Dramatised reactions to pension debts could worsen the recession, according to the Confederation of British Industry (CBI).

The group says that extra pressure has been heaped onto firms that run defined benefit (DB) pension schemes which could weaken sound businesses at this critical time, and affect the UK's economic recovery.

Government figures show that last June DB schemes were £53.4bn in surplus, but tumbling share prices and the credit crunch could have landed them £194.5bn into the red.

Investors and trustees urged not to feed the recession fireThe CBI fears that investors will therefore not allow for the longer-term, secure nature of this pensions funding, and will mark these types of firms down. It said this could trigger a vicious circle where shares further decline, pension liabilities grow again, and trustees ask for more money upfront from stressed firms who are trying to weather the storm. This would cut business investment and performance, and therefore force shares even lower. This would in turn reduce the capital that firms could draw on to survive or expand.

The request from trustees for more money for pension schemes could also exacerbate the downturn, reducing the funds available to put back into the business.

John Cridland, deputy director general at the CBI, said: "Longer lives and complex rules have made final salary pensions very expensive at the best of times. Many firms are committed to keeping their schemes running, but that becomes especially challenging during a recession.

"An overreaction to deficits could be a factor in sending some firms under, and leave the rest struggling for capital at a time when they need it most. We urge investors and trustees not to feed the fire. Instead they should step back from these spot valuations, and recognise that the deficits are a snapshot indication that does not reflect the full picture," he added.

With regards to the possibility of an exacerbation of the circumstances, the CBI is calling for investors to resist using spot valuations and instead take longer-term approaches, taking into account that deficits will be rectified over time. Trustees should allow companies to manage payments over the economic cycle by agreeing longer recovery plans, and the Pensions Regulator is urged by the CBI to then approve longer recovery plans.

The Pension Protection Fund is also urged to resist increasing contributions to the fund. Finally, the CBI said that the government should amend its rules that hinder firms with DB schemes from adapting to the recession, and that reform to the Section 75 rules go ahead.

"These measures could give businesses the breathing space they need to protect their pension schemes and survive the recession," concluded Cridland.

- Pensions Age January 2009

Share Story: