Small firms always complain about the hassles of red tape. But their administrative burden is set to increase with new rules requiring them to enrol employees in a pension scheme. And experts warn that many SMEs are ill-prepared or even totally unaware of the new obligations on the horizon.
The pension auto-enrolment regulations require employers to enrol members of staff in a pension scheme if they are not already signed up for one, though staff can opt out if they wish. The new rules apply to employees aged between 22 and state pension age who are paid through the PAYE system and earn more than £9,940 a year. At least one per cent of the contribution is met by the employer.
Such moves may be good for workers planning for their old age, but small businesses face a significant bill to comply with the new rules – £8,900 in average set-up costs, according to the Centre for Economics and Business Research (CEBR). Then there’s the time and paperwork involved. The CEBR report identifies 33 different administrative tasks that businesses must cover ahead of the legislation, with the average firm needing to give up 103 man days to get ready, and a further three days every month for many companies to keep up to speed with ongoing pension-related issues.
The laws came into effect for the UK’s larger businesses in April this year. From April 2014, SMEs will also begin to feel the effects, though their eligibility to comply will be staggered over several years depending on the size of their workforce.
- Medium-sized companies paying between 50 and 249 employees through the PAYE tax system will be eligible to work to the new auto-enrolment legislation between April 2014 and April 2015.
- Smaller firms with fewer than 49 employees on the PAYE payroll will follow from June 2015 to April 2017.
- Start-ups launched between now and October 2017 will have up to February 2018 to comply.
Confused? You’re not alone. More than half of firms that have yet to reach their staging date – the time by which you have to have your pension ducks in a row – admit they’re uncertain of what being compliant involves, says the Confederation of British Industry. Other fears expressed include how businesses will absorb the costs of embracing the new system. One in four SMEs says that they expect to have to cap any pay growth, according to a recent study by the Chartered Institute of Personnel and Development, while 23 per cent think they may have to cut bonuses or overtime to make up the financial loss.
The Government has responded to smaller employers’ concerns about the pension plans by relaxing the rules for SMEs, saying that bosses will have six weeks to auto-enrol new employees into a pension scheme, and the deadline for employers to provide workers with information about their pension joining rights will also be stretched to six weeks from April 2014.
But even the chief executive of the National Association of Pension Funds (NAPF), Joanne Segars, has acknowledged the pressure the new rules place on SMEs. She said:
“Large employers and pensions schemes have put great effort and resources into making auto enrolment work. However, the real test will come when small and medium-sized employers, who have fewer resources and less pension know-how, start enrolling staff next year. The challenge now is for the Government and the Pensions Regulator to make sure these employers understand what they have to do to comply.”
The Pensions Regulator has given SMEs some pointers on how to get ready for the new regulations.
- Start planning early, even if your staging date is some way into the future.
- Make sure you know your staging date. If you want to determine the exact date for your business, visit the Pensions Regulator’s website and submit your company details for an immediate answer. The Pensions Regulator should contact employers 12 months before their staging date to ensure they’re prepared.
- Choose a pension provider and scheme at least six months ahead of the date when you must comply with the new laws.
- Decide on a software provider to manage your pension processes at least six months ahead, as well, and test all systems to ensure that they run efficiently.
- Communicate with your staff about the changes. The numbers of employees choosing to opt out of pension auto-enrolment has been very low so far, but small employers have a duty of care to their staff and must ensure they provide them with all the information that they need to make an informed decision.
- Use the Pensions Regulator website if you have any further difficulties or confusion over auto-enrolment. It contains a lot of advice and tips for businesses of all sizes.
Another potential layer of complication is that some pension providers have warned that they may not be able to cope with the increased level of demand that auto-enrolment creates. This could mean that some workers are rejected, becoming what has been termed ‘pension orphans’. However, the Government-backed National Employment Savings Trust (NEST) is obliged to accept all pension applicants. It is one of the low-cost methods of saving for retirement, charging 0.3 per cent a year and a further 1.8 per cent charge on contributions as they’re made. Other affordable options include non-profit multi-employer scheme the People’s Pension, which has a simple charging structure of a single charge of 0.5 per cent per annum. Another reasonable alternative is NOW: Pensions, which charges just 0.3 per cent annually, but makes a deduction per contribution, generally £1.50 per month. The charity the Money Advice Service judges the People’s Pension to be the best choice for those looking to invest over the short-term – say, a five-year period – whereas NEST comes out top for those who are in it for the longer term.
These new requirements may be unpopular with many business owners, but the fact is that they’re happening. Those who put their heads in the sand now will just suffer greater costs and inconvenience further down the line. Act now to find out what you need to do and by when. Work out the costs of compliance to understand how you will pay for the new pension requirements. Just as your workforce is being ask to make provision for its future, company bosses must also think ahead to keep their business in good general health. If you haven’t already done so, put pension scheme planning at the top of your list of things to do in 2014.
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