Employees at smaller companies are often discouraged from joining the workplace pension scheme by finance directors keen to keep costs down, says a ground-breaking report from the Pensions Institute, the independent research group based at the Cass Business School.

The report also finds that those who do save in company schemes are likely to face high charges, poor asset management and then a bad deal on annuity contracts.

Debbie Harrison, co-author of the report, pensions journalist and visiting fellow at the Pensions Institute, spoke to many of those involved in selling, setting up and running group personal pensions and stakeholder schemes within companies. They gave evidence on condition of anonymity. Harrison's sources said company finance directors control pension schemes, and few believe that pensions offer a good return on the company's investment in terms of recruiting and retaining staff. In many cases, companies even large ones have tacit limitations on the number of employees they want in the pension scheme.

Many ways are used by companies to deter high take-up of pension scheme membership. Harrison says: “They want to show they have a good scheme, but they don't want people to join. An effective barrier is high minimum contributions. On average earnings, anything over 4 per cent is a real barrier, so they could set up a fabulous scheme with a 6 per cent minimum contribution.” Other tricks include holding meetings about schemes long after working hours. The report notes pointedly: “While pensions for the workforce may not be a priority for finance directors, we understand they usually secure individual advice for themselves and key executives.”

Even those who overcome the barriers erected by companies and actually join the scheme may well find themselves disadvantaged.

Harrison and her co-authors, Alistair Byrne and David Blake, found that there is little choice for employees because there are just three pension providers active in selling schemes to the smaller company market (those with fewer than 100 employees).

IFAs in this market are paid by commission, so they can recommend only the handful of firms that have been willing to enter a loss-leading commission war, which sees payments made to advisers of up to 35 per cent of the total employer/employee contributions made during the first year of the scheme.

The pension providers have to underwrite each company scheme separately, and this also leads to inequalities. Harrison says: “They look at the earning rate of employees and sector turnover the ‘stickability' of the employees and the more it tends to be a high turnover, the less attractive it is. They then charge a higher management fee. Lower earners in smaller companies pay more.”

Another problem is that some 80-90 per cent of scheme members accept the ‘default' investment option, usually a managed unit-linked fund or index tracker. “You are not going into top funds, “ says Harrison. “They are active but virtually index funds. Many people are paying an active management rate for index trackers.”

In the case of stakeholder schemes, the annual charge on pension funds is currently capped at 1 per cent, but this can rise to 1.5 per cent from April next year.

There's no individual advice for people who pay into small schemes, and “lifestyling” the process that sees investments gradually switch from equities to “safer” alternatives as retirement approaches varies between firms.

Another issue highlighted is the lack of help for employees who reach retirement with a small pension pot. Two-thirds of people don't shop around for an annuity and simply accept the offer from their pension firm. Harrison says this could leave already vulnerable people 25 per cent less well-off than the best market-leading offers.

Many independent advice firms are not interested in doing annuity business for customers with small pension pots, yet the average annuity purchase in the UK is just £40,000.

Tom McPhail is pensions development director at Hargreaves Lansdown a firm that does business in the smaller annuity market. He says it is hardly surprising that few people bother to exercise the “open market option” for annuity purchase because the instructions for exercising rights are so comPlex. “They have to wade through three or four pages before they get to the part about the open market option,” he says. “There is a fairly widely held perception that it is not worth the effort.”

www.pensions-institute.org. The full report, Delivering DC Barriers to Participation, costs £150

● The Financial Times Guide to Self Invested Personal Pensions, sponsored by Chartwell Investment Management, is available free on 08708 303418

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