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FSB warns pension reforms could force small firms to raise prices or cut jobs

FSB warns pension reforms could force small firms to raise prices or cut jobs
Photo: iStock

Key Points

 
     
  • 92 per cent of small businesses say doubling employer pension contributions would negatively impact operations.
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  • FSB urges Government to pause reforms until a full economic impact assessment is conducted.
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  • Complexity and rising employment costs are already straining small firms’ ability to comply with auto-enrolment rules.
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Small firms could be forced to hike prices, cut jobs or absorb further profit losses if proposed pension reforms go ahead without proper safeguards, the Federation of Small Businesses (FSB) has warned.

New FSB research, published in its Backing the Future report this week, highlights how existing auto-enrolment rules are already causing financial and administrative burdens for small employers – with further reforms potentially placing even more pressure on firms already grappling with rising wage bills and increased National Insurance contributions.


The warning comes ahead of the second phase of the government’s Pensions Review, expected later this year, which could introduce major changes to workplace pension contributions and eligibility.

Among the proposals being considered is a doubling of employer contributions from 3 per cent to 6 per cent. According to FSB, 92 per cent of small employers say they would be forced to take negative action in response. Over half (52%) would raise prices, 38 per cent would hire fewer workers, 34 per cent would absorb the cost through profit cuts, and 14 per cent would reduce their workforce.

Another potential change – removing the £6,240 lower earnings threshold so contributions are applied from the first pound earned – would negatively impact 82 per cent of small employers. More than a third (36%) would raise prices, while 32 per cent would cut profits and 28 per cent would scale back recruitment. Notably, one in five (19%) said they would slash their pension contributions to the legal minimum or cancel investment plans.

FSB policy chair Tina McKenzie said small businesses were committed to supporting staff pensions but are approaching breaking point.

“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,” McKenzie said.

“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.”

Over half of small employers (53%) already find pension rules confusing, and 24 per cent are paying more than £500 a year for expert advice – costs the FSB warns will only increase with further regulation.

In response, the FSB is calling on ministers to ensure that the next phase of the Pensions Review properly considers the administrative and financial toll of any changes on small businesses.

Key recommendations include:

 
     
  • A full economic impact assessment of any proposed reforms, factoring in recent tax and wage pressures.
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  • No change to the earnings threshold or employer contribution levels until such an assessment is complete.
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  • Improved guidance and rule simplification, led by the Government and regulators, to make compliance easier.
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  • A broader review of pensions adequacy beyond just contribution levels – including fund performance and returns.
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“The more complex and expensive the system becomes, the more we risk pushing employers from willing participants into reluctant bystanders,” McKenzie added. “If the government wants pensions policy to succeed, it must prioritise clarity over complexity and provide the right support.”

The first phase of the Pensions Review began in 2017 and focused on expanding auto-enrolment to get more workers saving for retirement. The second phase of the review will focus on retirement adequacy and outcomes, including potential changes to auto-enrolment. It is due shortly after the Pension Schemes Bill passes later in 2025.