Only a fifth of SME firms have considered the impact of 2012 pension reforms

Only one in five of the UK’s smaller employers have started to consider the financial impact of new statutory rules, that from 2014 will require them to auto-enrol millions of extra employees into workplace pension schemes – employees who at present have not joined schemes.

The report, ‘2010 Smaller Firms’ Pensions Survey: Auto-enrolment and Nest’, from Association of Consulting Actuaries (ACA) polled 404 small and medium-sized (SME) organisations with 250 or fewer employees.

Across the UK, there are over 1.2 million SMEs with one employee or more. All will be required to auto-enrol their employees into a qualifying workplace pension scheme under the government’s pension reforms, which come into effect for large employers from 2012.

Over half (53%) of respondents from SMEs say the reforms will add significantly to costs, and 29% say they are likely to reduce future pension contributions into existing and new schemes to meet the additional cost of newly pensioned employees, although the scope for levelling-down is limited across the UK’s smaller firms as a whole as at least two-thirds do not offer any pension arrangements at present.

Other findings include:

  • 54% of SMEs say they support auto-enrolment, but they expect 35% of employees to opt-out of the new pensions.
  • 60% of smaller firms say they will auto-enrol current non-joiners into existing schemes.
  • 20% say they will close their existing scheme and auto-enrol all employees into Nest.
  • one-fifth say they will auto-enrol employees into a new firm’s scheme, or will restrict entry into an existing scheme placing the balance in NEST, or will use NEST as a foundation scheme.
  • 66% say that employers with one employee should be exempt from operating auto-enrolment.
  • 61% say employees with less than 3 months’ service should not be auto-enrolled.
  • The respondents say the principal reasons why employees do not join existing schemes is cost (84%), a preference to spend (72%) and disillusionment with pensions (69%).
  • Firms not presently providing pensions say they do not principally because of cost (96%), economic conditions in their sector (82%) and insufficient competitive pressures (53%).

On the National Employment Savings Trust (Nest), the smaller firms responding to the survey have mixed feelings.†Nearly half (43%) agree with its establishment while the remainder are split between 11% who would prefer existing commercial organisations to fulfil the Nest role and 46% who disagree with the entire concept.

A small majority (53%) of smaller firms favour no further delay in introducing auto-enrolment.

According to the report, if the auto-enrolment policy was reviewed to exclude firms with just one employee, then this would reduce the number of firms that the auto-enrolment regime would need to manage by some 200,000.†More significantly, excluding firms with fewer than five employees would reduce the number of firms subject to auto-enrolment by a further 600,000.†Excluding these micro-employers need not be a permanent decision.† Once the regime has been established and been seen to work efficiently, smaller firms could be gradually eased into coverage.

The ACA survey also found that combined employer and employee pension contributions into defined contribution (DC) schemes in smaller firms range, on average, between 7.5% and 9.5% of earnings, depending on the type of scheme and size of firm.†Where defined benefits (DB) schemes are still present, 86% are closed to new entrants and 41% are also now closed to future accrual by existing employees.

Stuart Southall, chairman of the ACA, said: “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% as against 15%.†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.†Much remains to be done in educating the wider public about the importance of private pension saving to boost retirement incomes and the need to make room for higher levels of savings in spending plans.

“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 five employees.

“There is also a consensus to exclude employees with under three 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.”

Read more articles on the 2012 pension reforms