'Pensions holding back recovery'

Some of Britain's biggest firms are being impeded in their attempts to prepare for economic recovery by large deficits on their final-salary pension schemes, according to research published today by Watson Wyatt and the CBI today.

The actuarial consultancy and the employers group warn that the rising cost of funding final-salary schemes, including those already shut to new members, could slow down companies' recoveries. Three-quarters of companies expect to have to pay more into their final-salary schemes in their next funding plans, even if they are only maintaining the pension promises made to existing members.

One in three firms also says their final-salary scheme has become a major obstacle in financial reconstruction of the company, or in merger and acquisition activity. Eight out of 10 company directors think all such schemes will shut to new members in the coming years, while a third say they are planning their own reforms over the next two years, with outright closures a possibility.

Final-salary schemes have been hit by both falling stock markets, depleting the value of their investments, and rising corporate bond yields, raising the cost of accounting for future benefits. However, companies say they feel they must still continue offering pension benefits of some kind, with defined contribution plans increasingly the norm. Despite the recession, the average employer contribution into a defined contribution plan has remained at 7.1 per cent of members' salaries.

"Businesses are not stepping back from helping their workforce plan for retirement. Even during this tough recession, firms recognise the importance of offering their staff a good pension," said John Cridland, deputy director-general of the CBI. "However, the high and unpredictable cost of running final-salary pensions is having far-reaching and damaging effects on UK competitiveness."

John Ball, head of defined benefit pensions consulting at Watson Wyatt, added: "Three-quarters of employers think they will have to pay higher contributions. If profits return, this increase in contributions may not be the last."