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Small firms struggling to offer ‘adequate’ pension provision

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A new survey has revealed that 90 per cent of defined benefit pension schemes run by small firms have been closed to new entrants.

In 1996, only 18 per cent of final salary pension schemes were closed to new workers.

The survey of some 400 firms employing fewer than 250 workers was carried out by the Association of Consulting Actuaries (ACA).

The study also found that, among businesses with under 50 staff, employer and employee payments into defined contribution pension schemes have barely changed in the last 12 years.

At less than 8 per cent of pay, contributions have been more or less flat since 1996, the ACA reported.

Among very small firms, those employing four or fewer staff, some 80 per cent of businesses offer no workplace pensions at all.

In its efforts to boost retirement savings, the government is to introduce a major pension reform in 2012. This will mean that all employees will be enrolled automatically in an approved workplace scheme or in the new Personal Accounts scheme.

Worringly, however, 45 per cent of small employers, the chief targets of the new pension measures, predicted that employees would opt out of auto-enrolment when the legislation comes into effect.

Keith Barton, chairman of the ACA, said: “Pensions in smaller firms are struggling to survive in hostile economic conditions. The majority of defined benefit schemes are in this sector, but the vast majority, 91 per cent, are now closed to new employees and half to future accrual for existing members.

“This can be no surprise, given the significant increases in the cost of running such schemes, courtesy of lower investment returns, increasing life-spans and extra regulatory requirements.”

Mr Barton described the finding that contribution levels to contract-based schemes have remained static since 1996 as disappointing: “At a time when contributions into defined contribution schemes need to rise to offset the impact of lower investment returns and longevity improvements, it is dismal news that contributions remain pretty flat – much the same as they were in 1996, when we started this series of surveys.

“Indeed, combined employer and employee contributions amongst the smallest firms, employing 50 or fewer staff, are generally below 8 per cent of earnings.”

Mr Barton went on to say that pension outcomes today and into the future are looking increasingly inadequate.

He argued that more incentives need to be put in place to encourage pension savings to reach levels well above 8 per cent of earnings, particularly given that “a figure of at least double that is needed to provide anything like a comfortable retirement”.