Britain's pensions crisis is being made worse because many small and medium-sized companies are actively discouraging employees from joining company schemes in an effort to reduce costs.
Research by the Pensions Institute, based at Cass Business School, reveals that finance directors have taken control of the defined contribution (DC) pension purse strings and in many cases attempt to impose strict limits on the number of employees that can join them.
The report looked at SMEs with up to 250 staff as well as firms employing up to 1,000 employees, which together employ almost half of the working population. And it reveals deep scepticism among finance directors about the value of pensions in recruiting and retaining staff.
"We believe many employers – and in particular finance directors – will only seek to increase take-up on a voluntary basis if it can be demonstrated clearly that their investment will reap dividends in terms of employee satisfaction, appreciation, and continuing service,” said Debbie Harrison of the Pensions Institute.
"This is one of the biggest challenges we face. For right or for wrong, the traditional human resources mantra that DC pension schemes help to recruit, retain and motivate good staff has been questioned and dismissed by many of our interviewees."
David Blake, Director of the Pensions Institute added: "Surprisingly at present, despite the huge volume of consultation and research on private pensions, there is no conclusive evidence that a direct relationship exists between the employer’s investment in terms of the company contribution and in allowing employees time to attend presentations; and an improvement in the recruitment, retention and motivation of high quality staff."
The report also reveals that DC pension schemes are simply not an option for millions of employees working in SMEs. The lack of employer support is forcing providers to withdraw from companies with fewer than 50-100 employees because they cannot make a profit, it says.
"Providers and advisers are finding it increasingly uneconomic to market to small and medium sized enterprises and are withdrawing rather than redoubling their efforts," said Alistair Byrne, one of the report’s authors.
"Although it is a legal requirement for companies with over five employees to provide access to a stakeholder scheme, in practice where there is no employer support this will remain an empty shell, as we have seen. This is an important and difficult issue for both government and private sector providers."
In companies where the workforce has a low-to-average earnings profile, the problem is even worse because financial advisers identify them as “no-go zones”.
"Where a life office decides a company is uneconomic, either it will not deal directly with the employer or, if it does, it imposes an above average annual management charge, which is paid for by the individual member,” said Debbie Harrison.
In addition, the commission arrangements between financial advisers and pensions providers, poor asset allocation and a "shocking" absence of formal annuity services mean that those who have joined SME schemes often get a very poor deal when they come to retire.
"As a result of these factors many of the employees that do join the company scheme face a triple whammy: high charges, an inconsistent approach to asset allocation, and unnecessarily poor annuity rates," she said.