"Personal accounts" will impact small business pension schemes

An expert report into the Government's planned shake-up of small firms' pension schemes via the introduction of "personal accounts" suggests that many existing schemes will be forced to close as they won't meet the proposed exemption tests.

In December 2006, the Government announced its plans to introduce "personal accounts" as a result of the massive underfunding of pensions in the UK. The new scheme, which is expected to go live in 2012 will automatically offer all employees enrolment into a savings scheme.

As a result of the reforms, employers will have to provide 3% of workers' salaries into the scheme. As a result of the increased uptake by employees, employers are likely to have to reduce contributions to their current schemes (or close them down).

However, and influential report released by the Association of Consulting Actuaries (ACA) suggests that not only will the personal account reforms result in the closing of many existing pension schemes, as 55% of current schemes would fall short of the proposed exemption tests.

80% of small firms do not currently offer a workplace pension scheme

Around 80% of the UK's 1.2 million small firms do not currently offer a workplace pension scheme, so it will come as little surprise that they represent one of the key target areas for the Government’s pension reforms aimed at extending private pension coverage, whereby all employees from 2012 will be enrolled into either an exempt workplace scheme or the new personal accounts scheme (although employees will be able to opt-out).

Keith Barton (ACA Chairman) said, “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. Whilst 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 1 million employers, with minimal red tape, also remains to be resolved.”

• Read more about the Government's proposals for personal accounts here.