UK - Over 60% of small employers believe the introduction of personal accounts and auto-enrolment will lead to an increase in the closure of existing schemes, according to the Association of Consulting Actuaries (ACA).

In the first report on the findings of its 2008 Smaller Firms Pensions Survey, the ACA revealed 55% of respondents claimed their existing pension schemes would not meet the proposed personal accounts exemption test.

The survey of 394 employers with less than 250 employees revealed the majority of firms with existing pension provision tend to offer group stakeholders or group personal pensions (GPPs).

Figures showed only 16% offered defined benefit (DB) schemes, and of these 91% were closed to new entrants and 48% were closed to future accruals, while 13% offer trust-based defined contribution (DC) schemes and 30% of these are closed to new entrants.

A large majority of employers questioned (48%) only offer access to a stakeholder pension scheme while 44% have group personal pensions, and the remaining 5% offer a mixture of pension arrangements.

However, the average take-up by employees to existing schemes is already poor at 45%, but the introduction of auto-enrolment post-2012 is expected to result in opt-outs of between 34-40% of members, although 75% of employers without a current scheme believe the opt-out rate will exceed 40% as a result of affordability issues.

In addition, figures showed 55% of employers offering a scheme do not believe it will be exempt from personal accounts, and almost 50% are expected to fail over restrictions in the joining rules.

This may be in part because 63% said the current contribution levels to employees' plans fall below the personal account employer minimum of at least 3% of banded earnings, or a combined contribution of 8%.

Figures showed in 2008 the average employer contribution for a DB scheme was 19%, however for DC schemes this fell to 5.5%, while GPP members received 4.7% and stakeholder members got an average of 2% - as 54% of employers do not pay a contribution.

As a result, the average combined contribution for employer and employee ranged from 25% for a DB scheme, to 9.8% for DC, 8.6% for a GPP and 8.6% in stakeholder schemes.

But the survey revealed the smallest firms with less than 50 employees reported average contributions for all types of DC schemes that are "markedly below the personal accounts minimum levels", at 7.7% for DC plans, 6.9% for GPPs and 4.7% for stakeholders.

As a result of the requirement to match or better the personal accounts levels, 63% of respondents claimed the reforms will lead to an increase in the number of current schemes being closed, while 67% predicted there would be a general levelling down of contributions by existing "good" schemes.

This is supported by suggestions that following the introduction of auto-enrolment and personal accounts 31% of small firms would reduce scheme benefits to mitigate the higher costs of an increased membership.

In addition, only 28% of DC schemes - and no DB schemes - were prepared to enrol all employees into the existing scheme without any changes, while the majority - 32% - planned to restrict entry to its existing scheme and offer new members access to a personal account.

Keith Barton, chairman of ACA, said: "It is very clear 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."

The report noted affordability is a key driver in the decision by employers when choosing not to offer a pension scheme, and for employees who opt-out of or do not join any existing pension provision, so ACA claimed "if current economic conditions continue, some delay beyond 2012 has to be considered" as the level of opt-outs will drive confidence in the sustainability of the reforms.

Barton added: "Ideally, government would best launch auto-enrolment and personal accounts alongside a move to lower personal and corporate taxes. That would require quite a turnaround in economic conditions by 2012."

The lack of pension provision among the nine million employees of small firms - which makes up 59% of the working population - is one of the key targets for the UK pension reforms announced in 2006.

However, ACA claimed the survey findings highlighted the "fragility" of the sector where "the success or failure of the government's latest reforms to a large degree will lie", in particular following the failure of the stakeholder pension reforms in 2001.

Fgures appear to support concerns among industry experts who believe existing pension provision will be impacted by the reforms, particularly as the government rejected industry plans to take a principles based approach to the exemption test on qualifying earnings in favour of an annual reconciliation mechanism. (See earlier IPE article: Gov't denies policy u-turn on personal accounts)

John Lawson, head of pensions policy at UK insurer Standard Life, added: "ACA's report confirms once again the potential toxic effect of personal accounts on existing pensions. The key problem is the exemption test; not the generosity of employers. The government needs to simplify this test so that generous schemes can contribute 8% of more of basic pay."

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