Extra Rules And Costs Risk Shortening The Lifespan Of Defined Benefit Pensions

by Robin Pilgrim, LawAndTax-News.com, London

31 July 2008

Excessive regulation is putting three million final salary pensions at greater risk of being wound up early or bought out, the CBI warned on Wednesday.

Richard Lambert, Director-General of the Confederation of British Industry (CBI) has spoken out this week to raise awareness of the fact that in the past few months, an increasing number of businesses have voiced alarm at the mounting pressures being placed on providers of defined benefit (DB) schemes, which include final salary pensions.

Mr Lambert argued that businesses need breathing space from further regulation if DB schemes are to be preserved.

Otherwise, further costs and extra red tape on surviving schemes would force firms to close their schemes for accrual, he predicted.

In addition, greater longevity and the capital market instability associated with the credit crunch and economic slowdown have also raised the pressure on DB pensions.

Mr Lambert told business leaders at an event hosted by Watson Wyatt in London on Wednesday that:

"Pension deficits are back near the top of the corporate worry list. There is an incoming tide of complex and expensive new regulation that threatens to drive an extra nail into the coffin of many DB schemes.

"Firms want to preserve their excellent schemes for employees, but the pressure on them is continuing to build. This spring, we have seen another assault on boardroom confidence. And the result is growing pressure on the boardroom to be wary of involvement in UK defined benefit – even to avoid it altogether where possible."

He added that changes proposed by the Accounting Standards Board and the Pensions Regulator, and the volatility of the Pension Protection Fund levy have all added significantly to the burden of providing a DB pension.

Mr Lambert made three proposals to reform the regulatory climate:

• Turn back the tide of poorly justified regulation by taking a tougher, risk-based approach to future pensions legislation;
• Deliver more stability for firms. While some volatility is inherent, more could be done to make the Pensions Protection Fund levy and other costs more foreseeable and stable; and
• Give companies the freedom to design schemes that work and then leave them alone, so long as the funding and covenant is there to meet the promise, and scheme members understand what is on offer.

He concluded:

"Without these three simple steps, we will see a significantly shorter life for DB accrual than we would all hope for. That would be a matter of great regret to our members. And it would also reflect badly on government, which would face the political fallout from its role in the ending of accrual."

John Ball, Head of Defined Benefit Consulting at Watson Wyatt, added:

“40% of employers now expect that they will have closed their defined benefit schemes to existing members within a decade. For some, this is on the agenda because the burdens they must shoulder in order to run a defined benefit scheme seem to keep getting heavier."

"It took a while for the closure of DB schemes to new entrants to reach a tipping point but this trend then quickly gathered momentum. If a few more high profile employers close their schemes to future accrual, we could see a similar snowball effect," he concluded.

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