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Auto-enrolment is about to become reality for millions of small businesses. So far, the signs have been encouraging. But that doesn’t mean firms can afford to leave anything to chance, as David Adams explains
Auto-enrolment may be that rare thing: a UK Government initiative that is not only going to plan, but exceeding expectations. Since the first employers – the largest – began to enrol employees in 2012, more than 6.4 million people, working for 171,000 employers, have joined auto-enrolment compliant workplace pension schemes. Opt-out rates have been lower than expected, at around 10 per cent, and there is no sign yet of a dearth of capacity among pension providers.
But there may still be trouble ahead, as the smallest employers, those that had 30 or fewer employees in 2012, approach their ‘staging dates’ for beginning auto-enrolment. More than 1.6 million organisations will go through staging before the first quarter of 2018. Many FSB members will be among them. Others will either have finished the process recently or be close to completion.
Most of these employers will not have run occupational pensions before. The schemes their employees join could be set up by the employer using a pension provider, or employers could work with a master trust. The latter manage pensions for dozens or hundreds of employers, and range from long-established organisations originally designed for specific groups of workers to the Government-backed National Employment Savings Trust (NEST), which will provide pensions for any organisation or individual, and newer trusts launched specially to cater for auto-enrolment requirements.
“Most people would agree that auto-enrolment has been a success,” says Joanne Segars, Chief Executive at pensions industry body the Pensions and Lifetime Savings Association (PLSA). “It’s brought 6 million people into pensions for the first time. But we’re now at the sharp end with the smaller employers.”
Awareness of auto-enrolment among small business owners and staff seems to have risen since the launch last year of a Department of Work and Pensions (DWP) and Pensions Regulator television campaign starring Workie, a monster who is overjoyed when employees join an auto-enrolment scheme.
But not everyone is a fan. “I think it’s too serious a message to start messing around with a monster,” says Paul Baker, who manages FSB Workplace Pensions, the auto-enrolment scheme provider for FSB members. “There is still a big need for pensions education. People say ‘I’ve only got one employee, so I don’t have to do anything’ or ‘all my staff want to opt out, so I don’t have to do anything’. Both are wrong.”
Nonetheless, early indications of the progress of smaller businesses through auto-enrolment are largely positive so far, says Charles Counsell, Executive Director for Auto-Enrolment at The Pensions Regulator. “Currently, the indications are that the opt-out rates aren’t any higher than for the larger employers,” he says.
Malcolm Trotter, Chief Executive at the International Association of Bookkeepers (IAB), is also cautiously optimistic, noting that a feared capacity crunch in pension providers has yet to materialise. “There hasn’t been a problem so far,” he says. “What has happened is that some providers have washed their hands of the market for the smallest businesses. Some just won’t set up a scheme for 10 or 20 people. Employers end up being funnelled towards a smaller number of pension providers.”
The good news for FSB members is that there are plentiful sources of advice and support available – from FSB’s auto-enrolment partner FSB Workplace Pensions to the PLSA and The Pensions Regulator – to help them find the right pensions provider or master trust to suit their needs.
The first thing businesses yet to begin the process must do is find out their staging date. This is easily done on The Pensions Regulator’s website (thepensionsregulator.gov.uk). It is possible to defer staging for three months, but employers will still need to inform the Regulator of their intentions as soon as possible. They also need to provide the Regulator with a declaration of compliance. If you are working with a business adviser – such as an independent financial adviser, accountant, consultant, actuary or bookkeeper – they can complete the declaration on your behalf. However, although the declaration can be completed by someone else, it is still the employer’s legal responsibility to ensure it’s completed correctly and on time. Even if an employer has no eligible jobholders, they are still legally required to complete the declaration.
“Make sure you work on your declaration of compliance, even if you do nothing else for two months,” says Glyn Jones, Divisional Director for Group Savings and Investments at independent financial adviser LEBC. “Staff at the Regulator are helpful. They will do everything they can to get you on track. But if you do nothing, don’t be surprised if they come knocking on your door. Their records are very good.”
Mr Jones adds that the whole process is now much faster and less painful for businesses than was feared would be the case. “Early on, people were saying this would need 18 months of planning, but it’s a lot easier now,” he says. “The payroll software has caught up. Just make sure you do something about it before your staging day.”
FSB members have one big advantage: they can use the system developed by FSB Workplace Pensions for FSB members. Since 2013, FSB Workplace Pensions, run by Paul Baker, Managing Director of IFS Employee Benefits, has been working with Legal & General. More than 4,000 employers have now used the system. They pay a single annual management charge of 0.5 per cent, with no additional charges on employee or employer contributions. The scheme is open to any FSB member.
“Even if you’ve got just one employee who wants to put in £20 per month, we will do it,” says Mr Baker. It is also a group personal pension product, rather than a master trust, and offers a wide range of funds and retirement products. Fees start at £399 plus VAT for 10 employees.
