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Every so often, there’s comfort to be had when major employment legislation is introduced but there’s no ‘big-bang’ requirement forcing all businesses, large and small alike, to fall into place at exactly the same time. This has been the case with pensions auto-enrolment – the Government’s big idea for all employees, above a minimum earning threshold, to be automatically enrolled into a workplace pension (unless they specifically opt out).
Starting with the largest employers in 2012, the process of requiring employers and employees to contribute 1 per cent each to form a total 2 per cent pension contribution has been rolling out at a steady pace. It was introduced to counter the ‘double whammy’ of woeful private pension-saving figures – in 2012, just 38 per cent of British working adults had any pension at all – and rising life expectancy.
So far, the evidence suggests the process has been a success. Official figures from July 2015 show that 70 per cent of eligible employees (13.9 million people) paid into a workplace pension in 2014 – a 15 percentage-point increase compared with two years previously.
During this period, smaller firms have had the luxury of being able to sit back and watch how larger firms have figured it out. But now, time is fast running out. With small businesses employing 48 per cent of all private sector staff, it’s this tranche of firms that is the key to the policy’s success.
From now on, around 1.8 million small firms – 500,000 more than the Pensions Regulator originally estimated, owing to increases in business starts and fewer closures –employing 5 million people, will need to enrol their own staff.
Each business has been given a unique ‘staging date’ – the date by which it must start auto-enrolling staff into a pension scheme – based on the last two digits of its PAYE references. In June, a trial group of employers with 30 staff or fewer began auto-enrolling their staff. The number of employers reaching their staging date will increase from around 16,000 in the final quarter of this year to almost 100,000 from January next year, and will reach 200,000 per quarter by 2017.
“Most members haven’t staged yet, and won’t do until next year,” says John Allan, FSB National Chairman. “But because most small business bosses are not pensions experts and don’t have an in-house HR team, suddenly they will have to become knowledgeable about this topic. Our advice is that they need to be thinking about this now, and starting to make their plans for auto-enrolment.”
With surveys, such as one from autoenrolme.co.uk, suggesting that as many as two-thirds of small firms still don’t know their staging dates, some experts have been privately worrying that this community has been burying its head in the sand, and won’t have been using the longer preparation time they’ve been given wisely.
“Some employers still won’t be familiar with the rules, or will think it won’t apply to them – but they’re wrong,” says Mr Allan. “Our members are among those who are the most aware of their obligations, but the deadline is fast approaching. The Pensions Regulator suggests a minimum of six to nine months is needed to select a provider, sort out payroll, test it and then communicate the scheme to employees. It could take longer than people think.”
Apart from not wanting to fall foul of regulator fines for lateness – of £500 per day for firms with five to 49 employees and £50 for those employing one to four – it’s the background legwork that takes time. “We’re noticing that many of the large, well-known insurance companies are reluctant to accept schemes with a small number of employees, especially if they are based on minimum contributions,” says Roger Sanders, managing director of Lighthouse Group Employee Benefits, adding that it can take time just to select the right scheme, and provider.
Because the onus is on the business itself to demonstrate it has selected a compliant scheme, it has to do the homework. It’s also for firms to prove they’ve checked whether their accountancy/payroll provider is up to scratch – and this can be done only with testing.
One problem is that because so few small firms have yet to stage, there’s little upfront documentation of the problems they might face. However, a handful have staged early, and First Voice spoke to one – charity Bag Books, which has just 10 staff, but decided to stage four years early, in 2013. “It wasn’t straightforward,” says Bag Books Chief Executive Dean Caswell. “We decided auto-enrolment was going to happen anyway, so there was no point putting it off.
“What we discovered, however, was just how many variables we had to think about – things such as defining what someone’s salary actually is, bearing in mind overtime and bonuses – and whether the agencies we use providing contractors were ready and compliant, too. To avoid changing what people’s defined pay was, we sought advice and decided it was contracted pay only, so not overtime.”
Other issues for Bag Books involved ensuring people’s data was correct – for those staging in 2014/15, auto-enrolment starts only for those over 22, earning more than £10,000 – so that triggers could be set up for when people start earning above the minimum amount, or have a birthday that takes them into eligibility, says Mr Caswell.
“You then need policies for dealing with different outcomes,” he adds. “We had a part-time employee who fell below the earnings minimum, but we felt it was right to offer her the chance to be in a pension if she wanted, which we are able to do. That person – even though she earned less than she technically needed to – actually chose to contribute.” (Employees who earn less than £10,000 can take part if they want to, but most opt out).
Overall, the process took around six months longer than Mr Caswell anticipated, he says, citing another component as being budgeting planning – actually planning for the cost of the employer contribution. For as well as a sliding scale of staging dates, there’s also a contributions escalation, where total contributions need to hit 8 per cent (4 per cent from employees, 3 per cent from employers, with 1 per cent as tax relief) by 2018. “We decided we’d go straight in at the 3 per cent level,” he adds. “We didn’t want the admin burden of changing it each year. To pay for it, we’ve simply worked the cost of this into any applications we make for funding or grants.”
However, this offering a 3 per cent contribution straight away is something Mr Allan says he hasn’t seen much appetite for from small firms. It’s unlikely to happen much, he says, especially since the Emergency Budget introduced the new National Living Wage, which will push up salaries at the same time as most small employers will be starting their contributions.
“Small firms need time to adapt to the new requirements, and that’s why it’s important that minimum contributions for employers start low, at 1 per cent,” he says. “Over time, minimum contributions are set to increase – but it’s important that this happens gradually, as some firms will struggle with the extra costs.”
At Bag Books, only one person hasn’t enrolled, and when most small firms are enrolling people for the first time, Mr Caswell will be sending letters to encourage re-joining, as re-enrolment has to be done every two years. “Auto-enrolment is an ongoing commitment,” he says. “Letters will need devising; re-enrolment communication will be needed; ad hoc communication – what pension plans can grow into and where to go for more advice – will be required.”
Plenty of help is out there, from the Pensions Advisory Service and the Pensions Regulator (see box on preceding page), while the FSB has resources that explain pensions in easy-to-understand terms, and has partnered with Legal & General to provide an auto-enrolment solution that is exclusive to FSB members.
Adam Bicknell, founder of Bicknells & Sons jewellers in Birmingham, says that he, for one, will now be focusing on assessing exactly what auto-enrolment means for his business. “We employ 15-20 people, depending on demand.Pensions will be good for staff. While employers might begrudge it at first, everyone will have to pay it, so there’s no point complaining. We plan to use some consultants on a one-off basis to work out the details soon.”
Indeed, those who embrace the process could steal a march on their rivals, by using pensions as a recruitment differential. “While auto-enrolment may cause headaches at first, over time it may bring hidden benefits for small employers,” says Mr Allan. “In complying, employers will be communicating that they value their workforce and supporting their financial future. A good pension package might help to reduce staff churn, and make employers look attractive to join.”
PETER CRUSH is a freelance business journalist
National Federation of Self Employed & Small Businesses LimitedSir Frank Whittle Way / Blackpool / FY4 2FE. National Federation of Self Employed & Small Businesses Limited (FSB) is registered in England, number 1263540