Facing a £2bn deficit, the BBC risks dividing its staff between final salary and equity schemes. But there is another way

Lucy Adams, the personnel boss at the BBC, and Bectu's union officials face a historic moment in the life of the corporation – divide the workforce, as most other big corporations have done, usually with union compliance, or keep everyone on the same terms and conditions. The proposal today recommending staff joining the Beeb should enter a cheap pension plan that will pay only a fraction of the existing final salary scheme follows the crowd mentality in corporate life that often looks for the easy way out. But it is the wrong answer.

The BBC says it has no choice now that the deficit in the final salary scheme has jumped to £2bn. No doubt, that figure reflects the dire position of the fund, though pension accounting is notoriously volatile and can throw up the most bizarre results. No doubt, also, the BBC management and trustees feel obliged to act and act quickly. The pension regulator is probably on their backs, insisting that "something must be done" to reduce costs. Ministers, sharpening their knives on the sidelines, may have signalled that a pension scheme with a monster deficit must be dealt with before talks on funding can make any progress.

These pressures are real, but should be resisted by the corporation and the union. The route out of the problem is the "Tesco solution", not the chipping and slicing of benefits in the underhand way the BBC proposes. Back in 2003, when it was obvious to everyone in the pensions world that final salary schemes were ridiculously expensive, Tesco approached its union, Usdaw, to strike a deal. Life expectancy was rocketing. The stock market had crashed for the second time in three years. Make-believe estimates of investment returns were downgraded. Move to a career average scheme said Tesco and the business will resist shareholder demands for a wholesale switch to a cheaper scheme reliant on stock market gains.

Career average schemes maintain the guarantee of a fixed pension provided by the employer, but are based on an average salary calculated over a staff member's whole working life. The main losers are usually men who stick with a company for 40 years with no breaks for kids and finish their careers in management. The low-paid years are ignored under a final salary scheme, which pays a retirement income pegged to the worker's last pay cheque. Checkout staff, who start and finish their careers on the same salary plus whatever wage rises they receive, lose very little under a career average scheme.

Usdaw was derided as a weak union throwing away a vital benefit. But who is having the last laugh? All Tesco staff are still in the scheme, when almost every other employer has destroyed all their employees' pension guarantees. Staff at the major banks, insurers, pharmaceutical companies, mobile phone companies and manufacturers have closed their schemes. Staff in these businesses would kill for a career average scheme.

Today, there are a couple of million people still paying into final salary schemes while the rest of the 29 million-strong workforce either have a stock market pension or nothing at all. How did we get to this position?

Self-interest played a part. The people who sat round the negotiating table were, in the main, directors in the final salary scheme and trade union officials under pressure from existing staff – and the 50-plus year-old shop stewards – to protect their benefits. It meant a deal emerged that protected current union members, who could remain in the final salary scheme, but which cast aside new staff. They became second-class citizens.

Sitting at their desks, they could turn to a colleague doing the same work, but being paid 30% more than them. That's the difference in the cost of a final salary versus a stock market scheme. Over a working life, it is a colossal difference and is reflected in retirement incomes of 66% of final salary, as opposed to 20% to 30%, depending on how well investments have performed.

I don't know if Alan Yentob is a member of the BBC pension scheme (many of the best paid in the corporation have their own pensions), but he and his ilk should join with the lower-paid staff and put forward, through their union, a solution that keeps everyone in the same scheme with the same proportional reward.

That will mean sacrifices from the better-paid, so it is unlikely. And given the fact that the BBC has approached the problem by restricting benefits under the final salary scheme with a cap on inflation at 1%, which is designed to disguise the chipping and slicing cuts, trust is likely to be low on the union side. Nevertheless, unity should be the watchword.

Major corporations are only now waking up to the implications of dividing their staff based on pension benefits and the bitterness it creates. The BBC and Bectu owe it to BBC staff to take a different path.

• Proposal would close final salary scheme to new employees and cap contributions to those already paying in
• Industrial action 'a serious possibility', says broadcasting union

The BBC is proposing to close its final salary pension scheme to new employees and cap its contributions to existing members as part of moves to tackle a £2bn deficit.

