Federation of Small Businesses: Time to address high costs and low transparency in pensions

Small businesses don’t need persuading on the value of pensions. We know our staff deserve security later in life, and we know that contributing to their future is part of being a responsible employer.

What we can’t understand, however, is why the system we are expected to deliver is so needlessly complex.

Auto-enrolment has been a success in many ways. It’s brought millions into retirement saving who might otherwise have been left without a pension. But the reality of running a pension arrangement when you are a small employer with no dedicated pensions specialist is very different – you’re often left wading through technical jargon, learning clunky software, and keeping abreast of the ever-changing rules.

Now that the government has revived the Pensions Commission to confront the UK’s pension shortfall, small businesses must be at the centre of its work. After all, they are the ones who made auto-enrolment a reality with grit, patience, and the sheer determination to do the right thing for their staff.

High costs, low transparency

FSB’s new report, Backing the Future, shows just how much of that burden small employers have carried. A third are paying over £500 a year to run their scheme and a quarter are spending the same again on advice – simply to stay on the right side of rules.

Most have never switched provider (95%) – not because they’re thrilled with the service, but because the process is so opaque and the risks of getting it wrong are too high. Just three in 10 employers say they get clear information from their provider on how their pension provider is performing. That makes the case for reform clear.

On top of that comes the ritual of re-enrolling staff who’ve already opted out, which is a headache for nearly half of small employers, particularly when workers have made it clear they don’t want to be put back in. The current rules force businesses to go through the motions, even when it helps nobody.

And yet despite this, small firms still back the principle. Nearly two thirds say auto-enrolment is good for their staff and society.

However, our research shows that there would be clear risks associated with extending auto-enrolment in the future. Increasing the cost and administrative burden would see small businesses hire fewer people or raise prices.

We also know that buy-in from small firms is critical for any future pensions policy, and it is key to its success and improving outcomes for savers.

“It’s important that the government and the Pensions Commission listen to small employers and those who represent them. Small firms were most impacted by auto-enrolment and the answers won’t come from large corporates.”

Tina McKenzie, Federation of Small Businesses

If the commission wants to improve the pensions landscape, it has to start by asking: how do we make this system workable for the employers holding it up? That means putting an end to unclear guidance, straightforward steps on how to switch providers, and requiring schemes to be transparent about performance and value.

It’s important that the government and the Pensions Commission listen to small employers and those who represent them. After all, it’s small firms that were most impacted by auto-enrolment and the answers won’t come from large corporates.

It’s also great to hear that the self-employed are included in the commission’s focus on adequacy, because any future proposals must reflect the diversity of their working lives.

The commission has a real opportunity to get this right, and that starts with recognising who’s been doing the heavy lifting and what they need in order to keep it going.

Tina McKenzie is policy chair at the Federation of Small Businesses.