UK - Deficits in final salary pension schemes are making it much harder for UK companies to restructure and prepare themselves for an economic recovery, according to research by Watson Wyatt and the UK employers organisation the CBI.

In their latest joint pensions survey, employers’ organisation the CBI and consultancy Watson Wyatt said one in three of the business leaders they polled felt pension provision had significantly obstructed internal reorganisations or mergers and acquisitions, and had often led to reduced competitiveness. The number of respondents sharing this opinion had doubled since the last survey in 2007, it said.

Pensions provision had also hit business investment, according to 38% of respondents.

“The current regulation of final salary schemes is obstructing business reorganisation, often without making those pensions any safer,” claimed John Cridland, deputy director-general of the CBI. “During a recession it is vital that firms are able to restructure and realign to strengthen the business and prepare for future growth,” he said.

More and more companies are now seeking to transfer some of their final salary liabilities to an insurance company, in a bid to reduce the risk of past pensions commitments, the survey found, as 49% of scheme sponsors said they expect to have secured at least some pension liabilities with an insurer in 10 years’ time.

Eight out of ten directors said they also believe most final salary schemes will close to existing members over the next few years, with employees moving into DC schemes. But 83% of the heads of businesses surveyed said there was still a strong business case for offering pensions. That said, DC pensions would be the choice for the vast majority, the compilers of the survey added.

“To avoid future surprises, more companies are looking for exit strategies,” said John Ball, head of defined benefit pensions consulting at Watson Wyatt. “Nearly half of scheme sponsors expect to have transferred at least some pension liabilities to a third party in 10 years’ time. But only one in six expect all liabilities to be off their balance sheet.

He continued: “Companies facing drawn-out endgames may look at how to remove pension risks more affordably, for example by offering members enhanced transfer values.”

The CBI said it was calling for the government to reform “poorly-drafted” pensions law, especially the Section 75 rules. “These can force companies to make large top-up payments to pension schemes when they are simply reorganising a corporate group in a way that does not make pension benefits any less secure,” the two organisations said.

It also argued the government should allow for longer deficit repayment plans, giving firms time to secure pensions and drive economic recovery.

“Accordingly, the Pensions Regulator should focus on investigating recovery plans longer than 15 years, rather than maintaining the current 10-year trigger,” the two parties said.

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