Pension deficits causing severe restructuring headaches says CBI

FINAL salary pension deficits are making it much harder for recession-hit firms to restructure themselves in preparation for an economic recovery, the CBI and Watson Wyatt warned today.

Their latest biennial Pensions Survey showed the costs of defined benefit – including final salary – schemes are hitting UK competitiveness and have become a leading issue in boardrooms, especially as deficits have worsened during the recession.

Three quarters of respondents (73%) expect that the business will have to pay even more into its final salary scheme in their next funding plan, despite most schemes being shut to new members.

Meanwhile, one in three firms (33%) felt that pensions provision had significantly obstructed internal reorganisations or mergers and acquisitions, often leading to reduced competitiveness – double the level of 2007’s survey. Similarly, 38% said that business investment had been hit.

Given the wider impact of pensions costs, eight out of 10 directors (80%) believe most final salary schemes will close to existing members over the next few years as a result of the current turmoil, with employees moving into DC schemes.

A third (37%) are planning to take cost-saving steps within the next two years, designed to reduce the cost of schemes or close them completely.

An increasing number of firms are looking to transfer some of their final salary liabilities to an insurance company in order to reduce risks in relation to past pensions commitments.

Nearly half of scheme sponsors (49%) expect to have secured at least some pension liabilities with an insurer in 10 years’ time.

Despite the pressures of the downturn business leaders remain committed to staff pensions with 83% saying there is a strong business case for offering them.

But boards are clear that this will be a commitment that they know the cost of up front, and so DC pensions are the choice for the vast majority. This year’s survey shows that average employer contributions to DC plans have remained unchanged through the recession, at 7.1%.

Andrew Palmer, CBI’s Regional Director for Yorkshire & the Humber, said:
“Businesses are not stepping back from helping their workforce plan for retirement. Even during this tough recession firms recognise the importance of offering their staff a good pension.

“However, the high and unpredictable cost of running final salary pensions is having far-reaching and damaging effects on UK competitiveness and the wider economy. This survey clearly shows that more and more companies are making changes to these legacy schemes.

“The current regulation of final salary schemes is obstructing business reorganisation, often without making those pensions any safer. During a recession it is vital that firms are able to restructure and realign to strengthen the business and prepare for future growth.”

John Ball, head of defined benefit pensions consulting at Watson Wyatt, added: “Invoices for higher pension deficits will start to arrive next year as the first companies complete their funding negotiations.

Three-quarters of employers think they will have to pay higher contributions immediately but that’s not the end of the story. Trustees and the regulator will want deficits cleared more quickly if profits return, so this increase in contributions may not be the last.”

While the scale of liabilities of final salary schemes, coupled with increasing longevity, mean that the affordability of these pensions remains very challenging, the CBI does believe that legislative action can be taken to ease the burden.

Such moves could help improve business competitiveness and also encourage more schemes to be kept open for longer. In particular, the CBI is calling for the government to reform poorly-drafted pensions law, especially the Section 75 rules.

These can force companies to make large top-up payments to pension schemes when they are simply reorganising a corporate group in a way that does not make pension benefits any less secure.

The CBI also argues that the government should also allow for longer deficit repayment plans in these troubled times allowing firms time to secure pensions and drive economic recovery.

Accordingly, the Pensions Regulator should focus on investigating recovery plans longer than 15 years, rather than maintaining the current 10 year trigger.

The government should also resist any moves to make the situation worse for these firms through sweeping new EU funding standards or changes to the way these schemes are accounted for by FRS17.