Not only will coalition government proposals to abolish the Default Retirement Age have a negative impact on small businesses’ employment practices, but pension auto-enrolment will also add significantly to their costs.
A new paper by the Institute of Directors argues that the government should scrap plans to abolish the DRA and instead raise it progressively in line with life expectancy from 65 to 68 and to 70 over time.
The membership body warns that if the DRA is got rid of, thousands of retirements would for the first time have to be managed via a dismissal process, which has become “excessively complex and protracted” in recent years.
But dismissing more staff would only serve to divert management time away from growing the business and creating jobs and into handling the process and fighting vexatious claims before employment tribunals, the IoD claimed.
As a result, some employers, and most notably small firms that could not afford HR support, would feel under pressure to live with underperforming personnel aged over 65. This situation could have a damaging effect on business performance and deny promotion opportunities to higher performing staff.
On the other hand, large companies with well resourced HR departments, knowing that they can no longer rely on DRA to retire staff at 65, may become more focused on removing underperforming workers sooner, for example at 60 or 62.
Such dismissals would inevitably lead to many people’s careers ending in “an undignified manner” and demoralise all participants in the process, which includes managers, the employees concerned and colleagues.
A second study published by the Association of Consulting Actuaries, meanwhile, revealed that 53% of small businesses believe that a move to pension auto-enrolment in 2014 will add significantly to their costs, although only one in five have begun to evaluate the true financial impact.
While 54% said that they supported the initiative, they also expected 35% of staff to opt out. The main reason why employees do not join existing schemes today is cost (84%), a preference to spend (72%) and disillusionment with pension (69%).
The report entitled ‘2010 Smaller Firms’ Pensions Survey: Auto-enrolment and NEST’ likewise indicated of those companies that were currently not providing pension schemes, 96% did not do so because of cost, 82% due to economic conditions in their sector and 53% as a result of insufficient competitive pressure.
ACA chairman Stuart Southall said: “The cost of pensions to both employees and employers is the big issue that has prevented the extension of pension provision to date in the sector. Whilst auto-enrolment may break the mould, if we are all still paying higher taxes to recover over-spending, it’s difficult to see how this will not bump up opt-out rates.”
Surveys of both larger and smaller firms had also found a “clear consensus” in favour of excluding firms with just one employee from the auto-enrolment regime, with a majority looking to remove firms with fewer than five employees, he added.
The same applied to excluding staff with less than three months’ service and for not basing pension contributions on earnings. “If adopted by government, these changes would all greatly simplify the launch of auto-enrolment,” Southall said.