Regulations place final salary pension schemes at risk

Thursday, 31 July 2008 12:00

Final salary pension schemes could be at risk because of “excessive” regulations, claim industry leaders.

The CBI yesterday revealed increasing numbers of businesses are voicing concern about pressures placed on providers of defined benefit (DB) pension schemes.

Richard Lambert, CBI director-general, claimed firms need a break form further regulation and red tape if DB schemes are to be preserved.

He explained schemes are already under pressure from greater increased life spans and capital market instability.

DB schemes – guaranteeing a fixed percentage of salary on retirement, depending on the number of years of service in a company – are increasingly being dropped by firms in favour of defined contribution (DC) schemes, where the pension level is dependent on the annuity bought by the scheme member with funds invested by the employee and employer over a working life.

“Pension deficits are back near the top of the corporate worry list. There is an incoming tide of complex and expensive new regulation that threatens to drive an extra nail into the coffin of many DB schemes,” Mr Lambert told an event hosted by Watson Wyatt.

“Firms want to preserve their excellent schemes for employees, but the pressure on them is continuing to build.”

He added: “This spring, we have seen another assault on boardroom confidence. And the result is growing pressure on the boardroom to be wary of involvement in UK defined benefit – even to avoid it altogether where possible.”

John Ball, head of DB consulting at Watson Wyatt, said: “Forty per cent of employers now expect that they will have closed their defined benefit schemes to existing members within a decade.

“For some, this is on the agenda because the burdens they must shoulder in order to run a defined benefit scheme seem to keep getting heavier.

“It took a while for the closure of DB schemes to new entrants to reach a tipping point but this trend then quickly gathered momentum. If a few more high profile employers close their schemes to future accrual, we could see a similar snowball effect.”

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