Why are many SME’s not providing pensions?

by Dr. Ros Altmann

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PENSIONS SEEN AS A COMPANY COST, NOT A COMPANY BENEFIT – SME’s DON’T WANT TO PROVIDE PENSIONS ANY MORE
The latest research from the Pensions Institute shows that Finance Directors in smaller and medium size companies (SME’s) do not want to provide pensions for their workforce any more. This confirms the crisis engulfing pensions and confirms that millions of workers’ future incomes are in jeopardy. Government policy on pensions has succeeded in undermining future pension provision, by introducing major new disincentives for UK employers and employees. SME’s, employing 11 million people, now consider pensions an unnecessary expense. Alan Johnson and Malcolm Wicks both told the Labour Party conference that there is no pensions crisis. Only those who are unable to look into the future could believe this. Yes, the UK has built up a strong retirement savings culture. This is now crumbling away before our eyes.

Employers in smaller businesses now see pensions as a company cost, not a company benefit. Their employees do not value the pension contributions made on their behalf, as confidence in pensions has plummeted.

Government must urgently address this. Just saying there is no crisis is burying their heads in the sand. The disincentives of means testing must be removed. At the moment, pensions are not ‘suitable’ investments for the majority of British workers, since they face the risk of losing at least 40p of each £1 of their pensions due to the means test of Pension Credit. The regulatory regime is another huge obstacle to pensions for the mass market. Costs and constraints on promoting or advising on pensions have effectively locked lower earners out of the best deals and out of the advice process altogether. Government pensions policy has not focussed on the realities of the marketplace. If employers do not want to pay the costs of providing pensions and employees do not want to engage in this process due to lack of confidence, the future is bleak indeed. In this environment, auto-enrolment will not work, since Finance Directors would find ways of putting up barriers to avoid having to contribute to pensions. For example, they could impose high minimum levels of employee contribution, encourage presentations that focus on the risks of pensions and means testing and provide easy opt-out forms.

If Government seriously wants to ensure more pension provision, rather than less, it is also imperative to introduce proper incentives, for both individuals and employers to contribute to pensions. Not one of the Government’s policy initiatives has introduced measures to encourage those who were not providing pensions for average earners before, to do so in future.

The Pensions Institute research is a damning indictment of Government policy. It provides clear evidence that pension provision for the stakeholder target group will fall, not rise, if policy is not changed. The nation as a whole will be the poorer for this and the sooner policy makers realise what is happening out there, the better for all of us.