Small firms fail to up pension contributions

Most small firms fail to keep pace with necessary increases in employer pension contributions, the Association of Consulting Actuaries (ACA) says.

The majority of small businesses' pension schemes attract less than 8% of earnings in combined employer and employee contributions.

However, by 2017 contributions must be 4% of earnings from the employee and 3% from the employer.

The ACA's Smaller Firms' Pensions Survey finds defined benefit (DB) schemes run by smaller firms are much healthier, with the average scheme receiving 24% of earnings.

However, around 90% of DB schemes are closed to new entrants and 41% are shut to future accrual.

Small firms make up 99% of all private sector enterprises and employ 60% of UK private sector workers, but only a third offer any kind of pension scheme.

All of these firms will have to auto-enroll employees of more than three months earning over £7,475 per year into a pension scheme (their own or NEST) between 2014 and 2016.

However, only 21% of small employers have started to consider the impact of NEST and auto-enrolment.

Around a quarter of firms will review their pension schemes this year, while 21% want to decrease their pension spend over 2011.

Between 2014 and 2016, 62% of smaller firms say they will auto-enroll staff into existing company pension schemes. A fifth of firms will close their existing pension scheme and enroll staff into NEST.

A further 24% of firms will enroll workers into a new company scheme, and a fifth say they will restrict entry into an existing scheme and put the remaining employees into NEST, or use NEST as a foundation scheme.

"Pension contributions into most schemes reporting to this survey need to double on average to at least 15% of earnings if reasonable retirement incomes are to be achieved," says Stuart Southall, ACA chairman.

"Whilst understandable, it is concerning the minimum levels of contributions under the auto-enrolment policy are very modest.

"If these levels become the norm, emerging pensions are likely to disappoint, feeding further disillusionment with pensions."