Comment

2012 AND ALL THAT

Unless the economic climate improves, Personal Accounts in their Olympic year debut could be the new Eddie “the Eagle”

The year 2012 is no longer the distant future but coming up with frightening rapidity. Clearly UK sports champions look as if they will be well prepared for the London Olympics, but more importantly how will the pensions industry, and in particular small businesses, cope with the introduction of Personal Accounts – a far more notable event in the same year?

With this in mind, the influential Association of Consulting Actuaries (ACA) has produced a report with some disturbing analysis. Among firms where there is no employer sponsored scheme at present, 75% of these firms expect opt out rates to exceed 40%. So communications in the run up to 2012 must be key.

The smaller firms sector – firms employing 250 or fewer employees – is the largest part of the UK private sector economy. It employs over 59% of the working population and generates over half of the UK business turnover of £2.7bn. These smaller firms make up over 99% of the UK enterprises – there are only 5,900 businesses including public corporations and nationalised bodies – that now employ over 250 people. The importance of pension trends in the smaller firms sector is therefore clear in terms of the coverage of employees, over 9m, and the potential of some of these firms to be the larger firms of the future.

It is also the key market where the success of the new Personal Accounts scheme and auto-enrolment will be most tested, including as it does over 1.2m firms, the vast majority of which at present operate no workplace pension scheme.

Commenting on the survey results, ACA chairman, Keith Barton, said: “Our survey suggests the benchmark set by the government may weigh very heavily on smaller firms, particularly if economic conditions are not good at the time auto-enrolment and Personal Accounts are launched.

“Of particular concern is firms’ expectation as to how many of their current pension schemes will fall short of exemption from Personal Accounts and the scheme reviews and levelling down that might therefore occur, alongside high opt out levels by individuals. While a phased introduction of the reforms will help, we do wonder whether the minimum benchmark for smaller firms has been set too high. The viability of running a low charge scheme across over 1m employers, with minimal red tape, also remains to be resolved.”

The 2008 ACA Smaller Firms Pension Survey collected responses from over 394 employers, all with 250 or fewer employees. Key findings featured in the report are as follows:

55% of firms say their current pension schemes would fail the Personal Accounts exemption test, with over 60% paying lower contributions than proposed for Personal Accounts, particularly among the smallest firms
where a workplace scheme is offered in firms employing 50 or fewer staff, average combined employer and employee pension contributions are below 5% of earnings (and only around 1 in 5 of these 1.2m firms runs such a scheme)
the smallest firms with an existing scheme or with no scheme expect opt out levels by individual employees to exceed 40%. Affordability is seen as the principal reason likely to drive the opt out decision, not the loss of means tested benefits in retirement
31% of firms expect to reduce their pension scheme benefits (to mitigate the cost of higher membership) or to close their scheme in favour of Personal Accounts
over 90% of the defined benefit (DB) schemes in this sample of smaller firms are closed to new entrants with half closed to future accruals. No firms are prepared to auto-enrol into a DB scheme.

Affordability
The survey results suggest the government might reasonably expect between 4 and 6m extra pension savers through auto-enrolment and Personal Accounts.

One of the key factors is “affordability” in the opt out decision, the economic conditions at the time of introduction could have a big impact, either way. Ideally, government would best launch auto-enrolment and Personal Accounts alongside a move to lower personal and corporate taxes, but this would clearly require a turnaround in economic conditions by 2012.

The ACA’s 2008 Smaller Firms Pension Survey Report is available at www.aca.org.uk

stephanie.hawthorne@lexisnexis.co.uk