For a start, the schemes, under which employers 'guarantee' their employers a retirement income related to salary, are mostly in huge deficit. BT is the latest company to plug the gap in funding - at the expense of its dividend.
A plugged gap in funding may seem like a problem remedied, but staff in all final salary schemes need to be aware that an employer's guarantee is only as strong as their employer. It is not a sure thing that a scheme kept running will deliver 100 per cent of the benefits.
Even if you are retiring aged 65 today, you are relying on the scheme to pay out for another 20-30 years. And if you are many years from retirement, can you be sure that the company's guarantee will be honoured in 40 or 50 years? In a recession staff are right to have worries about their retirement benefits.
Nevertheless, for most people the security of a 'guaranteed' final salary pension means that they should leave their pensions behind if they change jobs. Under this option, anyone leaving the employer's service with more than two years rights accrued in the pension scheme can have their pension rights preserved until retirement.
However, it all depends how much you have at stake in your former employer's scheme. If you are expecting a higher income than the compensation available if your employer goes bust, consider your options carefully.
The Pension Protection Fund (PPF) offers a safety net for employees in final salary schemes with a funding deficit, when the employer becomes insolvent. However, benefits are restricted in three main ways:
First, the pension is scaled down by 10 per cent for all of those who have not reached the scheme retirement age.
Second, the potential problem for higher earners is that the maximum PPF pension for someone who has not yet retired is £28,742 a year. This is a generous safety net - it would cost at least £700,000 for a 65 year old man to buy a similar pension with a personal pension pot - but it may be considerably less than you are expecting.
Third, increases to pensions in payment are reduced to 2.5 per cent a year for service after April 1997, and to zero for pensions earned before then.
For those whose pensions will not be fully covered by the Pension Protection Fund if their former employer becomes insolvent, transferring into a personal pension or a self-invested personal pension (Sipp) may be more attractive. It's not a perfect solution as you'll take on the investment risk rather than the risk of your employer going bust.
But bear in mind that there is a growing risk that if the PPF hits funding problems it may use its powers to reduce benefits further.
David Trenner, technical director at independent financial adviser Intelligent Pensions, says: "Giving up guarantees in a defined benefit scheme is not usually advisable, but if those guarantees could be slashed when the scheme goes into the PPF, the decision may not be so straightforward. People with service built up before 1997 and those with deferred pensions of more than about £30,000 per annum need to consider their options very carefully as they may be faced with the option of moving their pension or seeing its value slashed."
