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CBI warns pension costs are damaging UK growth

The business group has called on the government to stop the rollercoaster of pension deficits.

CBI warns pension costs are damaging UK growth

Business group the CBI has warned the government that soaring pensions costs are harming UK companies’ ability to invest and create jobs, as it was announced that GDP fell 0.7% in the second quarter of this year.

It has expressed its concern about the ‘artificially high’ pension deficits that have been driven by low gilt yields. The yield on 10-year gilts has hit a low of 1.4%, and as pensions are invested predominantly in gilts this low yield affects the return the pension funds can generate.

As yields fall pension deficits increase, and the CBI said a move of just 0.4% in the gilt yield can add up to £100 billion in pension costs to businesses, even though there has been no underlying change in the funding of the pension fund.

Gilt yields have been driven lower by the Bank of England’s quantitative easing (QE) programme and the UK’s status as a safe haven compared with eurozone countries.

Alongside the unstable gilt yields, businesses are also struggling with increasing Pension Protection Fund (PPF) levies, which they pay to protect savers in defined benefits schemes in the event of the company becoming insolvent. Levies are increasing by 25% next year, which the CBI said would be a ‘potential double whammy’ for businesses running defined benefit pensions, which cost employers £36 billion a year.

Last Friday Scottish cashmere company Dawson International became the latest company to succumb to its growing pension deficit. It is teetering on the brink of insolvency following a collapse in negotiation with the PPF over its £50 million pension deficit. The company was hit by huge job cuts in 1998 and 2007 which saw its workforce reduced from 12,000 to just 200 as sales fell.

This had a significant impact on its pension fund which has less than 60 active members but 3,500 deferred members. The pension liabilities have risen dramatically since 2006, when the cost was £19 million, because of changes in the way liabilities are calculated.

John Cridland, CBI director-general, called for the government to smooth the measure of gilt yields and step in to prevent a further rise in fees.

‘A solvent, profitable company as sponsor is the best protection for a pension scheme and its members. Artificially high deficits will only hold businesses back further from investing and creating new jobs because of demand for higher funding from trustees,’ he said.

‘A move of the gilt yield by just 0.4% can add up to £100 billion in costs to business, despite nothing about the scheme of the employer having changed. This makes no sense – pension schemes have liabilities that run for a century or more and can afford to be more long term.

‘We’re urging the government to act to address this important issue by taking three steps: stop the rollercoaster deficits by smoothing the measure of the gilt yield for businesses; halt a possible 25% rise in PPF levies next March; and ensure The Pensions Regulator takes account of businesses’ ability to grow.’

However, chief executive of The Pensions Regulator Bill Galvin said higher deficits did not mean employers would have to make increased contributions, and argued against smoothing gilt yields for pension schemes.

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1 comment so far. Why not have your say?

rich banker

Jul 25, 2012 at 19:20

I accuse Gordon Brown of this fiasco. As Jezza says "he should be shot" for what he has done to private sector pensions.

High taxes caused by Public Sector pensions are the real bogeys plus corporate greed by bankers and the like as well as overpaid Drs Greed and Drs Avarice and sundry other other NHS folks. No wonder they can retire early.

Poetic justice then that Dawson's is a Scottish company. Of course tinkering with the pension funds solvency rules by HMG and getting it wrong did not help in the post Maxwell fiasco. HMG runs a PONZI scheme for pensions so why cannot companies, within reason. Why over provide now for future liabilities? Shoot the actuaries, especially those at Equitable Life and the PRU.( PS Still awaiting my own WPA compensation from the ELPS - over 10 years a coming so I still work at 70!)

However the CBI is not a worthy organ as long as it allows such corporate greed at the top and the dropping of most final salary schemes to new entrants. It needs to mention this and join the campaign to send all Scots MP's back to their own parliament in Skintland. Of course pension holidays by CBI companies have not helped. These should be illegal but the CBI actively encouraged them in the past for the same bunkum arguments. It's time the bosses realised that workers outside the boardroom deserve better pensions.


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