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Small firms struggling on pensions

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The workplace pension contributions made by smaller firms are failing to keep pace with the rising costs of pension funds, a new survey has found.

According to the latest study carried out by the Association of Consulting Actuaries (ACA), most defined contribution pension schemes run by smaller firms are attracting combined employer and employee contributions of less than 8 per cent of earnings.

There is little evidence, the ACA said, that such contributions are keeping pace with the increasing cost of building sufficient retirement incomes as people live longer. 

The picture is brighter in the case of defined benefit schemes. These are, on average, receiving combined employer and employee contributions of 24 per cent of earnings.

But, the ACA pointed out, almost 90 per cent of such schemes are now closed to new entrants. 

The ACA survey covered responses from 404 smaller employers with 250 or fewer employees. 

At present, two-thirds of smaller firms offer no pension scheme at all.

However, all firms will be required to auto-enrol their employees into a ‘qualifying workplace pension scheme’ between 2014 and early 2016 under the Government’s pension reforms.

By October 2017, contributions must constitute 8 per cent of an employee’s earnings, with a minimum of 3 per cent coming from the employer, along with 4 per cent from the employee and 1 per cent from the Government in the form of tax relief.

The ACA survey revealed that smaller firms expect 35 per cent of employees will exercise their right to opt out of the scheme.

Of those firms that currently run a workplace pensions scheme, some 84 per cent reported that some employees declined to join because of cost.

Of firms that do not offer a pension scheme, almost all (96 per cent) cited the expense as the main reason for not providing an employee pension fund.

Only 21 per cent of the smaller employers responding to the survey said that they had started to assess the likely financial impact of the new auto-enrolment and NEST rules.

In other findings, the survey indicated that a fifth of firms are planning to reduce their pension spend this year, while 14 per cent are aiming to increase their spend on employee retirement savings.

On the planned auto-enrolment and NEST scheme, a third of respondents (62 per cent) said that they will auto-enrol current ‘non-joiners’ into existing workplace pension schemes.

However, one in five also reported that they will close their existing schemes and auto-enrol all employees into NEST. Around a quarter of smaller firms say they will auto-enrol employees into a new scheme, and a fifth will restrict entry into existing schemes, placing the balance in NEST.

On other pension issues, 65 per cent of firms running a defined benefit scheme said the Government should allow schemes to index pensions in line with CPI, if they so wish in the future.

Two-thirds want a statutory override that would enable them to adjust scheme pension age automatically as life-spans extend.

Stuart Southall, the ACA’s chairman, commented: said: “Our survey has found savings by both employers and employees into defined contribution schemes generally have failed to keep pace with the cost of building a sufficient pension.

“Pension contributions into most schemes reporting to this survey need to double on average to at least 15 per cent of earnings if reasonable retirement incomes are to be achieved. Whilst understandable, it is concerning that the minimum levels of contributions under the auto-enrolment policy are very modest. If these levels become the norm, emerging pensions are likely to disappoint.”

Mr Southall added: “It seems clear to me that if we are to encourage a much wider proportion of our people to save adequately for their retirements, we will need to make greater room for savings from individuals’ disposable incomes. Employers, too, will need new rewards for boosting their pension contributions and greater freedom in pension design.  

“Greater transparency and low-cost products will play a part in this, as will better consumer financial education and auto-enrolment – but more will be needed. A plan to provide new incentives to save, building up over a number of years as the economy recovers, is badly needed.  

“The smaller firms covered by this survey – so important to the UK economy in terms of employment and innovation but where pension provision is endemically weak – seem particularly needful of financial incentives to kick start sufficient levels of pension saving.”