Final-salary pension rules 'risk cash crisis at one on five firms'

One in five companies that still run final salary pension schemes face a cashflow crisis because of the Government's regulation system, the CBI said today.

The employers' federation said there was a "real danger" that new rules on funding schemes would see firms divert millions of pound away from much-needed investment.

It said it had "major concerns" about the Pensions Regulator's approach to the funding of so-called defined benefit pension schemes.

It said its members were concerned that the new funding rules required the equivalent of at least 0.5 per cent of GDP - more than £5bn - to be diverted to pension schemes every year over the next decade.

The survey is the latest criticism of the pensions funding rules which came into force in December 2005, which were blamed last month for fuelling a bubble in prices of long-dated government bonds as fund managers rushed to buy gilts to meet rules on deficits.

New rules allow trustees and employers to agree funding arrangements that matched the individual circumstances of a scheme and its sponsoring company.

The CBI believes the new system of "trigger points" highlighting where action needs to be taken could make the situation worse if they are applied too rigidly. It has also called on the regulator to be more flexible about the time limits placed on firms to deal with pension scheme deficits. It said a time limit of 10 years for companies to make good funding shortfalls would deprive a fifth of firms of vital cashflow.

John Cridland, deputy director general of the CBI, said trustees would feel compelled to make companies adopt "aggressive" new funding plans - regardless of the impact on the business. "It could have the perverse effect of throttling private sector investment, thereby damaging the UK economy - putting the very pension schemes the regulator is trying to protect under even more pressure," he said.

"The regulator's own figures suggest that one in five UK companies is likely to see its cashflow dry up unless it can come to a sensible agreement with its trustees. This would put 10 per cent of UK companies out of business and cannot be the way forward."

The new regime replaces the old Minimum Funding Requirement (MFR), which was seen as being inflexible. Mr Cridland said: "Business called for a new scheme specific funding standard for pensions, but without significant improvements to the regulator's proposals, trustees could see this as MFR mark II and we'll be back at square one."

Between 20 and 30 final schemes are closed to new members every year as companies switch to defined contribution schemes, which put the risk on the employee. Firms blame the stock market crash and the abolition of the dividend tax credit as well as the new regulatory system.