Pensions burden 'is holding back' British business

UK companies at 'severe disadvantage' compared with European rivals

British companies trying to compete with European rivals are starting from behind because the UK's pensions system puts them at a disadvantage compared to almost every other country, a leading consultancy says.

The meagre benefits on offer from Britain's state pension system, combined with the huge pension burdens that private companies are bearing means many businesses cannot compete with continental rivals, Aon says in a report today.

The consultant says UK businesses are at a "severe competitive disadvantage", with Britain facing a worse pensions headache than any other nation in Western Europe.

The biggest problem for British companies is the way they have traditionally offered pension benefits to staff, through defined benefits schemes in which employers guarantee set levels of retirement income. The UK has pension assets worth £2 trillion, more than any other European nation. Three-quarters of the money is held in defined benefit schemes.

While Dutch and Irish companies are also big sponsors of defined benefit schemes, the two countries have more generous state systems, which means businesses bear less of the burden of staff's retirement benefits than their counterparts in Britain.

"With three-quarters of UK pension fund assets held in defined benefit schemes, UK companies who have such schemes are at a severe competitive disadvantage to their European peers," said Paul McGlone, the director of propositions at Aon.

"Recession is increasing the pressure on these companies and those that haven't already scrapped their defined benefit schemes now hold a competitive advantage over those that haven't."

The research is likely to strengthen the arguments of groups such as the CBI, which are lobbying for British companies to be given more help with coping with the cost of pensions provision through less onerous regulation.