pensions 2A major survey of pension trends in smaller firms with 250 or fewer employees conducted by the Association of Consulting Actuaries (ACA) has found the reactions to some of the ideas outlined in the Government’s recent workplace pension reinvigoration paper[1] are mixed. Firms without a pension scheme at present are more relaxed about large, multi-employer schemes, whereas those with existing schemes are largely opposed to fewer, larger schemes and Government intervention to encourage their take up. Whether this situation will change as tens of thousands of these smaller firms confront auto-enrolment from 2014 onwards is unclear. The pursuit of value-for-money pensions, given the combined ‘pressure’ for scale from Government, the Regulator, possibly the OFT and multi-employer scheme providers, may change the outcome and have a profound impact on the shape of pension provision and its sustainability over the next few years, says the ACA.

This report forms part two of the ACA’s Smaller firms’ pension survey and focuses on questions posed to firms following the publication of the DWP’s workplace pensions reinvigoration paper, as well as examining wider areas such as trends in pension contributions.

Key findings are:

  • Increasing the amount people receive as an outcome from their savings was the ‘top priority’ for firms when considering the objectives outlined in the DWP reinvigoration paper. Increasing transparency and trust was the second ranked priority. Increasing the amount people save in pensions came out as only the fourth ranked priority.
  • A third of firms support ‘automatic escalation schemes’ whereby members’ pension contributions increase at a future date, often in line with wage increases, with 22% saying they would consider adding such a feature to their scheme.
  • 17% of firms said that a ‘money back guarantee’ of members’ contributions at either retirement or death would make a significant difference (and 32% a marginal difference) to employees joining a qualifying default fund run by their scheme.
  • 67% of firms do not believe fewer, larger schemes result in better value for money for savers and/or employers and only a fifth feel Government should encourage scheme consolidation in the pensions market.
  • 67% of firms do not support the Government facilitating and encouraging the development of large collective schemes where, for example, investment, inflation or longevity risks might be shared between members and employers.
  • Firms with no pension scheme at present are more positive about the value of large schemes (42% are supportive) and Government intervention (supported by 39%).
  • 66% do not support the Government encouraging businesses with small defined contribution arrangements to merge these into multi-employer schemes.

The ACA survey gathered responses from 344 smaller employers with 250 or fewer employees. There are over 1.2 million of these smaller firms which employ over half of the UK’s private sector employees (59%) and generate a half of all private sector turnover (49%), amounting to £1,500 billion per year. They make up 99% of all private sector enterprises. Presently across the UK as a whole, around 75% of smaller firms (rising to 85% of those employing 5 or fewer employees) provide no workplace pension scheme, but between 2014 and 2018 all will have to auto-enrol employees aged 22 and above, earning over £8,105pa (2012/13 figure), into an auto-enrolment scheme.

Earlier this month, the ACA published results from the survey noting that contributions into smaller firms’ pension arrangements are flatlining. Average combined pension contributions by employers and employees into defined contribution schemes have remained static since the last survey in 2010 at 9% of earnings into trust-based schemes and just over 7½% into contract-based plans. This trend, given lengthening life spans and generally lower investment returns in recent years, is alarming in terms of the inadequate pension outcomes that will emerge in the years ahead.

The results prompted ACA Chairman, Andrew Vaughan, to call for minimum auto-enrolment contributions to be increased to 12% by 2020.

Other findings were:

  • Smaller firms believe financial incentives are the key to increasing both employer and employee pension contributions above existing levels. For employers, reduced employer’s National Insurance contributions are seen as the most important way of enabling them to boost pension contributions, followed by less ‘red tape’, reduced corporation tax and a clearer disclosure of pension charges.
  • For employees to contribute more into their pensions, firms again felt reduced National Insurance and Income tax were key, followed by a clearer disclosure of charges. They also felt that a ‘star rating’ system for pension schemes covering charges, governance and transparency and a ‘money-back guarantee’ of members’ contributions on retirement or death would help boost scheme membership, both initiatives championed recently by the Pensions Minister, Steve Webb.

Commenting on the survey results published today, ACA Chairman, Andrew Vaughan said:

“Smaller firms employ the majority of private sector employees and the trend-line is that the percentage share is increasing quite rapidly. It is vital that the auto-enrolment and reinvigoration agenda is pursued so a significant proportion of these firms’ employees are placed in high quality pension schemes that offer value-for-money. Yes, we must not be too prescriptive in terms of complex regulatory rules, but it is vitally important that Government, the pensions and financial services industries and representative bodies of smaller employers come together to make sure smaller employers grasp the opportunity to enrol millions of new pension scheme savers from 2014 in products that are sustainable and good value.

“In my view, it would be disastrous if smaller firms’ employees are auto-enrolled en masse into products from 2014 that offer poor value and weak governance. It places immense pressure on Government to make sure its reinvigoration programme is pursued at some pace, ideally supported by the Opposition so legislative changes can be agreed in quick time. It would be a missed opportunity if providers and employers are unable to offer some new designs because of reforms moving too slowly over the next year or so. We are encouraged that the Pensions Minister seems aware of the challenges ahead.”