A proposed European Union (EU) regulation will increase costs for UK employers managing defined benefit (DB) pension schemes, according to research by the Confederation of British Industry (CBI) and Towers Watson.
A view from the top – the CBI/Towers Watson pensions survey 2011 found that two-thirds (69%) of employers 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 DB pension scheme, whether open or closed, remains a big concern to organisations because almost three-quarters (71%) are worried about the level of funding, and 85% are concerned that market fluctuations could further harm funding levels.
Over two-thirds (69%) of organisations said providing a DB pension scheme is having a significant impact on their accounts, and almost half (45%) said they have less left to invest to grow the business, up from 38% in the 2009 survey.
The survey showed that employers’ perceptions of The Pensions Regulator’s performance to date are generally positive. Almost half (44%) of employers are satisfied with TPR’s interaction with their organisation, while just 12% are dissatisfied.
The trend of closing final salary schemes or changing terms for existing members is set to continue. The survey found that nearly one-third (29%) of respondents said their DB scheme is already closed to future accrual by existing members, and this is expected to rise to 43% in the next two years.
Two-thirds (64%) of employers that are currently offer DB schemes to at least some employees are either planning to close their scheme completely or make changes to it within the next two years.
Most respondents (89%) see a strong business case for offering pensions, an increase on two years ago (83%).
Organisations are preparing for auto-enrolment as part of the 2012 pension reforms, as most employers (80%) said they have already discussed how to comply with the new regime at board level.
The majority of organisations are planning to auto-enrol their employees into a defined contribution (DC) pension scheme, with 61% expecting to enrol new members on existing terms, and only 1% said they will level down contributions for existing members.
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 organisation, as well as its staff.
“But employers’ big concern about DB 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 is completely unacceptable is Brussels’ plan to impose further costs on firms operating DB 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, added: “Plans for repairing pension deficits have been blown off course and employers are hammering out new agreements with pension trustees.
“For the 62% 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.”
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