees. Even that might not be enough, but it will put the individual, rather than the employer, in charge of his own financial future, and nobody ever claimed that freedom was cheap.

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