Business Finance: Linda Ellett of KPMG on tackling the pensions issue

LAST month the CBI warned that soaring pension costs were starting to damage UK growth prospects, and harming the ability of businesses to invest and create jobs.

With the latest official figures confirming that the deficit of the UK’s final-salary pension schemes hit its second highest level on record in July, continued economic weakness and quantitative easing are piling the pressure on the region’s defined benefit pension schemes. Add to the mix that all companies will face auto-enrolment obligations with the approaching implementation date, under which all businesses will be obliged to automatically enrol all eligible employees into a company pension scheme, and pensions is fast becoming a major issue for all businesses.

Local businesses that offered employees generous promises of guaranteed future pensions are now counting the cost as the funding shortfall hits record levels and may yet rise further. The Bank of England’s attempts to stimulate the stuttering economy by buying government bonds has an unwelcome side-effect on pensions schemes - its actions suppress bond yields and fuel inflation, driving pension shortfalls higher.

In an already tough business environment, those companies with defined benefit pension schemes face even greater challenges and the very existence of a defined benefit pension scheme can act as a serious impediment to refinancing or pursuing merger and acquisition activity. Our teams across the country are now seeing how the pensions issue is having an impact on local companies on a day to day basis. For example, we recently worked with a business which had been loss making for the last 12 months and had a significant final salary pension scheme liability of around �7m (against turnover of only �2m). As such, it was under pressure to fund the ongoing pension scheme liability from trading activities, which it was unable to do and subsequently went into administration.

But the challenges that businesses are facing in meeting their pension commitments have driven ever greater innovation, as companies look to address these issues. We are working hand in hand with many companies across the region to reduce the cash that needs to be paid into their schemes and manage the volatility; the focus is on securing a strong future for the business and hence long term security for the pensions benefits.

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So, while economic or regulatory conditions are unlikely to make life easier for sponsors of defined benefit schemes in the short-term, there will be opportunities or companies willing to “tackle pensions”.

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