Pensions shift risks more market chaos, warns CBI

BRITAIN’S biggest business group has warned the Government that its overhaul of final salary pension schemes will reduce company investment and risks sparking fresh financial turmoil.

The Confederation of British Industry (CBI) said proposals designed to make so-called defined benefit schemes safer will force employers with wellfunded schemes to pump billions of pounds of extra cash into them to meet new rules.

A letter to the Department for Work and Pensions (DWP) seen by Telegraph warns that “excessive overfunding and de-risking” will come at the cost of productive investment.

The rules, drawn up by the DWP, will make companies that offer final salary pensions invest in a low-risk way and meet funding targets by the time most members are retired.

But the CBI says they could also result in some businesses taking on “dangerous levels of investment risk” in a rush to meet fixed funding targets.

This “poses a threat to schemes’ and savers’ interests”, the letter says.

The overhaul is designed to prevent a repeat of the scandals that engulfed BHS and Carillion.

Both the high street giant and construction company collapsed with black holes in their pension funds, leaving them unable to fulfil promises to pay workers a set income for life after retirement.

While the CBI’s response to the DWP’s consultation stresses that it is “clear” reforms are needed, it says the “disproportionate” approach stands in contrast with the Government’s goal to raise economic growth. Businesses are already dealing with soaring energy bills, higher staffing costs and a weakening economy, it adds.

The changes also risk fresh market volatility as schemes switch from stocks to bonds in a scramble to de-risk.

The CBI estimates that close to £500bn of the £2.5trillion in defined benefit pension assets will need to transition into bonds as a result of the proposed changes.

“Given that the total size of the UK bond market is just under £2trillion, significant asset price distortion over the short to medium term appears highly likely,” the letter says.

The lobby group wants schemes to have more flexibility to invest in higher risk investments when most members are retired.

Industry consultant LCP previously

Overhaul of final salary schemes poses a threat to investment and to savers’ interests, ministers told

‘Seismic shifts in gilt yields have shown the importance of a funding regime that is flexible’

warned that the new rules will cost businesses £30bn and push hundreds of companies to the brink of collapse.

The Society for Pension Professionals, which represents advisers and trustees, describes the proposals as “unnecessarily restrictive” in its submission to DWP. “Seismic shifts in gilt yields have shown the importance of a funding regime that is flexible,” it adds.

The Department of Work and Pensions said: “Our intention is to have better – and clearer – funding standards, whilst retaining the strengths of a flexible, scheme-specific approach. It is neither ‘one size fits all’, nor about micro-managing schemes. Every scheme will be treated on its merits.

“Millions of people rely on defined benefit schemes. While most are well managed, best practice is not universal. Our new measures will help ensure they are protected for the long term.”