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BP yields to pressure and closes final salary pension scheme to new members

June 3, 2009

BP, the oil and gas company, is preparing to shut its $18 billion (£11 billion) UK final salary pension scheme to new members, in the latest blow to generous retirement provision for Britain’s workforce.

BP was one of the few FTSE 100 blue-chip companies to maintain a final salary scheme for new recruits. These schemes offer retiring employees a pension based on their final salary at retirement.

The group told the 69,000 members of its UK pension fund yesterday that, from next April, new employees will be offered a “money purchase” scheme. These riskier schemes offer a payout based on the performance of investment markets.

BP will contribute up to 15 per cent of a worker’s salary to the new scheme, with a minimum of 5 per cent going into the fund. Staff can choose to take the difference in cash. It will also offer free health insurance to staff, a first for the company.

A BP spokesman said that the move was part of efforts by Tony Hayward, the chief executive, to reduce overheads. By shutting the scheme to new joiners, BP will eliminate some of the financial risks of paying out generous pensions as life expectancy continues to increase.

He said that BP should begin to make significant savings after ten years. Mr Hayward added that the pension scheme was fully funded and capable of meeting all its obligations to pensioners. Existing scheme members will be unaffected.

BP’s scheme has 12,219 serving members, 19,939 deferred claimers and 38,974 pensioners and dependants.

Royal Dutch Shell, BP’s main rival, continues to offer a final salary scheme to its UK workforce, but BP’s move is likely to prompt fresh speculation that Shell will follow its competitor’s lead.

British companies have been shutting their final salary schemes in recent years as they struggle to maintain payouts to a workforce with far longer lifespans and as tumbling investment markets erode the strength of their schemes.

In April Aon Limited, the British element of Aon Corporation, the American pension consultant, halved its contribution level to its money purchase scheme in a cost-cutting measure expected to spark a rash of copycat moves.

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