SMEs need to tackle penions deficit timebomb

OWNER/managers are being warned that they could face huge additional cash burdens like those affecting many FTSE 100 pension schemes.

Law firm Irwin Mitchell is urging SMEs to look at the pension debt after recent research found that nearly a quarter of FTSE 100 companies will be unable to pay off their past deficits.

According to Nigel Bolton, associate solicitor at Irwin Mitchell’s Leeds office, small firms often fail to apprecitate the range of measures open to them and that they must start “acting big” to address the issues.

He said that despite a “pensions regulation revolution”, firms were still facing very difficult challenges – large and small.

“Many smaller businesses are at their pension tipping point and it’s predicted that half of final-salary schemes will be closed to existing employees within three years,” he continued.

“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 schemes’ potential liability.”

Mr Bolton said that unlike larger companies, most SMEs don’t have immediate access to lawyers and consultants and often don’t realise that they can implement the same cost saving stratefgies as those used by 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,” he said.

“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.”

Smaller firms can also utilise many of the advantageous de-risking measures used by larger corporates such as generating cash by offering a ‘salary sacrifice’ option.

Mr Bolton said: “Both the employee and employer will therefore benefit from national insurenace 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.”