Competitive edge lost in fight to preserve pensions

Weighed down by obligations to reduce pension deficits and preserve pension schemes, UK companies say their ability to remain competitive is being severely compromised.

A survey of more than 350 chief executives and senior board members, published by the CBI last week, found that three-quarters (74%) of firms with defined benefit schemes have experienced a significant reduction in profits as pensions costs have grown.

The report also discovered that 40% of companies with defined benefit pension schemes are having to trim down their investment in the business, with one in five firms saying they have been forced to cut jobs.

Particularly arduous are the requirements to settle pension deficits within a reduced timeframe, and increases in contributions to the Pension Protection Fund (PPF) levy, the statutory fund set up to pay compensation to members of defined benefit pension schemes should their employer be declared insolvent.

Tim Keogh, a worldwide partner at Mercer Human Resource Consulting, the firm that carried out the survey for the CBI, said: “When the PPF was set up last year, companies were told they’d have to find £300m annually, but this year the cost will be around £575m.

“While the PPF is a good idea, it’s painful for businesses when they have to pay such a premium,” he said.

Couple this with a fall in stock values, a reduction in long-term interest rates and an increased life expectancy, and employers are under the cosh, said Keogh.

But, according to the TUC’s pension officer Michelle Lewis, the hardship now being experienced by many companies has as much to do with their lack of foresight as it does with the testing conditions under which they are currently operating.

“These trends haven’t happened overnight. When pension schemes were performing well, many employers took their eye off the ball and took contribution holidays, while employees continued to pay in,” she said.

“Companies should have made provisions, now it’s come back to haunt them. It’s a bit short-sighted to start whinging now.”

Also contributing to this climate of uncertainty, said Keogh, are the Pension Regulator’s powers to intervene in corporate deals where pensions are an issue, such as mergers and acquisitions – a concern for almost 80% of those in the CBI report.

The EEF, the manufacturers’ body, confirmed these fears in a recent survey of its 6,000 members.

David Yeandle, EEF deputy director of employment policy, said: “Weighing up the implication of pension deficits prior to a merger or acquisition is taking up more and more senior management time and is another hurdle to any deals being struck.”

Yeandle also echoes CBI members’ concerns about the disparity that exists between public and private sector pension provision.

The CBI report found the government’s agreement to allow some public sector workers to retire at 60 was making it difficult for companies to raise the retirement age in their own schemes or remove early retirement options. 

“We are in danger of creating an environment where, because of their different pension arrangements, labour mobility between the private and public sector may become increasingly difficult, and that isn’t healthy,” he said.


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