David Prosser: Now is not the time to go soft on pension schemes

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Outlook The problems of Equitable Life in the individual pension sector have their mirror in the collapse of a string of occupational pension schemes whose employers went bust without having properly funded the plans. The kerfuffle over upwards of 60,000 workers who lost their pensions as a result eventually culminated in a shake up of the way in which occupational pension schemes are policed – and the launch of the Pensions Regulator with some pretty draconian powers.

As ever with these situations, there are those who believe that the delicate balance between protecting the individual and not over-burdening employers has gone awry. So much so that the CBI yesterday launched an eight-point plan for the reform of pension regulation to help recession-hit businesses cope with the cost of providing final salary schemes to staff.

It's difficult to fault the business group's logic. Even without taking regulation into account, the cost of final salary pension provision is rising, thanks to increased life expectancy and falling investment returns. Add in red tape and a regulator with a pretty rigid view on scheme finances and things get even tougher. And now there's a recession on, many employers are finding pension provision just too onerous.

The problem, however, is that a recession is exactly the time when you need to keep a close eye on pension scheme finances because when times are tough, some employers may be tempted to play fast and loose with their funds. They intend, of course, to make good the damage once better times return, but some won't make it through the downturn, leaving industry compensation schemes to pick up the tab for their shortfalls. This is not to say all the CBI's suggestions should be rejected. Some of the points it makes are excellent – the Budget clearly did raise the cost of financing pension schemes, which is daft, and it is true, as the employers group argues, that poorly drafted pension law can often make it difficult for companies to restructure their occupational plans.

Its most substantive proposals, however, are more difficult. The CBI wants companies to be able to work to 15-year recovery plans – rather the current 10 years – where their schemes are in deficit. And it wants longer-term valuations of scheme finances, rather than what it describes as the current "marked-to-market" approach, which looks at the value of assets on a given day.

The first of these ideas should be rejected out of hand. The longer a scheme is allowed to remain substantially in deficit, the more chance there is of its sponsor going under without having tackled the problem. The CBI says extending the concession could be granted temporarily, but this would be the worst time to do that.

As for valuations, you can see the point. The turmoil of the past year has seen asset prices swing wildly – a pension scheme whose assets were valued just at the wrong moment might appear to be much less well-funded than it really it is. Still, in practice, valuations don't work quite like that, and longer-term valuations are already possible in all sorts of ways. Assets need to be matched to liabilities, but unless you know the value of both sides of the equation, doing so is impossible.

The bottom line, says the CBI, is that unless companies are given extra breathing space, more will put out of final salary provision. To which the unpalatable answer is that it would be preferable for employers to be honest about withdrawing such benefits if the costs really are prohibitive, rather than trying to muddle through with soft-touch regulation that ends up with ever more workers having to claim compensation for lost pension benefits.

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