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Majority of employers not ready for pension reforms

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Just 20 per cent of the UK’s smaller employers have started to assess the likely financial impact of planned major reforms to the pensions system.

A survey carried out by the Association of Consulting Actuaries (ACA) found that only one in five small firms have so far investigated the cost implications of the changes which will see employers obliged to enrol all employees in a pension scheme if they are not already in a qualifying fund.

The scheme is due to be phased in as from October 2012 for larger companies with 250 or more staff, but the effects for small firms will be felt as from 2014.

Under the scheme, employers will contribute 1 per cent of an employee’s salary to the fund initially, with the figure rising to 3 per cent by 2017. Individuals will need to contribute 4 per cent of their salaries to the new scheme, while the government will add a further 1 per cent in tax relief.

According to the ACA survey, which covered some 400 smaller employers, more than a half of respondents (53 per cent) believe that the scheme would add significantly to their costs, with almost a third (29 per cent) likely to reduce future pension contributions into existing and new schemes in order to meet the additional expense of new members.

Despite 54 per cent of firms backing the idea of automatic enrolment in workplace pension schemes, some 35 per cent think that a proportion as high as 35 per cent of their workers will choose to opt out of the new pensions.

There are over 1.2 million smaller firms across the UK with one employee or more, and all will be required to auto-enrol their employees into a qualifying workplace pension scheme – one which meets certain legal standards, including a minimum employer contribution – under the pension reforms between 2014 and early 2016.

Six out of ten firms in the survey said they would auto-enrol current non joiners into existing schemes, but 20 per cent added they would close their existing scheme and auto-enrol all employees into the government’s National Employment Savings Trust (NEST).   

Two thirds argued that employers with one employee (and a half set the exemption at those with fewer than five employees) should be excused from operating auto-enrolment.

A similar proportion (61 per cent) said that employees with less than three months’ service should not be auto-enrolled.

For the majority of smaller firms (84 per cent) cost was cited as the principal reason why employees do not join existing schemes.

Cost also loomed large for those firms that do not currently provide workplace pensions, with 96 per cent of them listing expense as the main factor.

On the issue of the National Employment Savings Trust, many small firms appeared to have mixed feelings.

While 43 per cent support the government backed fund, the remainder are divided between those who would prefer existing commercial organisations (11 per cent) to fulfil the NEST role and those disagreeing with the entire concept (46 per cent).

The ACA said that if firms with just one employee were excluded from the plans, this would reduce the number of businesses that the auto-enrolment regime would need to manage by some 200,000.

Excluding firms with fewer than five employees would reduce the number by a further 600,000. 

The effect would be to ease the administrative burden of the scheme, the ACA added, while only reducing the numbers of eligible workers by around two million.

Micro-employers could be gradually added to the scheme once it was firmly established.

Stuart Southall, the ACA’s chairman, commented: “The success of the auto-enrolment policy in smaller firms is likely to hinge on how well the economy recovers over the next few years. 

“The opt-out rates expected are much higher than we found amongst larger organisations – 35 per cent as against 15 per cent. The cost of pensions to both employees and employers is the big issue that has prevented the extension of pension provision to date in the sector. Whilst auto-enrolment may break the mould, if we are all still paying higher taxes to recover over-spending, it’s difficult to see how this will not bump up opt-out rates.”

Mr Southall went on to say that size of firm is seen as an important element: “Certainly, our surveys of both larger and smaller firms have found a clear consensus in favour of excluding firms with just one employee from the auto-enrolment regime, with a majority looking to remove firms with fewer than 5 employees.

“There is also a consensus to exclude employees with under 3 months’ service and for pension contributions not to be based on the earnings basis laid out in current rules. If adopted by government, these changes would all greatly simplify the launch of auto-enrolment.”

The coalition government is conducting a review of the auto-enrolment scheme.