According to the Association of Consulting Actuaries (ACA), 31% of small businesses will opt out of their private pension schemes once the new Personal Accounts are introduced.

394 small businesses were questioned and the results revealed that 40% of companies with fewer than 250 employees are likely to withdraw from the Personal Accounts scheme because they will be unable to meet the financial cost.

The Personal Accounts scheme aims to make saving for retirement easier, and formed part of the Pension Bill in 2006. The pension reform programme states that employees from the age of 22 to the state retirement age will be automatically enrolled into a personal account, or a workplace pension scheme. The minimum employee contribution has been set at 4% for earnings between £5000 and £33000 per annum, with the employer committed to paying an additional 3% into the fund. A further 1% will be added as tax relief.

Pension reform has become necessary because Britain’s population has an increasing life expectancy. When considered against declining pension provision from employers, the future offers a very unstable retirement for a growing number of people. In the past, people have been reluctant to save for their future through financial bodies because of the industry suffering a significant amount of bad press such as the mis-selling of endowments policies. Also, the limited choice of low-cost financial products for people on low to medium incomes, coupled with poor access to financial advice has meant the uptake of investing in retirement has been low.

The new Personal Accounts scheme offers a low-cost alternative with a comprehensive choice of funds. Because it is run by an independent board, it is hoped employers and employees alike will buy into the scheme. However, according to Rachel Vahey from Aegon UK, small firms believe their own private pension provision will suffer because Personal Accounts offer such a high rate of competition against them. As more employees will be enrolled onto the scheme, very few small businesses will be able to afford to continue with their private pension schemes, and some unable to meet the 3% contribution.

Despite this concern the Government reiterates that the Personal Account scheme ‘will be designed to complement existing pension schemes, not to replace them. They will have a contribution cap, and no transfers will be allowed out of existing schemes into the personal accounts system.’ The Government believes all the right provisions have been put in place to ensure the smooth transition into the scheme: ‘in order to help employers manage the transition, minimum contributions to personal accounts are expected to be phased-in for employers and employees over a three-year period’, and ‘there will be self-certifying tests for employers with existing schemes to apply for exemption’.

Between six and ten million people are expected to participate in the scheme at its initiation, and as participation levels increase, management fees will reduce, potentially boosting pension funds by up to 20% compared with current schemes.

Despite concerns, ACA expect the biggest take-up small business with, affecting around 9.6m employees.

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