Pensions crisis could throttle SMEs

Jul 16 2003 by Brian Amble Print This Article

Small and medium-sized companies in the UK will be forced to close their final salary pension schemes or face going bust, according to consultants KPMG.

The extra contributions that many companies are having to pay into their final salary schemes to manage their deficits are being regarded as equivalent to loans by banks and financiers and so are making it harder for the SME sector to raise finance. This has serious impact on small and medium sized businesses’ ability to raise funds,.

A company that pays an additional £3m a year into a final salary scheme has the equivalent of a £50m bank loan at an interest rate of 6 per cent, KPMG claims.

As a result, KPMG warns, increasing numbers of SME’s will close down their final salary schemes until there are virtually none left in the sector.

The situation is made worse because recent Government proposals mean that the cost of winding up a scheme has risen substantially.

“Pensions deficits and the extra contributions companies are paying in order to manage them are being regarded as liabilities in the same way as conventional debts and loans, and so are impacting quite seriously on many companies’ ability to raise finance and fund expansion," Mel Egglenton, Head of KPMG’s Middle Markets, said.

"This can put a company in an already difficult position in even more difficulty. Unless solutions are found, the pensions crisis could effectively throttle many SME’s."

But KPMG says that the Government’s recent proposal to remove compulsory retirement ages and allow employees to work to 70 could help companies from a pensions perspective, however.

“If employees work for longer, it puts off the day of reckoning for the company in terms of having to start paying the pension. It also means they will have to pay the pension for a shorter period of time.

"This will ease the pressure on some companies, although it could raise other issues for them unrelated to pensions - such as whether they have suitable positions for workers in their high 60’s,” Mel Egglenton said.

"Final salary pension schemes are a great bonus for any employee,” he added. “Unfortunately, there are just too many disincentives for companies to run them. And when they start to impact on a company’s ability to raise funds, increasing numbers of boardrooms are simply going to say that enough is enough.”