Seven in 10 of businesses (69 per cent) say that the provision of defined benefit pensions is having a significant impact on financial results, a CBI/Towers Watson Pensions survey has revealed.
The survey, which covers firms employing a total of 1.3 million people, shows that the cost and uncertainty of managing defined benefit (DB) schemes – including ‘final salary’ – are holding back businesses’ activity and harming their ability to grow. (Defined benefit pensions are based on how much a member earns and how long they are an employed member of the pension scheme.)
The survey found that the proposed EU pension regulations would add significantly to business costs at a time when pension deficits are already holding back company performance. This underlines business leaders’ concern about increases in life expectancy forcing them to put their hands in their pockets again. This desire to fix pension costs has been a driving force behind the growing market in risk transfer. Despite difficult market conditions, pension schemes have continued to put bulk annuity and longevity swap contracts in place.
An EU pensions Green Paper unveiled in July this year proposed that companies should inject far more funding into final salary schemes. The CBI strongly objected to the paper and said that this would make companies spend £500bn extra providing final salary pensions.
Under the proposals, pension schemes were required to adopt an adjusted version of Solvency II – the capital requirement regulation being implemented for insurers from 2012.
Industry experts condemned the paper saying that the EU lawmakers had failed to see the difference between insurance schemes and pension schemes. While insurance schemes face demands for higher levels of capital because they can face an unforeseen surge in demands, pensions can be paid over time in a fairly predictable way.
The CBI has called on the EU to reconsider the proposed EU pension regulations because at their worst, the regulations could cost employers with DB liabilities hundreds of billions of pounds. The CBI said that this would divert money away from business investment in growth and jobs at a critical time, and harm prospects for investment in infrastructure.
Sixty-nine per cent of business leaders are concerned about the prospect of the EU enforcing high deficit payments over a shorter period of time, under Solvency II-style rules being planned in Brussels to cover DB schemes.
The cost of running a defined benefit scheme, whether open or closed, remains a big concern to businesses. More than 70 per cent are worried about the level of funding, and firms fear that things will get worse, with more than four in five (85 per cent) of businesses concerned that market fluctuations could further harm funding levels.
At a time when the economic recovery remains fragile and credit is scarce, this additional cost and uncertainty is doing nothing to help business confidence.
Despite the impact pension costs are having on businesses, employers remain committed to providing staff with pensions. Most business leaders (89 per cent) see a strong business case for offering them, an increase on two years ago (83 per cent). This commitment, however, could be undermined if the EU succeeds in imposing its plans to increase pension funding requirements even further.
Speaking about the survey findings, Katja Hall, CBI chief policy director, said: “Businesses remain committed to providing good quality pensions to help their workforce plan for retirement, and understand the benefits this brings the company as well as its staff.
“But employers’ big concern about defined benefit pensions is no longer just around rising contributions. Large and unpredictable liabilities are also harming firms’ ability both to attract investment to grow the business, or to restructure to cope with difficult times.
“What’s completely unacceptable is Brussels’ plan to impose further costs on firms operating defined benefit pensions at a time like this, when the protection in place has already proven itself during the economic crisis. We have told the EU, trade unions have told the EU, the pension funds have told the EU. So far they have refused to listen.”
John Ball, UK head of UK pensions consulting at Towers Watson, said: “Plans for repairing pension deficits have been blown off course and employers are hammering out new agreements with pension trustees. For the 62 per cent who are worried about contributions going up, the key issue is how much they can afford to pay without undermining the long-term strength of their business. Some of these negotiations will be difficult but employers would be given far less leeway if the Commission’s proposals were in force.
“The eurozone crisis underlines how unforeseen events can increase the cost of pensions promised in the past. For employers, the focus is now on locking these costs down and getting ready to seize opportunities to do that as they arise.”
- The pensions crisis: report challenges government life expectancy predictions
Call for single-tier state pension
The survey shows a significant majority of employers (73 per cent) are ready to support proposals to move to a single-tier state pension, which would persuade more staff to contribute towards a private pension because they would be clearer about how much they could expect to receive from the state on retirement.
But business leaders are clear that this change can only come about if the government allows schemes to reshape themselves to adapt to the new regime.
Simply abolishing contracting out – essential to a single state pension – would increase employer costs and reduce scheme member take-home pay. This can be avoided by allowing schemes a one-off opportunity to adapt, and 60 per cent of firms say that would be their preferred solution.
“Simplifying the state pension means people will get their pension without the bureaucracy of a two-tier system or means testing, which is good news,” added Hall. “But abolishing the contracted-out rebate in defined benefit schemes will significantly raise national insurance contributions, so the CBI is calling on the government to offset these costs for employers and employees, otherwise more DB schemes could be forced to close.”
Auto-enrolment in 2012
With the obligation on larger firms to auto-enrol staff into a pension scheme coming into force in less than a year’s time, the majority of employers (80 per cent) say they have already discussed how to comply with the new regime at board level.
As they continue preparations, the overwhelming majority of companies are planning to auto-enrol their employees into a defined contribution (DC) pension scheme, with 61 per cent expecting to enrol new members on existing terms and only one per cent saying they will level down contributions for existing members.
Speaking about auto-enrolment, Ball said, “Although firms with fewer than 3,000 employees are being given longer to comply, it’s full speed ahead for the largest employers. Planning is generally well under way but the detail of the legislation holds some hidden surprises. This is a major project which employers can’t afford to leave to the last minute.”
Related Files
CBI/Tower Watson pensions survey
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