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Pension savings dismal in small firms, says trade body

Defined contribution pension savings are below 8 per cent in 55 per cent of small firms and a third of firms contributing more than this are expecting to level-down ahead of 2012, according to the Association of Consulting Actuaries.

The trade body surveyed nearly 400 employers with 250 employees or less and found the number of firms which believe their current pension scheme would fail the personal accounts exemption test rises to 69 per cent amongst firms with 50 or fewer staff.

The research, published today, also shows that 91 per cent of defined benefit schemes offered by small businesses are closed to new entrants and half are closed to future accrual.

It found that, of the 1.2 million smaller firms in the UK which employ around 9.6 million people, only 20 per cent offer some form of workplace pension scheme. As such, the ACA believes small businesses represent one of the key target areas for personal accounts.

Although its finding show that many employers believe opt out levels will be high, exceeding 40 per cent among the smallest firms, due to affordability issues rather than ongoing problems with means-testing benefits.

ACA chairman Keith Barton says: “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, however, it is striking that just 12 years ago our survey found 82 per cent of defined benefit schemes were then still open to new entrants.

“Just as worrying is the levelling-down of defined contribution schemes that has already taken place. We found 30 per cent of ‘traditional’ trust-based schemes run by smaller firms are now closed, replaced in many cases by more lightly regulated contract-based schemes with lower contributions. Indeed, combined employer and employee contributions amongst the smallest firms, employing 50 or fewer staff, are generally below 8 per cent of earnings. The result of this is that the pension outcomes today and into the future are looking increasingly inadequate. We found high levels of expected opting out from pensions, around 40 per cent to 45 per cent amongst the largest group of very small firms with 50 or fewer employees. Auto-enrolment and personal accounts would best take off when corporate and personal taxes are going down – a very unlikely situation now, even by 2012.”

Barton has called for new incentives to encourage higher contribution levels.

He says: “We need some serious new incentives to encourage higher levels of corporate and employee pension saving to levels well above 8 per cent of earnings – realistically a figure of at least double that is needed to provide anything like a comfortable retirement. This is going to be a real challenge given the fiscal tightening likely in the period ahead, but it has to be addressed.”

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