Compulsory pensions don't have to hurt small firms

by Ed Bowsher on 10 November 2010  |  0 comments
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Small businesses claim that the new compulsory pensions scheme will impose extortionate costs. I reckon targeted tax cuts are the solution to this problem.

I’m a big fan of the government’s plan to introduce compulsory pensions for all workers in the UK (unless they opt out.) As life expectancy gets longer and the birth rate declines, the government may not have enough cash to pay out more than a very basic pension in 30 years time. So we need to push more people to save seriously for retirement and I believe that compulsory pensions are the only effective way to do this.

A big criticism of the scheme – known as NEST - is that employers will be hit by extra costs. I reckon that larger companies can probably cope but I accept it may be much tougher for smaller firms.

In fact, the Federation of Small Business said today that the scheme will increase costs for small firms by £2550.  This figure is for a company with four employees who are earning an average salary of £25,000. It includes the company’s compulsory contribution to employees’ pension funds plus admin costs. Given these costs, the Federation believes that the government should exempt ‘micro firms’ from the scheme.

Now I accept that NEST will make life harder for smaller firms but I also believe that it’s very important that the scheme is implemented. So is there anything we can do to make things easier for smaller firms?

I think so. The government could reduce the rate of corporation tax for smaller firms. It currently stands at 21% and will fall to 20% from next April. A reduction to 17% for smaller firms could ease the pain inflicted by NEST. I know this will cost money and effectively increase the cost of NEST, but let’s not forget that a cut in corporation tax won’t just make NEST more palatable for smaller company bosses, it should also boost economic activity by giving firms an incentive to grow profits more aggressively.

What’s more, recent GDP growth numbers suggest that the economy is more resilient than many – including me – had feared. If the government is going to get higher than expected tax revenues from higher economic growth, I can’t think of a better way to spend that money than boosting pension saving and helping small businesses to grow.