Final salary pension deficits are making it much harder for recession-hit employers to restructure themselves in preparation for an economic recovery, according to research by the Confederation of British Industry (CBI) and Watson Wyatt.
Their latest biennial Pensions Survey showed the costs of defined benefit (DB), 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.
And 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 ten 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 defined contribution (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.
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%.
John Cridland, CBI deputy director-general, 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.”
Click here for more articles on occupational pensions