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EU uncertainty around pensions damages growth prospects of UK employers, CBI/Towers Watson research reports

Proposed EU pension regulations would “add significantly” to business costs at a time when pension deficits are already holding back company performance, a poll of business leaders from the CBI and Towers Watson has revealed today

The latest CBI / Towers Watson Pensions Survey, which covers firms employing 1.3 million people, shows the cost and uncertainty of managing defined benefit (DB) schemes - including 'final salary' - are holding back businesses' activity and harming their ability to grow.

Two-thirds (69%) of business leaders are concerned about the prospect of the EU enforcing high deficit payments over a shorter period of time, under Solvency II-style rules being planned in Brussels to cover DB schemes.

At its worst, this could cost employers with DB liabilities hundreds of billions of pounds. It would divert money away from business investment in growth and jobs at a critical time, and harm prospects for investment in infrastructure.

The CBI is urging the EU to reconsider its proposal.

The cost of running a defined benefit scheme - whether open or closed - remains a big concern to businesses. Close to three-quarters (71%) are worried about the level of funding, and firms fear that things will get worse, with over four-fifths (85%) of businesses concerned that market fluctuations could further harm funding levels.

Over two-thirds (69%) of companies say providing DB pensions is having a significant impact on their accounts, and close to half (45%) say they have less left to invest to grow the business, up from 38% in the 2009 survey.

While firms' perceptions of the Pensions Regulator's performance to date are generally positive in the survey, the regulator must show it understands the added costs and risks as firms negotiate new deficit recovery plans. So far, 44% of businesses are satisfied with the Regulator's interaction with their company, while just 12% are dissatisfied. This positive balance of +32% reflects the additional flexibility the Regulator gave firms to cope during the recession.

Faced with rising pension costs, most employers have already taken action, be it closing their final salary scheme to new members, changing terms for existing members, or freezing the scheme altogether.

This is set to continue. Nearly a third (29%) of companies say their DB scheme is already closed to future accrual by existing members, and this is expected to rise to 43% in the next two years. Two thirds (64%) of employers who currently offer DB benefits to at least some employees are either planning to close their scheme completely or make changes to it within the next two years.

Despite the impact pension costs are having on businesses, employers remain committed to providing staff with pensions. Most business leaders (89%) see a strong business case for offering them, an increase on two years ago (83%). This commitment, however, could be undermined if the EU succeeds in imposing its plans to increase pension funding requirements even further.

Katja Hall, CBI chief policy director, said: "Businesses remain committed to providing good quality pensions to help their workforce plan for retirement, and understand the benefits this brings the company as well as its staff.

"But employers' big concern about defined benefit pensions is no longer just around rising contributions. Large and unpredictable liabilities are also harming firms' ability both to attract investment to grow the business, or to restructure to cope with difficult times.

"What's completely unacceptable is Brussels' plan to impose further costs on firms operating defined benefit pensions at a time like this, when the protection in place has already proven itself during the economic crisis. We have told the EU, trade unions have told the EU, the pension funds have told the EU. So far they have refused to listen."

John Ball, UK head of pensions consulting at Towers Watson, added: "Plans for repairing pension deficits have been blown off course and employers are hammering out new agreements with pension trustees. For the 62% who are worried about contributions going up, the key issue is how much they can afford to pay without undermining the long-term strength of their business. Some of these negotiations will be difficult but employers would be given far less leeway if the Commission's proposals were in force.

"The eurozone crisis underlines how unforeseen events can increase the cost of pensions promised in the past. For employers, the focus is now on locking these costs down and getting ready to seize opportunities to do that as they arise."

The survey shows a significant majority of employers (73%) are ready to support proposals to move to a single-tier State Pension, which would persuade more staff to contribute towards a private pension because they would be clearer about how much they could expect to receive from the state on retirement.

But business leaders are clear that this change can only come about if the Government allows schemes to reshape themselves to adapt to the new regime.

Simply abolishing contracting out - essential to a single state pension - would increase employer costs and reduce scheme member take home pay. This can be avoided by allowing schemes a one-off opportunity to adapt, and 60% of firms say that would be their preferred solution.

As far as defined contribution schemes are concerned, with the obligation on larger firms to auto-enrol staff into a pension scheme coming into force in less than a year's time, most employers (80%) say they have already discussed how to comply with the new regime at board level.

As they continue preparations, the overwhelming majority of companies are planning to auto-enrol their employees into a defined contribution (DC) pension scheme, with 61% expecting to enrol new members on existing terms and only 1% saying they will level down contributions for existing members.