Zarin Patel, BBC chief financial officer, said in a blogpost today that the proposals would lead to the first major reform of pensions in the UK public sector, where final salary schemes are still common.

The BBC said today it would close its final salary pension scheme, which guarantees staff a minimum pay out in retirement, to new members from December. In a move likely to prove highly controversial, it is also proposing that although staff who already pay into the scheme will be allowed to continue doing so, the amount the corporation contributes will be capped from April 2011.

The decision has been prompted by a dramatic fall in the value of the corporation's pension fund, which is now in deficit by around £2bn, the BBC said today.

It is certain to be hugely controversial and is being opposed by broadcasting unions, which forced the BBC to scrap similar proposals four years ago. Bectu, the union which represents thousands of BBC staff, said industrial action over the proposals was a "serious possibility".

BBC staff are already up in arms about an annual pay offer of a flat-rate rise of £475 for employees earning less than £37,000.

In an email to staff today Lucy Adams, director of BBC People, and Patel, said: "Future salary increases for calculating pension benefits will be limited to 1% per annum. In other words, after this date pensionable salary will grow at a maximum of 1% per year, no matter what actual salary increases an employee receives."

That means the annual amount the scheme pays out in retirement will be dramatically reduced. Final salary schemes pay their members a percentage of the salary they were paid at retirement for the rest of their lives.

BBC employees will be given the option of moving their pension pot to a new defined contribution scheme, which does not give members a set amount each year.

Staff are likely to be dismayed by the move because a generous public sector pension has long been regarded as compensation for the fact that salaries at the BBC are generally lower than those at commercial broadcasting competitors.

"Staff won't see the need to stay if pay is less and the pension is not better [at the BBC] than it is outside" said one insider.

Luke Crawley, Bectu assistant general secretary, said: "We are less than impressed by the BBC's plan to break the link with final salary. We have got a meeting there in pay tomorrow which we are not very optimistic about and the two things taken together mean that industrial action is a serious possibility."

Adams and Patel said that the poor performance of the stock market in recent years, and the fact that people are living longer, had left the BBC with no choice but to act.

"The 2009 interim valuation being published today by the scheme trustees shows that the scheme's deficit has increased from £470m in 2008 to around £2bn," they said.

The BBC will consult on the proposals until Thursday 30 September.

In her BBC blog, Patel wrote that pensions in the public sector is likely to be hit because of pressure on the public finances.

"The BBC is not alone in this – pension schemes in both the private and public sector are facing similarly difficult decisions. John Hutton is leading a review of public sector pensions, and last week the prime minister warned public sector workers that their pensions would be considerably less generous in the future," she said.

In the email to staff, Adams and Patel added that the amount that would have to be paid into the BBC pension fund to ensure it could meets its obligations would have to increase from 3.5% of the licence fee to 10%, "with a possibility of further increases being necessary in the future". "The BBC believes that this level of funding would be unaffordable and would damage our ability to maintain the quality and range of our services to the public."

Today's announcement will be viewed by some as an attempt to curry favour with the coalition government, which last week outlined sweeping public sector cuts in as it seeks to reduce the budget deficit.

The emergency budget unveiled by the chancellor, George Osborne, a week ago signalled the start of a new era of public sector parsimony and BBC executives are anxious to demonstrate they are being financially prudent.

The BBC expects to cut the cost of pension payments by around a third following the changes.

During a conference call with journalists today, Patel said that for every one year that is added to average life expectancy, an additional £35m has to be paid into a pension scheme as large as the BBC's.

Patel refused to speculate on how many of the BBC's 18,000 employees would elect to join the new scheme, describing it as "an issue of personal choice".

Asked whether the BBC was acting to appease government demands for greater fiscal discipline, she said: "Absolutely not … We have been talking about this for a long time." She added that the decision had "nothing to do with anyone else".

But the government is likely to take a close interest in whether the BBC can push the changes through in the hope that it can use them as a model for pension reform across the public sector.

