CBI chief calls for urgent action to prevent pension costs hampering UK growth prospects
It wants the Government to tackle both the artificially high deficit figures, driven by low gilt yields, and a potentially significant hike in the cost of the Pension Protection Fund (PPF) to businesses.
John Cridland, CBI Director-General, said: “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 demands for higher funding from trustees.”
The Bank of England’s recent Quantitative Easing (QE) programme and the relative attraction of UK Government debt over that of some Eurozone countries have driven down gilt yields.
As gilt yields are used in valuing the likely cost of future pensions, this has pushed deficits up, even though there has been no change in the underlying funding position.
At the same time, companies’ PPF levies could rise by up to 25% next year. This would be a potential “double whammy” for businesses running defined benefit pensions, who already contribute £36bn a year to these schemes.
Cridland continued: “A move of the gilt yield by just 0.4%, can add up to £100bn in costs to business, despite nothing about the scheme or 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.”
To address the rising costs of defined benefit pensions, the CBI proposes:
• Using a more long-term method of calculating the pension liabilities that companies must fund:
Cridland commented: “Using spot rate marked-to-market valuations to calculate defined benefit pension liabilities doesn’t make sense, especially given the length of time employers pay into a pension. Introducing smoothing – over a number of years – in the discount rate would better reflect the long-term nature of pensions and allow for countercyclicality.”
• Halting next year’s 25% rise in PPF levies on employers – as the CBI argues that this increase is unsustainable, and will negatively affect small and medium-sized companies.
• Introducing a statutory objective on The Pensions Regulator to ensure it protects the health and solvency of employers with defined benefit liabilities, in balance with its duty to protect pension schemes and the PPF.