UK businesses are at a "severe competitive disadvantage" in Europe due to weaknesses in private and state pension systems, says Aon Consulting.

The employee risk and benefits management firm has conducted research comparing UK systems to other European models that have better withstood the global downturn, and has found that the UK is losing out due to its funded defined benefit (DB) model.

The European Business Leaders Survey shows the differences in the delivery of pension benefits across Europe, with fully-funded DB schemes in Ireland, the Netherlands and UK, to fully-insured and primarily defined contribution (DC) systems in place in Scandinavia.

The survey, conducted in the first quarter of 2009 across business leaders in Europe, found that the UK, Netherlands and Ireland had suffered the biggest competitive disadvantage, attributed by Aon to their pension liabilities from sponsoring DB pension schemes.

"Employee benefit provision can have a significant impact on a company's cost base but the extent will vary considerably according to where the company's pension liabilities are," commented Paul McGlone, director of propositions, UK. "So, while volatile securities markets may be a global phenomenon, the way in which this volatility impacts pension scheme sponsors is not. There are winners and losers, with UK business a clear loser.

"The pensions issues highlighted in this report are long-term challenges that require careful consideration by governments, regulators and pension scheme stakeholders. The financial crisis has worsened many of these challenges and focused attention on them, but also offers an opportunity to address them."

McGlone added that those companies with DB responsibilities are facing increasing pressure from the recession, and the UK is at the biggest disadvantage as three quarters of UK pension fund assets are held in these plans. However, investment strategy can be to a disadvantage even in those countries with predominantly DC arrangements, such as Scandinavia, which favours conservative investment policies, making it harder to recoup portfolio losses.

"Continuing recession will hasten UK companies' efforts to reduce their DB liabilities. More schemes will close, both to new members and to future accrual for existing members. Indeed 80 per cent of companies have already closed to new members and 20 per cent have now also closed to accrual for existing members. We expect this proportion to rise above 50 per cent within three years.

- Pensions Age May 2009

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