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The BBC plans to close its final-salary pension scheme to new joiners, and restrict its benefits, to stem a £2bn deficit

From: Internal Communications

Sent: 29 June 2010 08:15

Subject: Proposed changes to the BBC Pension Scheme

This email is going to everyone on behalf of Lucy Adams and Zarin Patel

Dear all,

We are writing to you today to give you information about changes we are proposing to the BBC Pension Scheme. The 2009 interim valuation being published today by the Scheme Trustees shows that the Scheme's deficit has increased from £470m in 2008 to around £2bn. The deficit is the shortfall between the BBC's future pension liabilities and the assets it has to fund these liabilities. As an organisation which is paid for by the public, but which unlike much of the public sector operates a self-funding pension scheme, we need to act now to make a number of changes that will reduce this significant shortfall.

The deficit has grown because the Scheme's assets, like those of many other pension schemes have performed poorly due to the global economic downturn. Although financial markets have improved during 2009/10, the investments in the Scheme have not returned to previously expected levels and the outlook for the future remains uncertain.

The 2010 actuarial valuation, due to be published next year, will also reflect the significant long-term trend of pension members living longer than previously expected. This will also contribute to an ongoing increase in the costs of the Scheme and require additional funding. With people living longer, the cost of funding their pensions inevitably increases.

Along with many other organisations dealing with substantial pension deficits, the BBC faces a choice. To reduce the deficit and continue the current arrangements, without making any changes to the Scheme, would require the BBC's contributions to rise from the equivalent of 3.5% of the licence fee to around 10% – with a possibility of further increases being necessary in the future. The BBC believes that this level of funding would be unaffordable and would damage our ability to maintain the quality and range of our services to the public.

So instead we are proposing a number of measures that will reduce the existing deficit and help ensure the Scheme remains affordable and sustainable in the future. We have thought long and hard about the changes that we propose and have tried to balance doing the right thing for staff against what is acceptable to licence fee payers.

The proposed changes are as follows:

The current Scheme will remain open to existing members but close to new joiners from 1st December 2010.

Employees who are currently members of the Scheme will continue to build up benefits under the current structure. However from 1st April 2011 future salary increases for calculating pension benefits will be limited to 1% per annum. In other words, after this date pensionable salary will grow at a maximum of 1% per year, no matter what actual salary increases an employee receives.

We will introduce a new competitive, flexible, defined contribution plan for new joiners. This will give employees a choice over the levels of contributions they make and the BBC will match or better these contributions up to a certain level.

We will give existing Scheme members the choice of joining the new defined contribution plan or remaining in the existing Scheme under the changed terms outlined above.

The BBC will now be consulting on these proposals from Thursday 1st July to Thursday 30th September. The consultation period is an opportunity for you to understand and feedback on the proposed changes. If you want to contribute to the consultation you can click here for more information on how to do this.

It is important that you fully understand the proposals even if you decide not to contribute to the consultation. With this in mind, we've put in place further information and a number of services to support you:

Details of all the proposed changes are being sent out in the post to your home address today.

The myPension site on Gateway has further detailed information on the proposed changes and the new defined contribution plan, including examples to illustrate the changes and a modeller (via myDetails) to help you understand the possible impact on your pension.

The pension service line will be available on 029 2032 2811 (internal 01 22811) from 08:30 to 17:30 Monday to Friday. Or via email at myPension@bbc.co.uk There will be a series of staff seminars hosted by our Pensions team, across the BBC from 5th July. The team will explain the proposed changes in greater detail and give you the chance to ask questions face to face. You can get details of the seminars here.

Later today, all existing Scheme members will also receive an email from Jeremy Peat, Chairman of the BBC Pension Scheme Trustees, with further details of the 2009 interim valuation of the Scheme.

If you have questions about the proposed changes, do please consult the myPension site on Gateway in the first instance and then if necessary the pension service line on 029 2032 2811 (internal 01 22811).

We understand that Scheme members will be concerned about the proposed changes, however by taking action now we believe that these proposed measures will help ensure that the pension benefit structure remains affordable and sustainable for the future.

Lucy Adams

Director BBC People

Zarin Patel

Chief Financial Officer