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The Actuary The magazine of the Institute & Faculty of Actuaries
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ACA publishes 2008 smaller firms pension survey report

The Association of Consulting Actuaries (ACA) has released the first report on pension trends in small firms. Firms with less than 250 employees employ 59% of the working population. The ACA forecasts that such businesses are key targets for the Government’s new personal accounts (PA) scheme.

The scheme is aimed at extending private pension coverage in the UK. The ultimate goal is that, from 2012, all employees will be enrolled into either an exempt workplace scheme or the new PA scheme or choose to opt out. To secure exemption from the PA scheme, employers’ offerings must equal or exceed a minimum scheme standard of 3% employer contributions, 4% employee contributions and 1% tax relief.

The report’s key findings were:
>> The majority of existing smaller schemes would fail the personal accounts exemption test — 55% of the 394 firms surveyed said that their current pension schemes would fail in this respect. More than 60% said they were currently paying lower contributions than the minimum levels proposed for personal accounts.
>> Firms are concerned that their schemes will experience sharp falls in membership as individuals opt out and into the PA scheme.
>> Where a workplace scheme is offered by firms employing less than 51 staff, the average combined employer and employee contributions are below 5% of earnings. Across all firms, contributions were well below the 8% minimum standard highlighted by the PA scheme.
>> One third 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.
>> Of the firms surveyed that have offered defined benefit schemes in the past, 90% say these schemes are now closed to new entrants and approximately 50% are closed to future accruals.

ACA chairman Keith Barton commented, “Our latest survey in the sector points to the huge challenges there are in achieving wider pension coverage in smaller firms. Yes, it is very clear that there is a huge under-pensioning of millions of employees, but 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 wonder whether the minimum benchmark for smaller firms has been set too high. The viability of running a low-charge scheme across more than one million employers, with minimal red tape, also remains to be resolved.”

The ACA’s report is available to view at www.aca.org.uk on the ‘Latest Publications’ and ‘Research’ pages.