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Auto Enrolment: Bad for Small Businesses?

Happily for us, people are now living longer than ever before. According to a prediction by the UK Government’s Office for National Statistics, women will be able to expect to live to 100 by 2055, and men can expect to reach that massive milestone by 2080. Even by 2037, life expectancy will have increased by over a decade from the 1980s. While this is clearly great news for us on an individual level, healthy life expectancy levels aren’t rising so quickly: people are living longer, but facing an uncertain future plagued with health problems such as cancer and dementia. What this increased life expectancy really means for us now is that the government is being forced to radically rethink its relationship with pensioners: it can no longer afford to support the growing numbers of us who have increasingly long retirements. Instead, individuals and businesses are now obliged to contribute to our own pension pots (in addition to our usual tax) with monthly contributions direct from our pay.

Private Pension Contributions

In the past, it’s been the case that larger companies have offered voluntary private pensions options to employees, to which both the employee and the employer make monthly contributions. There have been similar initiatives in the public sector, too, with Teachers’ Pension schemes working in a similar way. While larger and more profitable businesses have been able to afford to offer such schemes as a perk of the job, smaller businesses have traditionally found the cost of implementing such schemes to be too high to be viable. It should also be noted that certain classes of employees, normally those is lower-paid jobs (such as bar staff, shop assistants, caterers, and those in manual work) usually haven’t had access to private pension schemes through their employer, so auto enrolment will likely be good news for them.

Since October 2012, new pensions legislation has forced larger employers to pay into the new auto-enrolment programme, and to automatically deduct a proportion of workers’ wages each month for it too. By 2018, all businesses will be included in the new law- even very small ones who only employ a handful of workers. With up to 11 million new workers to be included in the scheme by 2018, costs for small businesses implementing their own pension schemes for the very first time are set to rise.

The Cost for Small Employers

Small businesses already struggle to meet demands to pay for fuel, workers’ wages, rates, and other associated business costs. The auto-enrolment pension programme will only add to the burden as it means that, by 2018, 8% of any eligible employee’s salary will have to be paid into the scheme. Of this, 4% will have to be paid by the worker, 1% will come from tax relief, and the remaining 3% will have to be paid by the employer, thus adding a substantial cost to any employer’s wage bill. On top of this, administering the pension scheme in the workplace will have associated costs: there are annual management fees associated with NEST (the National Employment Savings Trust, the most common pension provider) as well as with other pension companies. Joining itself will also take up extra working hours as each small business works to ensure it’s compliant with the law: extra hours which will have to be budgeted for internally as processes are developed. With additional financial contributions on the wage bill, the internal management of the pension scheme, and the annual administration fees that all employers are forced to pay on top, costs for small employers could be punishing- perhaps even enough to drive the under prepared to the wall.

Big Changes Needed

Big companies can take between a year and eighteen months to get ready for pension auto-enrolment, but small businesses living day-to-day may not have the luxury of that time, particularly if they are not fully aware of all of their new obligations. Additionally, big businesses will have plenty of internal support systems to ensure a smooth transition: in-house legal teams, HR departments, pension specialists, dedicated admin staff, payroll clerks, and communications and IT staff who all make the process much more streamlined. If it’s a small employer left to struggle with the new responsibilities alone, the difficulties of setting up the system, not to mention the administration and start-up costs, may be overwhelming.

Because non-compliance is not an option, even the smallest of businesses will need to make sure that they are handling things correctly. Employers can’t claim ignorance of the law as a defence, and there is a fixed £400 penalty for failing to put things in place for employees’ pension enrolment. Furthermore, escalating fines of anything between £50-£10,000 -depending on employee numbers- for every day of non-compliance mean that ignoring these new statutory requirements could cost businesses dear. Regulators will pursue employers through the courts for the money if necessary, and it’s possible that criminal prosecutions could take place for repeat or persistent offenders. For most businesses, however, while they clearly need to take the responsibilities seriously, it should not come to that: the Pensions Regulator has pledged to work with employers to help them become compliant with the new law.

A Pensions Disaster?

That said, as the auto-enrolment process has been “staged”- with larger businesses coming in first, and smaller businesses coming in more gradually over the next few years- a false sense of security may have developed. Large firms such as Marks & Spencer or Tesco already had employee pension schemes in place which largely already met the new auto-enrolment guidelines. Small businesses may not have the expertise- and clearly do not have the financial resources- of a large supermarket chain, meaning that they may not be able to cope with the new demands placed upon them by the government.

By July 2014, businesses with between 62 and 89 employees were supposed to have rolled out the new pensions auto enrolment scheme to their employees. However, City solicitor Irwin Mitchell stated in October 2014 that a large proportion of the 12,000 businesses affected had taken up their legal right to ask for a 3-month extension. When the second deadline passed, many of these smaller businesses had still not managed to comply with new pensions law, meaning that they were now vulnerable to the fines and penalties imposed by the Pensions Regulator. Of these, “Micro-employers”- those with only several staff- are particularly exposed to these fines. With over half of micro-employers unsure as to what their legal responsibilities really are- never mind all of the additional costs involved- they are in for a rough few years, and doubtless some will not weather the storm. Another problem may be that a large auto enrolment company may not even be interested in gaining the business of the smallest employees (even if they won’t admit it), simply because there isn’t enough money in it for them.

While the government’s auto-enrolment scheme presents huge challenges, both administrative and financial, to small businesses, it seems that even the smallest companies now have no option but to simply get on with it- the only other option is to cease trading, or face staggering fines and potential jail time for persistent non-compliance.

How we can help

Ontime are determined to make the whole transition of implementing auto enrolment easy and simple, we take the the burden away and make sure you comply before your staging date to avoid any fines or penalties. If you would like to discuss your requirements please give us a call on 0113 8267260.

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