Press Release

State Reform Proposals Too Complex, Says Major Survey On Pension Reforms That Also Shows Many Smaller Firms Will Revise Existing Schemes Or Will Abandon Them Altogether

25 April 2006: A major survey of smaller firms'  attitudes to the reforms proposed by the Pensions Commission, published today (28 April), has found close to two-thirds (61%) think the State pension reforms are too complex.  The reforms will not create the clear understandable base upon which private savings can be built - the Government needs to look again at a simple consolidated State pension, say firms.  The survey also found a quarter of small firms will revise their existing pension schemes to reduce the cost impact of the proposed non State reforms or will abandon their scheme altogether.  Even if employees are all auto-enrolled  into schemes, 4 out of 10 firms expect opt-out rates to be higher than 30% of their employees.  Amongst firms employing 50 or fewer, this high opt-out rate is expected by 6 out of 10 firms.

The survey, conducted by the Association of Consulting Actuaries (ACA), underscores the deterioration in workplace pensions amongst smaller firms employing 250 or fewer people - firms that in total employ 58% of the UK workforce and which produce over half of UK business turnover.  This is a sector where the Pensions Commission's key private sector reform proposals (if enacted) of auto-enrolment into existing schemes or a new National Pension Savings Scheme (NPSS) will be most severely tested. THE COMING WHITE PAPER MUST REMOVE THE DIFFICULTIES EMPLOYERS FACE IN PROVIDING PENSIONS.

The main survey findings were as follows:

• 74% of defined benefit schemes in the small firms sector are now closed to new entrants with 41% also now closed to future accruals.

• Employer pension contributions into smaller firms' defined benefit schemes (17.7% of earnings, on average) are now three-times those into defined contribution schemes, where contributions range from 3% to 6%, depending on the type of scheme in place.

• Around half the firms in the sector (51%) say the pension scheme they now provide is not as good as the NPSS proposed by the Pensions Commission.

• 1 in 4 small firms say they will either revise their existing pension scheme to mitigate against the costs of higher scheme membership post-enactment of the reforms (16%) or will probably close their firm's scheme (9%)

• 1 in 5 small firms say that employees would have to meet the cost of introducing NPSS through lower wages or employment levels.

• There is greater support (56%) than active opposition (17%) to the NPSS proposal amongst these small firms.  However, there are greater worries about the implications amongst firms employing 50 or fewer staff. 

• 61% of firms say the Pensions Commission's State Pension reforms are overly complex, with 68% saying that these do not create the clear incentive or understandable base upon which private savings can be built.

• 88% of firms support more work on the idea of a consolidated State pension (combining the Basic State Pension and earnings-related S2P), although a sizeable group would not want such an outcome to add to costs or taxes.

• Only 56% of these smaller firms think that retirement ages should rise because of greater longevity, with as many as 3 out of 4 of the smallest firms opposing a later State Retirement Age , as proposed by the Pensions Commission.

• To set an example, 57% of firms say the Government should raise the public sector retirement age for existing employees as and when there are changes to the State Retirement Age.

Commenting on the survey results, ACA Chairman, Adrian Waddingham said:

"It is clear from this latest ACA survey that 'NPSS alone is not enough'.  First and foremost, businesses need to see a simple State scheme in place upon which to build any second-tier private pension.  Despite recent encouraging noises from the Chancellor, it's still unclear that the State pension system will be thoroughly reviewed to make it fit for purpose.  The number of pensioners on means-tested benefits needs to be markedly reduced as we introduce a better, simpler State pension that improves by more than RPI, paid for largely by a later retirement age.

"NPSS, which our survey found is generally welcomed by smaller firms, can only be safely built on top of this simplified and improved State pension.  But it must not be allowed to displace better existing schemes: the Pensions Commission failed to offer any encouragement for good workplace pensions. How sad if all we have is NPSS that will place 100% investment and longevity risk on to employees.  There are particular dangers in the NPSS approach for the lower paid, who must have reliability in the level of pension expected and received.

"At present, good risk sharing schemes are subject to an intolerable level of costly regulation, built up over the last 20 years by misguided reforms.  This must change quickly.  We have today spelt out three simple changes to present pensions legislation  that would help existing scheme sponsors to continue to offer schemes better than NPSS, where the risk is shared between employers and employees. We need to get back to schemes costing employers 10% of salary, and employees 5% - the traditional “2 to 1” ratio in a good scheme.

"Without these much needed reforms the Government will continue to see, through its inaction, the destruction of good workplace pensions in the private sector, affecting millions of existing scheme members.  Without White Paper reforms good employers will ask why government has made pension provision so difficult.  Without reforms, a growing and huge pension gulf will emerge between public and private sector employees that must eventually fuel a political response.  Is this what Mr Blair and Mr Brown want as their political legacies?" concluded Adrian Waddingham.   

The initial report of the ACA’s 2006 Smaller Firms Pension Survey is available at www.aca.org.uk on the ‘Discussion Papers’ page (see Placard 23: NPSS alone is not enough).  Printed copies of Placard are available from the ACA, Warnford Court, 29 Throgmorton Street, London EC2N 2AT.