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Pension deficits are obstructing businesses says CBI

08 December 2009 / by Andy Davies

Pension deficits are obstructing businesses looking to restructure themselves in preparation for an economic recovery, the Confederation of British Industry's (CBI) and Watson Wyatt has warned.

In their latest Pensions Survey, it has been revealed that the cost of defined benefit (DB) pension schemes – including 'final salary' schemes, is affecting the competitiveness of some UK businesses.

In fact one in three firms has admitted this, which is double the level seen in the 2007 survey. Similarly, 38 per cent of respondents said that business investment had been hit in the wake of the recession.

Despite many DB pension schemes being closed to new members, almost three quarters of the respondents believe their business will have to pay even more into its final salary scheme in their next funding plan.

Meanwhile, as a result of the economic downturn, 80 per cent of directors said they believe most final salary schemes will close to existing members in the next few years, with employees moving to defined contribution (DC) pension schemes.

To combat the rising expenses, 37 per cent of respondents said they were planning to take cost-savings steps within the next two years, designed to reduce the cost of schemes or close them altogether.

Despite many businesses coming under pressure, it seems business leaders remain committed to staff pensions, with 83 per cent saying there is a "strong case" for offering them. However, according to the CBI, DC plans are the choice for the vast majority of businesses as they want to know the upfront cost.

This pledge of commitment by businesses has been reaffirmed by the fact that the average employer contribution to DC pensions remains unchanged through the recession at 7.1 per cent.

Commenting, John Cridland, CBI deputy director general, is pleased that despite the recession, firms "recognise the importance" of offering a good pension to their staff.

However, he warned: "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."

As a result, the CBI is now calling on the Government to take legislative action to "ease the burden" felt by businesses, suggesting that reforms could help "improve business competiveness and also encourage more schemes to be kept open for longer".

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