Renewed focus required on pension costs

Linda Bell, who leads the pensions team at KPMG in East Anglia, warns of the need to tackle risk issues

Linda Bell, who leads the pensions team at KPMG in East Anglia, warns of the need to tackle risk issues

RETAINING cash is good business practice, whatever the economic climate, but the cost of company pension schemes is one area now under close scrutiny more than ever.

The pension landscape has changed dramatically over the past 12 months as the impact of the credit crunch has resulted in pension scheme investments suffering a major setback.

Companies with defined benefit schemes will have seen their cash funding deficits rise in the wake of the economic downturn. Meanwhile, pension trustees facing much higher deficits and worsening economic conditions are asking for more cash to be directed into pension schemes - precisely at the time when cash is hard to come by.

With increasing numbers of companies looking to cut costs in all business areas, pension schemes are not immune. Companies will be looking to reduce the cost of future pension provision and some will be unable to meet their agreed funding plans.

Now is the time for employers to take action to develop a strategy to progressively reduce their pension risk. This makes it imperative for employers across East Anglia to tackle liabilities and to develop plans to reduce legacy pension liabilities relating to ex-employees - a feature of many of our regional businesses - and if necessary to reduce or cease providing defined benefits for current employees

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With all this in mind, there are many options available in which to make real cash savings for your business., Here are some of our top tips to consider when looking at your pension arrangements:

n Re-negotiate funding agreements with the trustees of your pension schemes. For instance, extending the recovery period by five years could reduce your cash funding by 50%.

n Consider implementing salary sacrifice arrangements for pension provision, something which could typically save 10% of pension costs, as well as saving cash for your employees too.

n Consider offering your current and ex-employees who are members of your defined benefit pension scheme the opportunity to take early retirement before April 2010 when the statutory minimum retirement age increases to 55 years. Having members retire early will reduce your pensions risk and could help reduce the deficit. For an individual who is currently 50 if they do not retire before April 2010 they will have to wait almost five years, and many are choosing this option.

n Pay pension contributions in the best period. Pension contributions are normally tax deductible on a paid basis so companies could agree with the trustees to pay contributions in the year which gives the most effective tax relief. For example, where a company is making an abnormally large contribution (perhaps to fund a pension deficit), it should take care that it structures payments to avoid deductions being deferred under the pension spreading rules