Cost of final salary pensions is eroding cash for investment

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Two-fifths of companies with final salary pension schemes have spent so much on their occupational schemes that they have been forced to reduce business investment, according to a survey published by the CBI today.

The employers' group said the cost of providing final salary schemes had risen so steeply that one-fifth of companies had even cut jobs in order to fund staff pension benefits.

The CBI said companies with final salary pensions were now investing an average of 20 per cent of employees' pay into the schemes in order to pay for benefits. The top 25 per cent of employers now contribute an average of 40 per cent of staff pay.

In addition, almost one in two companies has been forced to make lump sum payments into its final salary pension scheme in order to reduce funding deficits over the past two years. The payments averaged £12.6m.

Three-quarters of companies in the CBI survey said rising pension costs had "significantly or severely" reduced profits, up from 50 per cent in the last survey conducted by the group two years ago.

John Cridland, the deputy director-general of the CBI, said that despite improvements in stock market returns, which have reduced the funding deficits of most occupational pension schemes, "at a time when business investment is being squeezed by higher business taxes and the sky-high cost of energy, the added burden of spiralling pension contributions is threatening UK firms' ability to invest in future jobs and growth."

The CBI is publishing the research as the Government prepares to implement a White Paper on pensions reform announced in May. Mr Cridland said the government could alleviate some of companies' pension costs by fulfilling pledges to reduce the regulatory burden on occupational schemes.

The CBI's survey suggests the trend among employers to close final salary schemes - either to new staff or completely - is continuing. Some 6 per cent of the companies in the survey closed final salary schemes to existing members over the past two years, while a further 16 per cent plan to do so over the next two.

While almost 60 per cent of companies still offer final salary pensions to their existing workforce, just 16 per cent have schemes that are also open to new employees. Most of these companies now offer money purchase pensions, which, unlike final salary schemes, do not offer guaranteed retirement benefits, instead.

Tim Keogh, a partner at pension scheme adviser Mercer Human Resource Consulting, said that many employers were keen to go on offering staff generous benefits but needed Government help to do so.

In particular, he called for reforms of the rules governing hybrid schemes, which offer a combination of guaranteed benefits and pensions dependent on stock market returns.