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Lawyer Warns Regional SMEs Face Pensions Tipping Point

Pensions Law



A leading lawyer says the region's small businesses could face huge additional cash burdens, similar to those hitting many FTSE 100 pension schemes, if they fail to seek expert advice.

Nigel Bolton, associate solicitor at the Sheffield office of national law firm Irwin Mitchell, made the call after recent research found that nearly a quarter of FTSE 100 firms will be unable to pay off their past deficits.

Meanwhile most are currently spending more funding former employee benefits than they are on current staff contributions.

Nigel Bolton said small firms failed to appreciate the range of measures open to them and that they must start "acting big" to address the issues.

"Many smaller businesses are at their pension tipping point and it is predicted that half of final-salary schemes will be closed to existing employees within three years," he added.

"However, there are still a huge number of SMEs out there offering such schemes that are yet to take defensive steps to help reduce their risk profiles and decrease their scheme’s potential liability.

"Unlike larger companies most SMEs don't have immediate access to lawyers or consultants but in the current climate they must take urgent advice. We find that smaller firms experiencing pension difficulties don't realise that they can implement the same cost saving strategies as those used by the big players.

"For example, any size firm can take out a contingent asset such as a charge over a property, bank guarantee or an insurance policy. This is an easy-to-execute measure that will provide security to the scheme without having to put cash in. The Pensions Protection Fund introduced this off-set option five years ago but very few schemes have taken advantage of it.

"We have seen pensions regulation undergo a revolution in recent years. However, despite the increased flexibility brought to employers by changes in legislation such as the Pensions Act 2004, they are still facing very difficult challenges.

"In particular in recent months the feasibility and ultimately the affordability of final salary pension schemes has been brought into question. With the Pension Protection Fund recently estimating the deficit of the UK’s 7,400 final salary pension schemes as £158bn, it is clearly no longer just a major concern for FTSE 100 companies.

"As with many of the FTSE 100, those smaller companies who have closed their scheme to new members can carry out an enhanced transfer value exercise to encourage deferred members to transfer out of the scheme and significantly reduce the company's overall pension deficit. In the current climate this may be a very attractive option as employees facing redundancy may be able to access additional funds immediately and could receive cash in hand payments.

"SMEs can also utilise many of the advantageous de-risking measures used by larger corporates. The firm may be able to actually 'generate cash' by offering a 'salary sacrifice' option. This is where the employee's contributions are taken over by the employer and the employee's salary is reduced by the same amount. Both the employee and employer will therefore benefit from NI contribution savings which can be used for business development, to pay off the company's pension deficit or to share with employees by providing other benefits such as childcare vouchers.

"SMEs must realise the breadth of de-risking and off-setting measures available to them and not assume that their pension crisis will disappear if they close the company's scheme to future accrual. As with every FTSE 100 firm they need a long-term structured pension plan to manage liability. Smaller firms must start acting big when it comes to pensions."