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The Actuary The magazine of the Institute & Faculty of Actuaries

Gloomy outlook for SME pension provision

The above was the main conclusion from ‘Delivering DC?’ a Pensions Institute report by Harrison, Byne and Blake published last month.

Key messages of this report are as follows:

  • The government must understand that if no changes are made to the way employer-sponsored DC pension schemes are designed and delivered in the small and medium-sized enterprise (SME) market it will not significantly extend pensions provision and has virtually no chance of achieving its ambition to change the 40:60 private/state benefit dependency ratio to 60:40 by the year 2050.
  • The evidence demonstrates that the government has not recognised where the real barriers to participation lie for SMEs, and that it does not consider seriously the views of advisers that work in, and understand, this tough market.

At present a complex and interrelated series of factors denies access to affordable and effective company pension provision to millions of people in the low-to-average earnings bracket in the smaller and medium sized-company market. These factors include:

  • The finance director’s reluctance to pay a company contribution to its pension scheme. FDs are not convinced by the traditional rationale for running a pension scheme, namely that it helps to recruit, retain, and motivate high-quality staff. Given this lack of conviction, for FDs the pension scheme does not represent a measurable return on investment.
  • The barriers imposed by the government’s means testing system, which discourages employers, advisers, and providers from promoting membership to low-to-average earners.
  • The withdrawal of advisers and providers from companies with fewer than 50–100 employees owing to low profit margins.
  • The fact that where providers do sell to ‘less attractive’ smaller companies with low-to-average earning employees, they impose an above-average annual management charge to compensate for the lack of economies of scale.
  • The commission war among pension providers, which started with the introduction of stakeholder schemes in 2001, encourages advisers in the SME market to select only those providers that pay above-average commission rates. Several major pension providers that either do not pay commission, or do not pay sufficiently high rates, are ignored by advisers.
  • Companies selected for their commission terms also provide the main default investment option – typically a managed unit linked fund – in which 80%–90% of members invest from the date they join the scheme to the date they retire. These funds do not adhere to clear performance benchmarks, nor do they necessarily provide relevant risk profiles for the long term and the changing requirements of members over the course of their working lives.
  • The lack of ‘at retirement’ services for members, most of whom accept their provider’s annuity, which could offer an income 25%–30% lower than the best available rates.