Auto enrolment pension setup has been on the horizon for small and micro businesses since 2008 but there still appears to be some confusion on the best way forward.
In August 2015 the Pensions Regulator published its twice yearly report on Employers’ awareness, understanding and activity relating to automatic enrolment. It showed that awareness has reached 77% for micro employers and 88% for small employers. U.K government statistics show there were 195,000 businesses in 2014 employing between 10 and 49 people so that’s a substantial number of businesses with no awareness of their obligations under automatic enrolment.
Perhaps more alarming is the report finding that understanding levels of auto enrolment pension setup stood at 48% for micro employers and 59% for small employers. That said, on the positive side, an Office of National Statistics survey in 2014 found that pension membership rose for the first time since records began between 2013 and 2014 so the legislation is obviously having some impact. For the record small employers are classified as those employing 5 to 49 people and micro as employing between 1 and 4 people.
For those in the no awareness group a short summary may help:
- The workplace pension reforms were introduced in October 2012.
- large employers were subject to the legislation first with medium sized businesses required to meet their obligations by April 2015. Small/micro employers have compliance dates from June 2015 onwards.
- If an employee is not already a member of a qualifying pension scheme employers are required to automatically enrol members of their workforce (aged at least 22 but under State Pension Age and earning more than £10,000 per annum) into a pension scheme and contribute a minimum defined amount towards it.
- Businesses with a pension scheme in place must check it is compliant with the regulations.
- The staging date is the date a business needs to be compliant with the regulations. This date is communicated by letters from the Pension Regulator.
- Failure to comply with the legislation will result in fines and possibly court action.
Research shows two of the major problems employers find with the legislation is calculating costs (and supporting those costs) and choosing the best pension scheme for their business. Given the issues, outlined above, surrounding levels of understanding there is also clearly a requirement for professional advice.
There is another, often overlooked issue. The pension scheme may be the best for the employees but is it the best for the business owners? The needs of employee and employer may be radically different. As a separate exercise to the auto-enrolment a review of the business owners requirements may also be appropriate.
There are a number of different contribution options that can be used however in principle employer and employee contributions start at 1% of a band earnings (total 2% of earnings between £5,824 and £42,385) with the contribution increasing yearly to a maximum figure of 8% (3% employer and 5% employee). To choose an appropriate pension scheme a number of factors should be considered including:
- The type of scheme. Most employers choose a defined contribution scheme where contributions are invested to build up a retirement fund.
- The type of defined contribution scheme. There are several including Nest ( a workplace pension set up by the Government) Trusts and Group Personal Pension arrangements.
- Can the preferred scheme be used for auto-enrolment?
- Will the chosen scheme be compatible with existing payroll software?
- What are the pension funds default investment options?
- What are the costs and charges?
- What tax relief method is used by the pension provider.
- What level of support (if any) is available from the pension provider.
- Is the pension fund well run.
Although the steps involved in auto enrolment pension setup are not particularly difficult they are time consuming and put a strain on already stretched small business resources. A point of contact with the regulator must be appointed and there is documentation to issue by specific deadlines (or face an automatic fine). The pension regulator website delivers some good general advice including a schedule of events. The worst possible approach is to leave everything to the last minute.
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The information in this article does not constitute financial or other professional advice.