Final salary pension schemes are gradually dying. The first step was to close existing schemes to new members. The second step is to push employees into increasing contributions or face a downgrade in benefits.

The government has helped to kill off the final salary pension as this week’s report from the parliamentary ombudsman shows. Many employees now face the choice between a pay cut today and a better retirement income. Given the preference of most people for “jam today” rather than “jam tomorrow” the pension tends to suffer.

In 2002, Sainsbury offered employees a choice between increasing their contributions from 4.25 per cent of pay to 7 per cent, or moving from a final salary to a career average pensions basis. According to a note produced by pensions consultant John Ralfe for RBC Capital Markets, two-thirds opted for the downgrade.

Earlier this month, Sainsbury announced a further restructuring. Those wanting to stay in the final salary scheme would have to increase contributions from 7 to 10 per cent of pay; the career average employees would have to increase contributions to 7 per cent, the step they avoided in 2002. Those who want to stick to 4.25 per cent will be moved to a defined contribution, or money purchase, scheme.

Companies can hardly be blamed for wanting to reduce the costs of pension schemes which have risen in the face of tax and regulation changes, falling equity markets, lower interest rates and increased longevity.

But spare a thought for employees. As Ralfe points out, defined contribution (DC) plans rely on individuals, not the company, to take all the longevity and investment risk. If individuals had to insure these risks, they would have to pay very substantial premiums. So a move to DC represents a pay cut. Worse still, a second pay cut often occurs when management reduces its contribution, relative to the defined benefit scheme. The typical employer contribution into a final salary scheme is 16 per cent; into a DC scheme it is 6 per cent.

Some people see advantages in DC schemes for employees. They are more flexible and allow investors to avoid the risk of the employer not being solvent enough to meet the pension promise. This risk has been all too real in the past but is now reduced by the creation of the Pension Protection Fund.

But the key is the reduction in contributions. That means lower benefits. Do employees realise this?

Most DC scheme members contribute to a managed fund, often with a “lifestyle” option that switches out of equities and into bonds in the last few years before retirement. Merrill Lynch reckons this approach is riskier than is generally thought; around a third of the time, members end up with a pension lower than if they had owned a risk-free portfolio. Merrill is launching a “target-driven” approach which aims to deliver a return of cash plus 3 per cent and “locks in” that return when certain targets are met.

This is certainly a more sophisticated approach, although perhaps the targeted return is too high. I believe many people would settle for a conservative strategy if it came with a guarantee (or at least, reasonable certainty) they would receive a pension large enough to keep them out of poverty.

The way the current system is going, I fear we will see large numbers of people reach retirement expecting a decent pension, only to be disappointed. With the cost of care soaring (as a reference point, my mother’s nursing care bill has just been increased to £780 a week), that creates the potential for a lot of hardship, and a lot of political discontent.

In December, I reviewed The Little Book That Beats the Market, in which hedge fund manager Joel Greenblatt gave an incisive guide to value investment and outlined an intriguing stock-picking system.

No fund management group (as far as I can tell) has brought out a product based on his method. But James Montier, the iconoclastic Dresdner Kleinwort Wasserstein strategist, has tested the system internationally.

The good news is that over the period 1993-2005, the Greenblatt strategy beat an equally-weighted index in the US, Europe, UK and Japanese markets by an annual average of 3.6, 8.8, 7.3 and 10.8 per cent respectively. It performed even better against conventional, capitalisation- weighted indices.

Greenblatt’s theory was simple; to find companies with high returns on capital and to buy them at a low price. He thus ranked companies by two measures: return (defined as earnings before interest and tax – EBIT – divided by net working capital plus net fixed assets); and valuation (defined as EBIT divided by enterprise value, or EV). The 30 stocks with the best combined ranking formed the portfolio and were changed each year.

If the system is so successful, why don’t more investors follow it? Well, some investors do use a similar approach; so-called quant investors use statistical screens to try to beat the market. However, they do not tend to offer their services to retail investors.

Other investors may not have the patience to follow such a system, which underperformed significantly during the technology boom of 1998-99. Montier suggests following such a model may actually be too boring; once you have allocated your portfolio, what would you do for the rest of the year?

philip.coggan@ft.com