Small & Medium Enterprises (SME’s) and pensions schemes… they don’t appear too often in the same sentence! Pensions are a real issue for employees working in these small businesses and a headache for their employers. So what is the current situation and what needs to be done?

Pension coverage is at historically low levels

With the economic crash, pension coverage levels fell dramatically in Ireland. At the end of 2005, 56% of the working population in Ireland were in pensions schemes. Roll on a decade later and this figure had fallen to just 46%.

However these figures include public servants who we know are all included in pension schemes. So when you look at the private sector only in Ireland, the coverage figure at the end of 2015 is a lowly 33%.

We also know that almost all large employers in the private sector have pension schemes for their employees, which in turn means that pension coverage for SME workers is a lot less than this one third figure…

Do SME workers need pensions?

The answer to this is a resounding yes! The maximum state contributory pension for someone aged under 80 in Ireland today is €238.30 per week. While politicians like to increase this figure, it is becoming ever more difficult to do so. Unfortunately old age pensions and pensions for public servants are paid out of tax receipts; there is no pot of money that has been saved to pay for these. Today there are approx. 5 people working (and paying tax) for every retired person (taking money from central funds). But by 2040 this ratio will have halved, so there will be less money coming in and more going out.

Old age pension rates are very unlikely to ever provide more than subsistence benefit levels. Workers need to plan their retirements themselves.

Why is the problem so acute among SME’s?

There are a number of reasons for this, and all of them valid. However that fact doesn’t make the problem go away…

First of all, many SME businesses started from nothing. Many started in the owner’s kitchen or garage, as they pursued their wish or need to build a business themselves. Taking earnings out of the business was a challenge in itself, never mind funding a pension! Employees were then hired as needed, often pushing the earnings of the owner back again for a period of time until the new employee became productive. Funding pensions remained down the priority list. If the owner didn’t have a pension scheme, the employees were unlikely to have one either.

Then as SME’s moved on to a more sound footing, why were pension schemes not introduced? Some of the reason may be down to the increased flexibility that exists within SME businesses. The owner decides how much will be paid to an employee in total – usually he / she will be happy for the employee to decide the split between salary and pension. More often than not, the employee wants to maximise income today, so they take all of their earnings as salary. So part of the reason is down to choices made by employees in SME businesses. Corporates on the other hand are much more rigid. When you join a large organisation and agree a salary figure, you are also automatically enrolled in the pension scheme. You’re not given the option to opt out of the pension scheme and take the money as cash instead.

We also know that SME businesses were very hard hit during the economic crash as they don’t tend to have deep pockets or wealthy shareholders behind them. As a result, they slashed costs in their businesses simply to survive. Pension contributions were one of these costs.

So what needs to be done?

Unfortunately the problem is not going to go away for employees in SME businesses. There are a few stakeholders to bringing about change.

Employers in SME businesses need to start thinking a bit more like large companies. Pensions are a social requirement for workers today. They are doing a disservice to employees to look after them while working, but to then effectively set them adrift in their later years. SME employers often also underestimate the value of pensions in recruiting the best people into their businesses and then retaining them. Pension schemes are a really important and valued employee benefit.

Employees need to take ownership themselves too. This is not their employer’s problem. If employees want more than simply eking out an existence in retirement, they need to take some pain today. This is either in the form of lower earnings and a pension contribution by their employer, or saving for retirement themselves.

The state has a role to play too. First of all, tax relief must continue to play an important role in encouraging people to save for retirement. However more needs to be done… And this may be in the form of mandatory pensions, where employers are obliged to provide pensions for their employees. This system operates in a many countries around the world, and is currently being studied by policy makers in Ireland. Watch this space – you’re going to hear a lot of discussion about auto-enrolment in pension schemes in the coming years.

If you are an SME owner or an employee and want to start taking control of this issue yourself before being forced by auto-enrolment, give us a call. We’ll be delighted to guide you.