Martin McTague, Policy Director at FSB, says other potential sources of information and support include The Pensions Regulator’s website and your existing accountant. Take some kind of advice from someone with some experience of auto-enrolment, because “the cheapest option isn’t always the best”, he suggests.
One option is joining the Government-backed NEST, which is being recommended by some business advisers. But it is not always the best option, says Mr Jones. For example, its fee structure may mean it is not always the best choice for employees aged 50 and over. Other providers might be able to offer a better deal.
Unlike NEST, some of the other master trusts may not stay in business for long. It is generally agreed that there are too many and that consolidation is inevitable. “You need to know, if you set up a pension, that the money is safe,” says Mr McTague. “There is a question mark over the quality of some schemes.”
In recognition of this issue, the Regulator has created the Master Trust Assurance Framework for master trusts to prove they have attained high standards of governance and administration. At the time of writing, only 10 have achieved accreditation – The Pensions Regulator’s website contains a list – but that doesn’t mean all of those not listed are not capable of doing so. Employers considering working with a master trust should consult an experienced intermediary or adviser.
Mr Trotter says the IAB’s experience of choosing an auto-enrolment provider demonstrates the potential benefit of taking advice. The IAB and its 10 employees went through staging in March. All are now enrolled in a scheme provided by Aviva, after going through a market evaluation process provided by an IFA. “That helped us to produce a financial plan,” he says. “We were able to get a grip on what this would cost.”
Those costs will also increase in the longer term, as minimum employer contributions rise from 1 per cent today to 2 per cent in April 2018, and 3 per cent a year later. This may affect employers’ opinions of these schemes, particularly as they wrestle with the introduction of the National Living Wage and deal with the post-Brexit landscape.
Some may seek to avoid their obligations, or to encourage employees to opt out. But this would be illegal and could prove much more costly: as of April 2016 the Regulator had issued 7,834 compliance notices since 2012; and it is issuing escalating penalty notices (EPNs) to employers that fail to provide evidence of compliance after a 28-day warning. For employers with between five and 49 employees, EPNs cost £500 per day until compliance is proved.
It is also important to remember the benefits to be gained by both employer and employee as a result of auto-enrolment. “This will help employers to attract and retain good staff and to remain competitive,” says Paul Budgen, Director of Business Development at NEST. “An employer will gain kudos and credibility through having contributed to their people’s pensions. If people start to seek employers that make a virtue of how they package benefits, then you’ll have a competitive market for employers.”
The Regulator’s Mr Counsell also believes employees will continue to remain enrolled in schemes when minimum employee contributions also rise: from 1 per cent today to 3 per cent in 2018, and 5 per cent in 2019. “People are saying that now they’ve done this it’s a relief: they always meant to start saving for retirement but never got round to it,” he says. “If people can afford the extra contributions, they will make them.”
Ultimately, says Ms Segars at PLSA, auto-enrolment is good news for society, too. “The voluntary system we used to have led to less than half the workforce saving in a pension,” she says. “That was unsustainable for the workforce and for business, because the state would make up the deficit by taxing businesses. An extra six million savers in not even four years is an astonishing turnaround.”
FSB member Golden Valley Vets, which runs five vets’ practices in the Bristol area, has just completed auto-enrolment with the support of FSB Workplace Pensions.
Golden Valley has 36 employees, of whom 24 are eligible for auto-enrolment. Clinical Director David Holmes runs the payroll process in-house. He started working out how to meet auto-enrolment obligations during the summer of 2015, ahead of the company’s staging date in March 2016. Staging was deferred until June and the scheme is now up and running.
The company had never offered employees a pension before. Mr Holmes began by getting a quote from an independent financial adviser to help find a provider, but felt the amount quoted was excessive. FSB Workplace Pensions, by contrast, charged a much more modest, three-figure sum.
Mr Holmes also speaks highly of staff on the FSB Workplace Pensions dedicated helpline – “very helpful and knowledgeable”. He has had to overcome a small problem in his payroll software, but the software provider and FSB helpline are helping him to solve this, and he anticipates a smooth ride now the process is fully underway.
“I did find it difficult and FSB has been a real help,” he says. “If it was obvious what needed to be done I did it, and if it wasn’t I rang up FSB. We’d have been stuck – and several thousand pounds out of pocket – without that support.”
The Pensions Regulator thepensionsregulator.gov.uk/en/employers
FSB Workplace Pensions fsbpensionservices.co.uk
FSB Helpful Guide on Auto-enrolment fsb.org.uk/resources/helpful-guides/workplace-pensions-are-you-really-in
PLSA Pension Solution pensionsolution.co.uk
There is also a useful consumer guide to auto-enrolment at MoneySavingExpert.com
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