No one likes to think about getting older. But workers – and the companies that employ them – are being forced to face up to the realities of old age and retirement thanks to the Government’s auto-enrolment pension scheme, which is encouraging people to save for their later years with the help of their employers. But many firms don’t realise how long it may take to prepare for these legislative changes, and experts recommend acting as soon as possible to make sure they’re ready in time.
We’ve talked about the challenges this new legislation presents to SMEs before, and almost 19,000 companies employing between 90 and 249 employees have already been affected by the pension rules in April and May this year. The regulations require employers to enrol most staff in a pension scheme if they aren’t already paying into one, with the company paying at least one per cent of the contribution. However, employees can choose to opt out if they so desire. But a new wave of smaller businesses – those employing between 62 and 89 members of staff – are also about to fall within the legislation’s remit on July 1. So, how have those who’ve already taken the leap coped, and what tips do they have for their smaller peers?
Worryingly, many small enterprises appear to have their heads in the sand about the changes. Four out of ten SMEs haven’t yet started to think about how they will meet their obligations in terms of pension provision for staff, research from pension provider NOW: Pensions has found, and only a tiny two per cent has already put schemes in place. Of those that are beginning to consider their options, 14 per cent say that they will seek out the help of their accountant, which is a sensible place to start. Anyone that has queries about how the new rules will affect them would do well to turn to a trusted advisor very soon for guidance, be that their regular number cruncher, or an independent financial advisor. At the very least, they should attempt to do some research themselves into what the changes mean for them.
Not-for-profit pension provider The National Employment Savings Trust (NEST) asked employers that have already tackled the auto-enrolment legislation for their thoughts on how best to handle it. Companies had several words of advice:
Communicate with your workers.
Be prepared for low opt-out rates.
Assess your payroll function.
Check that worker data is clean and adequate before enrolling them.
One fifth of these larger employers – with all of the resources that they have to handle admin – took more than 16 months to prepare properly for the new rules. Many said that there were more challenges to the process than they’d expected, and altogether it took longer to get a scheme in place than they’d anticipated. Also, there’s no guarantee you’ll be accepted by the first pension provider that you approach, so give yourself time for the possibility of a few bruising rejections before you find the company you can work with.
Not only do you need to determine which eligible workers want to participate, but there are also several different elements of the business to coordinate to get things in place, such as payroll, IT, HR – if your enterprise has this function in-house – and those responsible for marketing.
So far, the new scheme is proving very popular with employees, so don’t naively hope that many of your staff will happily decline to take part.
It’s vital to be confident that your finance department can cope with the additional demands of auto-enrolment and pensions payments.
One piece of good news is that many business owners who have bothered to look into the auto-enrolment issue are planning on going above and beyond the legislation’s requirements. About one in five SMEs has plans to pay more than the minimum employer contribution, 43 per cent agree that it’s been set too low, and more than half of those who plan to reach deeper into their pockets for their workforce hope their generosity will inspire greater employee loyalty and improve staff retention, NOW: Pensions discovered.
How much employers contribute appears to be affected somewhat by the sector in which they operate. Financial services and property firms have been generous thus far in their levels of pension contribution, NOW: Pensions revealed. Meanwhile, those working in construction have been positively miserly, with just one per cent paying more than the statutory minimum. Hospitality companies have also been quite benevolent, and 12 per cent of those in the service industry say that they will pay more than the law required. Just nine per cent of businesses in the health and education fields feels the same.
Regardless of employers’ attitudes, the Government’s efforts do appear to be having a positive effect on individuals’ behaviour. About 45 per cent more workers are saving for retirement since 2013, the biggest annual rise on record, according to new research from Scottish Widows. But, while their report points squarely at auto-enrolment as being a factor in this marked increase in pension saving, it also makes it clear that it is larger companies that are helping staff to save for the future at present, and SMEs’ gradual inclusion in the scheme is expected to be fraught with problems. Some business groups have already complained about the cost of administering the new pension rules, and others are worried about the long-term financial implications for firms topping up employees’ pensions.
These critics could have even more to worry about if there’s a change of Government in the next General Election. Currently, the auto enrolment rules apply to employees aged over 20 and earning more than £10,000 per annum. But the Labour Party has laid out plans to extend the pensions regulation to include a further 1.5 million low earners. Rachel Reeves, the Shadow Secretary for Work and Pensions, explained in a recent speech that under a Labour Government the eligibility level for auto enrolment would be dropped to those earning over £5,773, the current lower earnings limit for National Insurance. If such a move were implemented employers would be likely to find themselves facing even higher implementation costs, as well as stumping up all those additional employer contributions.
Whether these proposed extensions to auto-enrolment come to pass will be seen in due course. And most genuinely small firms – those with fewer than 30 employees – do still have a little breathing space before the pension laws apply to them. Companies of this size will only have to comply with the auto-enrolment rules from next summer, after all. But even they should be doing their research now to find the best pension provider and scheme, and get all the necessary advice to plan properly for the rules when they come into effect for smaller SMEs. Like old age itself, these changes are inevitable. And as with retirement, planning ahead will make the reality when it arrives all the more bearable.
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