Vodafone plans to end final salary scheme

Vodafone is planning to close its £755m final salary pension scheme to roughly 4,000 of its employees, becoming one of the largest employers to propose such a move in an attempt to control the costs and risks of retirement benefits.

The company sent a letter to staff this week informing them of a consultation exercise, as required by law, ahead of a planned closure of the defined benefit scheme in April.

Vodafone follows several other high-profile employers, including Barclays, Whitbread and Fujitsu, in blocking current workers from earning further retirement benefits that are a portion of their final salary.

The move comes amid a flurry of industry surveys suggesting a growing number of employers – many of whom closed their schemes to new entrants years ago – are now considering shutting defined benefit pension funds to exisiting workers after having sustained heavy losses on investments in the recession.

Low interest rates have inflated liabilities, while rising life expectancy has increased costs.

Vodafone said the company was making the move because of the rising cost of defined benefit pensions. The group plans to “substantially improve” the defined contribution pension programme. “This will result in pension benefits that are fair to all employees, sustainable in the long term and affordable for employees and the company,” the group said.

The change means that current Vodafone employees, particularly younger workers, could end up with much less generous pensions than they would have had if the company maintained its existing arrangement. It will also shift the risks of rising life expectancy and uncertain investment returns from Vodafone to employees.

According to the company’s latest annual report and accounts as of March 31, the assets of Vodafone’s defined benefit scheme had a £60m shortfall compared with its liabilities of £815m.

However, that shortfall was estimated on an assumption of future investment returns that was higher than Vodafone had used in the recent past.

This so-called discount rate, which reduces the present value of liabilities, was 3.7 percentage points higher than its assumed rate of inflation.

A reduction in the discount rate to a spread of 2.4 percentage points, the level in the 2007 annual accounts, would raise the size of the deficit by as much as £350m.