Prospective pension reforms could see small firms raise prices, cut jobs or slash profits, the Federation of Small Businesses (FSB) has warned.

New research published recently looks at how the current rules relating to auto-enrolment are already piling cost and complexity onto small employers. It also exposes how possible changes expected in the second phase of the Government’s Pensions Review – due later this year – could heap much further pressure on small firms already dealing with soaring wage bills and mounting National Insurance contributions (NICs).

Most employers already say that decoding pension rules is a headache (53%), and a quarter (24%) are paying over £500 a year for advice – even before new changes are introduced.

Small employers want to do right by their staff – but 79 per cent are concerned about the rising cost of employment, and reforms must reflect that pressure.

For the first time, FSB’s report, Backing the Future, lays bare the full impact of potential pension reforms being promoted by the Government.

If employer pension contributions were to double to six per cent, 92 per cent of small employers would have to change their business negatively to cope:

• Raise prices (52%)
• Recruit fewer workers (38%)
• Cut profits or absorb costs (34%)
• Reduce the number of employees (14%).

One of the proposals could see pension contributions applied from the very first pound earned, instead of the current £6,240.

This would see 82 per cent of small employers affected negatively:

• Raise prices (36%)
• Cut their profits or limit their earnings (32%)
• Recruit fewer workers (28%)
• Reduce pensions to a minimum of three per cent (19%)
• Cancel/scale down plans for investing in the business (19%).

FSB is now calling for:

• Phase two of the Pensions Review to explicitly examine how workplace pension changes impact small employers and learn from how auto-enrolment has been rolled out until now. The review must look closely at the financial and admin burden on small businesses, including the cost of advice, running payroll, and getting to grips with the rules before bringing in any new proposals.
• Ministers to commission a full cross-cutting economic assessment before any changes to pension rules are made, which includes the impact of recent rises in National Insurance and the National Living Wage, to ensure small firms are not hit with unaffordable costs or forced into tough choices like raising prices or cutting jobs. Last November, the Labour Government said it would only make changes to auto-enrolment if the impact on businesses was fully considered.
• No changes be made to the earnings threshold, no increase to employer contributions and no lowering of the age limit before the economic assessment is complete.
• The Government to convene regulators, including The Pensions Regulator and the Financial Conduct Authority, and industry stakeholders, to simplify pension rules and provide clearer guidance for small employers, reducing complexity and unnecessary admin. This would be a pro-growth, pro-employment move.
• When considering pensions adequacy, the Government should look beyond just increasing contributions – considering scheme performance, investment returns and the real-world impact on small employers and employees. Poor fund performance leading to lower pensions later in life should not be masked by simplistic debates on contribution levels.

Tina McKenzie, Policy Chair of the Federation of Small Businesses, said:

“Small business owners want to do the right thing. Entrepreneurs have taken on auto-enrolment, absorbed the costs, navigated the jargon, and kept paying into their staff’s pensions even when their own margins have fallen. But goodwill has limits.

“The more complex and expensive the system becomes, the more we risk pushing employers from willing participants into reluctant bystanders. If the Government wants pensions policy to succeed, it must prioritise clarity over complexity and provide the right support.

“This is not about resistance to pension reform, it’s about the cumulative burden of regulation and the rising cost of employment. Small firms are already feeling the pinch – NICs and wage increases are really taking their toll – and any new reforms could push many to breaking point. This is no time to add new burdens. Ministers should pause, take stock, and think carefully before stacking more costs on firms already under strain.

“Now, as phase two of the Pensions Review gets underway, the Government must ensure the real pressures facing small businesses are front and centre – no further changes should go ahead without proper protections in place.”