Small businesses would be forced into some tough trade-offs if pension contributions were to rise by 6%, according to a report by the Federation of Small Businesses (FSB).

The vast majority (92%) of businesses would have to raise their prices, recruit fewer workers, cut profits or reduce the number of employees to cope with a doubling in pension contributions, the FSB said.

The organisation called for a full economic assessment, along with a review of how workplace pension changes impact employers, before any changes are made. The economic assessment should factor in the impact of recent rises in national insurance and the national living wage, the FSB added.

“This is no time to add new burdens. Ministers should pause, take stock, and think carefully before stacking more costs on firms already under strain.”

Tina McKenzie, Federation of Small Businesses

Tina McKenzie, the FSB’s policy chair, said: “This is not about resistance to pension reform, it’s about the cumulative burden of regulation and the rising cost of employment.

“Small firms are already feeling the pinch – national insurance contributions and wage increases are really taking their toll – and any new reforms could push many to breaking point. This is no time to add new burdens. Ministers should pause, take stock, and think carefully before stacking more costs on firms already under strain.”

The pensions industry frequently calls for increases in contribution rates to make pensions more sustainable for retirees. However, other ways to improve adequacy are being considered. For instance, consultancy Hymans Robertson recently suggested using pension savings to help people onto the property ladder, so they are not forced to bear rental costs in retirement.

Coffee shop

Small businesses have already been affected by higher national insurance rates and other costs.

Hannah English, head of defined contribution corporate consulting at Hymans Robertson, said: “This arrangement would let people get on the housing ladder without a deposit, and benefit from lower interest rates as lenders take on less risk of negative equity. Crucially, the money in the pension would still be invested – just in property, rather than in bonds or equities.

“Alongside the investment, the likelihood of someone being laden with paying rent throughout retirement is reduced as they could have paid off their mortgage by the time they reach retirement.”

While there is broad recognition of the need to improve pension adequacy, the FSB’s report highlights the serious challenges that a steep rise in employer contributions could pose for small businesses already grappling with rising employment costs.

As alternative approaches are explored, the debate continues over how best to secure better retirements without putting undue pressure on the businesses that power the economy.