Small firms bridle at pension strong-arm

Improving private sector pension provision is a laudable aim. But the new rules will inevitably cost SMEs time and money.

by James Taylor
Last Updated: 19 Aug 2013
A mixed reaction to the Government's new plan to ensure that all UK firms, regardless of size, will have to offer pensions to their staff from 2012: although there's a general acceptance that something needs to be done to address the current situation, where millions of private sector workers have no pension at all, there's concern that the new rules will be fiddly, time-consuming and expensive for small firms. And to be fair, it's not entirely in keeping with the Government's supposed plan to reduce red tape...

The new rules mean that all UK employers must either offer their own company pension scheme, or enrol their staff in the new National Employment Savings Trust. An idea dreamed up by Lord Turner in his review back in 2005, this is basically a pretty standard defined contribution scheme - into which staff will eventually put the equivalent of 8% of their earnings (4% from them, 3% from their employer, and 1% from tax relief). Estimates seem to vary about what this will actually amount to in real terms - but one pensions expert told the BBC that based on the average UK salary of £25,000, someone who paid into the scheme for 30 years would end up with a pension of about £7k a year. (There's a good Q&A on the BBC site here)

There's a real problem that needs addressing here: huge numbers of private sector workers (estimates seem to range from 9m to as many as 13m) have no pension provision whatsoever - and since many of these people are on low or middle incomes, they won't have much in the way of a nest egg to fund their retirement (particularly if the housing market keeps going south). So arguably something needs to be done to encourage people to save.

The trouble is that this inevitably creates an extra burden for employers - and the smallest employers will feel this burden most heavily. The Federation of Small Businesses says it is 'extremely disappointed' that there wasn't an exemption for micro businesses; they argue that choosing, setting up and administrating a scheme will be costly and time consuming, while FSB research suggests that 70% of business owners don't feel they know enough about pensions to do it. And if small firms are forced to cough up at least 3% of wages, we're talking about an extra cost of over £3bn a year.

The good news is that there are some concessions. Although the scheme starts in 2012, it will be phased in over a five-year period, so companies have a bit of time to get their house in order. Only staff aged over 22 and earning more than the income tax threshold (currently £7,475 p/a) will be eligible. Employers will have a three month window before they have to enrol new staff, which will help those employing a lot of temporary or seasonal workers. Plus staff can opt out if they choose (though let's hope they're not pressured to do so). And if they really don't understand the alternatives, presumably they can always use the Government scheme as a default fall-back.

The new rules will undoubtedly be an extra cost and hassle for small firms. But workplace pension schemes have been on the slide for years, and this is going to cause all sorts of problems further down the line. So does the Government really have any choice?

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