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Last Updated: Thursday, 25 May 2006, 16:20 GMT 17:20 UK
How pension plans affect business
By Clare Davidson
BBC News business reporter

Pension book
Small firms could be hard hit by the pensions proposals
For the first time, all UK firms are obliged under the government's new pensions proposals to contribute to a pension scheme for their employees.

The government says the aim is to design the scheme "so that the burdens on employers are minimised", but what does this mean in practice for the businesses involved?

There are fears that smaller firms could be particularly affected by the costs of the new scheme and try to cut costs in other ways.

Enrolment in the new scheme is automatic for all firms that do not currently have a scheme, regardless of size.

  • Employers will pay 3% of salaries
  • Employees will pay 4%
  • The government will contribute 1%

Costly schemes

According to the Pensions Commission headed by Lord Turner, the additional cost to business of the new proposals, called New Scheme of Personal Accounts, was estimated at 2.3bn.

Firms with 1-4 employees would pay 0.3bn
Firms will 5-50 employees would pay 0.8bn
Firms with 50-250 employees would pay 0.4bn
Firms with over 250 employees would pay 0.8bn

The government has said firms might choose to manage this cost in a number of ways.

They might raise salaries at a lower rate, or even chose not to hire more people, in order to offset the costs of the obligatory scheme, said Paul McGlone, principal of Aon Consulting, a human resources and benefits firm.

However the changes will be phased in over a three-year period with companies contributing 1% in 2012, when the scheme starts, and accumulating up to 3%, so they will not be hit in one go.

As yet, there is much uncertainty as to how the proposal will work in practice since the details have not all been worked out.

The latest Pensions White Paper, published Thursday, refers to "transitional support" for the smallest businesses, but fails to spell out what this means in practice.

Firms that already have an occupational scheme can at any point choose to opt into the so called New Scheme of Personal Accounts - the name given to what was previously called the National Pensions Saving Scheme - depending on contractual terms of existing pensions packages.

Since occupational schemes have traditionally been more generous, this would mean employers would be contributing less, and workers would thus be getting less.

This has prompted another fear, namely that one unintended consequence of the proposals is that larger firms would be reducing their contributions by "levelling down of employer pension provision", said Alison O'Connell of the Pensions Policy Institute.

"In short, this means that employers will shut their more lucrative pension schemes and choose merely pay into the NPSS," Ms O'Connell told BBC news.

If enough large firms were to start opting out of their pensions schemes this could be bad news for employees.

But there is still an argument that a lucrative occupational pension is a way that firms can help recruit and retain employees.

Larger firms will therefore want to use this as a way to differentiate themselves.

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