UK companies remain committed to providing pensions for staff despite the continuing high costs, according to a major new survey published today (Monday) by the CBI and Mercer Human Resource Consulting.
The survey shows that the burgeoning level of contributions companies are making to Defined Benefit (DB) pensions is having a significant impact on the money businesses have available to invest for the future and is hitting profits.
Despite this, the latest survey of 355 CEOs, chairmen and senior board members - between them employing 900,000 staff - reveals that over three-quarters are committed to providing an occupational pension scheme. Eighty-six per cent of employers want to see staff reach retirement with adequate savings and 81 per cent believe a company should play a part in raising understanding of the importance of planning for retirement.
Firms with DB schemes continue to experience high levels of pensions costs, with the survey showing that, on average, firms with DB schemes are putting the equivalent of nearly a fifth (19.6%) of employees’ pay into schemes to fund future benefits and deficits. The top quarter of contributing companies are investing an average of more than forty per cent of employees’ pay into pensions each year - and a small number as much as one hundred per cent.
As well as increasing their level of annual contributions, 45 per cent of firms with DB schemes have made additional lump sum deficit payments, averaging £12.6 million - with the highest in the survey being £200 million.
The survey shows that operating a DB pension is having a negative impact on companies' performance. The proportion of firms reporting a severe impact on profits has leapt, in the two years since the last survey, from 3 to 17 per cent. Three-quarters (74%) of firms with DB schemes reported a significant or severe reduction in profits due to increased pensions costs, up from fifty per cent in the last survey two years ago.
Disturbingly, forty per cent of firms with DB pensions schemes have cut their investment in the business - whether in people, new products or equipment - as a result of pension costs, putting their future competitiveness and viability at risk. One in five firms have also cut jobs.
CBI Deputy Director-General, John Cridland said:
"At a time when business investment is being squeezed by higher business taxes and the sky high price of energy, the added burden of spiralling pension contributions is threatening UK firms' ability to invest in future jobs and growth.
"It is clear that employers remain committed to pensions but they are going to need support to weather the current pensions storm. The Government must take heed of the extra burden on companies of these massive contributions and deliver on its promises in May's Pensions White Paper to simplify rules and reduce regulatory burdens."
The survey also shows the ways in which companies are seeking to address the impact of high pension costs. Sixty per cent of companies plan to increase members' contributions to pensions in the next year. Six per cent of firms have closed DB schemes to existing members, opening Defined Contribution (DC) schemes instead, and sixteen per cent more plan to do so in the next two. Just over half of firms (57%) now make DB pensions available to existing employees but only sixteen per cent do so for new staff.
As well as these continuing trends, an increasing number of firms are considering closing DB schemes to existing members. Twenty per cent of companies contemplating further changes to their DB schemes reported that this was their preferred next step.
Nearly a fifth of companies (19%) intend to move into hybrid pension schemes, which combine elements of DB and DC, with nearly one in ten (8%) having made the switch to hybrid since 2004. Nearly a quarter (24%) of companies have reduced their DB scheme benefits, for example by offering pensions of an 80th of final salary for each year worked rather than the larger fraction previously offered.
Tim Keogh, Worldwide Partner at Mercer Human Resource Consulting, said:
“The survey confirms that senior executives want to see staff retire with sufficient savings, but within acceptable levels of cost and risk to the business.
”More companies with defined benefit schemes closed to new joiners are now thinking of going a stage further and freezing their schemes to existing members. As well as reducing risk, this addresses a potentially difficult situation of employees being on two different levels of benefits."
He added: "While most companies think the solution is a defined contribution arrangement, there are also opportunities for risk sharing between employers and employees that deserve more attention, like hybrid schemes. But the Government must provide a more flexible regulatory environment for these arrangements to flourish, as hybrid schemes currently face the worst of both defined benefit and defined contribution regulations.”
Over sixty per cent of senior executives said the Government's agreement to allow public sector workers to retire at 60 would have an impact on their business. Of those affected, sixty-three per cent believed the Government's decision would make it difficult for them to raise the retirement age in their own scheme and over forty per cent said the deal would make it difficult to remove early retirement options. Nearly sixty per cent felt it would make negotiations with trade unions and employees more difficult.
The biggest regulatory concern among senior executives was the Pensions Regulator's ability to intervene in corporate transactions. Nearly eighty per cent of business leaders put this as their top concern. For over sixty per cent, the level and fairness of the PPF levy was a major concern and for over half (53%) it was the impact of new scheme specific funding requirements on their firm.
John Cridland concluded:
"So far, it appears the Pensions Regulator has used its extensive powers, in particular the ability to intervene in merger and acquisition activity, in a careful and measured way. Clearly concerns remain, however, about the potential impact of the regulator's actions. It must continue to demonstrate it is properly balancing the interests of pension scheme members and ensuring firms remain competitive.
"Likewise, the business community remains anxious about the ever increasing cost of the Pension Protection Fund (PPF) levy, which must be not be allowed to ratchet up. Already, the actual cost of PPF to business is double the original estimate.
"It is clear from the survey that as well as being patently unfair, the Government's deal on public sector retirement age will hamper firms' ability to make the necessary reforms to their own schemes."
Other key findings in the survey:
- Employers are currently just as likely to offer staff a DC scheme as they are a DB scheme - 53 per cent do so compared to only 35 per cent in 2004. But employees are still failing to take full advantage of company contributions to DC schemes. Contributions were, on average, 6.6 per cent of salary yet the maximum employers were prepared to pay was 9.6 per cent.
- Take up rates are higher for DB schemes than for DC - 90 per cent eligible employees for DB but 61 per cent eligible for DC schemes. Take-up in DC schemes varies greatly between firms and depends on the action of the company. Automatic opt-in is the most successful means of achieving high take-up, achieving a success rate of 75 per cent in the 16 per cent of firms that deploy it.
- One in ten firms have already raised their normal retirement age, where these are below the state pension age of 65. A further 11 per cent are considering such a rise.
- Employers are already providing staff with flexibility around the retirement age and not just early retirement. Over two thirds are already prepared to consider requests to work beyond the expected or normal retirement age.
- Despite the offer of flexibility, employers expect only 2.5 per cent of retiring employees to request postponement. The most optimistic sector was the hotel and restaurant sector (10%) and in terms of size, small and medium-sized firms were the most upbeat (5%).
1. A defined benefit pension scheme guarantees a fixed percentage of salary on retirement, depending on the number of years of service. A defined contribution scheme is one where the pension level is dependent on the performance of funds invested over a working life.
2. The survey was carried out between February and March 2006 to cover 2005. A total of 355 CEOs, company chairmen and senior board members responded. For a pdf copy of the report please contact the CBI Press Office.
3. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce.
Member companies, which decide all policy positions, include:
- 80 of the FTSE 100
- some 200,000 small and medium-size firms
- more than 20,000 manufacturers
- over 150 sectoral associations.
With offices across the UK as well as in London, Brussels, Washington and Beijing, the CBI coordinates British business representation around the world.
4. Mercer Human Resource Consulting is a global leader for HR and related financial advice and services, with more than 15,000 employees serving clients in more than 190 cities and 40 countries and territories worldwide. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific and London stock exchanges. For more information, visit mercerHR.com.
It is the largest consulting firm of its type in the UK, with some 3,000 staff in 19 office locations. Website:www.mercerHR.com/ukpress