Cost of funding DB pension schemes is preventing businesses from investing in growth, says CBI

Business body the Confederation of British Industry (CBI) said that 70% of the respondents to its research reported that the cost of their company's DB scheme was having an impact on their business investment. The CBI questioned 226 chief executives of companies with combined assets under management of £362.2 billion for this year's survey (32-page / 691KB PDF), which was backed by pension provider Standard Life.

The CBI questioned respondents on a range of issues. These included their experience of and concerns in relation to automatic enrolment, and whether the Pension's Regulator's proposed new objective to minimise the impact of scheme funding on sustainable economic growth would make a difference to their businesses.

"CEOs are looking for the Government to prioritise the big ticket reforms, making auto-enrolment easy and delivering the new State Pension effectively, while keeping [defined contribution schemes] simple and affordable," said Neil Carberry, the CBI's director of employment and skills.

"The cost of DB schemes is having a serious adverse impact on business investment, which must be the cornerstone of our economic recovery if we are to achieve sustainable growth. The Pensions Regulator's new objective to minimise the adverse impact of scheme funding has yet to have a positive impact. The Regulator needs to raise its game and ensure a material change in its day-to-day dealings with employers and trustees flows from its new legal duty," he said.

However, business leaders told the CBI that they were strongly committed to pension provision for their employees. The vast majority of respondents said that they recognises the "good business case" for offering a pension scheme, while 77% said that they felt an obligation to provide a pension for their employees. For the first time since the financial crisis, the CBI also reported that the majority of those employers that were still offering DB schemes did not plan to make any more changes to them.

The Pensions Regulator's new objective is included in the Pensions Bill, which is currently before Parliament; and will require it to consider for the first time the long-term affordability to sponsoring employers of plans to pay back a scheme deficit. The regulator is currently consulting on changes to its regulatory strategy and funding policy on DB, which takes this new objective into account.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the overall picture of large companies' DB liabilities was "more complex than a single survey can show".

"Companies are at different stages in dealing with their DB pension scheme liabilities," he said. "There are various initiatives companies can use for managing those liabilities; such as benefit restructurings, investment options, and the transfer of some or all of those liabilities to an insurance company. The extent to which companies have implemented different strategies will depend on the amount of 'wriggle room' they have, depending on their resources and the level of the pension scheme deficit."

DB schemes promise a set level of pension once an employee reaches retirement age, no matter what happens to the stock market or the value of the pension investment. The percentage of open schemes has more than halved since 2007 and these now tend to only be offered by large companies, as employers struggle to cope with the costs of providing pensions for longer against poor investment results.

Increasing numbers of employers are instead now offering defined contribution (DC) pension schemes, under which the benefits provided on retirement depend on the performance of the saver's investment and final annuity rates. The vast majority of the nine million people that the Government expects to begin saving more towards their retirement or saving for the first time under its automatic enrolment programme, which began for the largest employers in October last year, will be enrolled into DC schemes.

The survey found that the first year of auto-enrolment had been a success with opt-out rates remaining at about 9%, but the CBI noted that the "major test" for the Government and Pensions Regulator would occur between April and July 2014 when 30,000 mid-sized employers reached their staging date. Survey respondents noted challenges in relation to ongoing compliance, including managing opt-outs and refunds; understanding their regulatory duties and providing effective employee communications.

"This survey is further evidence of what I hear from CBI members up and down the country: the costs and complexities of auto-enrolment are a real concern for businesses and need to be addressed," said the CBI's Neil Carberry. "Different businesses have different payroll and HR needs. Greater regulatory flexibility would cater for that diversity, preventing companies from having to undertake expensive changes to their systems."

"Businesses will not welcome having to make further costly changes to their schemes if the Government introduces a charge cap set at too low a level. The issue on charges is legacy schemes, not new schemes being used for automatic enrolment," he said.