By Daniel Hunter
The Confederation of British Industry (CBI) today (Wednesday) called on the Government to prevent soaring pension costs harming businesses’ ability to invest and create jobs.
It urged action to address both artificially high deficit figures, driven by low gilt yields, and a potentially significant hike in the cost of the Pension Protection Fund (PPF) to businesses.
The Bank of England’s necessary Quantitative Easing (QE) programme and the relative attraction of UK Government debt over that of some Eurozone countries have driven down gilt yields. As gilt yields are used in valuing the likely cost of future pensions, this has pushed deficits up, even though there has been absolutely no change in the underlying funding position.
At the same time, companies’ PPF levies could rise by up to 25% next year. This would be a potential “double whammy” for businesses running defined benefit pensions, who already contribute £36bn a year to these schemes.
“A solvent, profitable company as sponsor is the best protection for a pension scheme and its members. Artificially high deficits will only hold businesses back further from investing and creating new jobs because of demands for higher funding from trustees," John Cridland, CBI Director-General, said.
“A move of the gilt yield by just 0.4%, can add up to £100bn in costs to business, despite nothing about the scheme or the employer having changed. This makes no sense — pension schemes have liabilities that run for a century or more and can afford to be more long-term.
“We’re urging the Government to act to address this important issue by taking three steps: stop the rollercoaster deficits by smoothing the measure of the gilt yield for businesses; halt a possible 25% rise in PPF levies next March; and ensure the Pensions Regulator takes account of businesses’ ability to grow.”
To address the rising costs of defined benefit pensions, the CBI proposes:
· Using a more long-term method of calculating the pension liabilities that companies must fund
· Halting next year’s 25% rise in PPF levies on employers
· Introducing a statutory objective on The Pensions Regulator to ensure it protects the health and solvency of employers with defined benefit liabilities, in balance with its duty to protect pension schemes and the PPF.
On a more accurate method of calculating the pension liabilities, Mr Cridland said:
“Using spot rate marked-to-market valuations to calculate defined benefit pension liabilities doesn’t make sense, especially given the length of time employers pay into a pension. Introducing smoothing — over a number of years — in the discount rate would better reflect the long-term nature of pensions and allow for countercyclicality.
“Other countries are ahead of us in this, with Denmark, the Netherlands and the US already taking action to spread the value of the return, rather than at a single point in time, and reflect the long-term nature of the scheme.
“Another possible solution would be to ask an independent body, such as the Office of Budget Responsibility, to set a discount rate. This could be based on the gilt rate, but with adjustments to allow for cyclical factors, like the current economic circumstances.”
On halting next year’s projected PPF levy increase of 25%, he said:
“A number of factors lie behind why PPF levies are likely to rise next year, but a 25% rise is simply not sustainable. Such a rise in the levies would be a major problem for many small and medium-sized companies.”
On introducing a new statutory “growth” objective on The Pensions Regulator, he said:
“The Pensions Regulator’s main role is to safeguard scheme members’ benefits. And the best way for it to do this is ensuring employers are able to balance the needs of the business with their duty to fund members’ retirement.
“The Regulator has given firms some flexibility in their funding plans — but the best way to ensure that this is always the case would be to add it to their statutory objectives, so that this remains the case wherever reasonable.
“Over-funding diverts essential cash from business investment, which is vitally important to securing economic growth. That’s why we’re calling for the Pensions Regulator to be required to promote growth under a new statutory objective.”
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