All the fanfare surrounding the Government’s auto-enrolment pension legislation when phase one was launched last October may have understandably caused some worry and consternation amongst the UK’s SME community.
Given the multi-phased stages of the new legislation, the leaders of small to mid-sized firms – which make up the backbone of the UK economy – would be forgiven for feeling a bit out of touch when the likes of Theo Paphitis and other high profile figures proclaimed ‘I’m in’ on a series of Government TV adverts aired in advance of the launch. In actual fact, there is still a long way to go before auto-enrolment will impact on most SMEs.
Auto-enrolment is designed to address the lack of pension provision amongst the nation’s workforce. Introduced in phases starting with the larger employers and working its way down to smaller businesses, employees will be automatically enrolled into a pension scheme, supported by mandatory contributions from themselves, their employer and the government (via tax relief).
Accompanying auto-enrolment legislation is the National Employment Savings Trust (NEST), a Government-led initiative which any UK employer, regardless of the size of the company or organisation, can use to meet these new pension responsibilities. Employers can use their own “qualifying scheme” to meet the requirements or enrol in NEST (or alternatives such as NOW:Pensions or the People’s Pension).
Despite some of the criticism and limitations of auto-enrolment, with phase one now live it looks as though, for at least the time being, that it is here to stay. So the next step is for businesses to be prepared. While there is no panic for SMEs, it is important to be aware of key milestones. Companies with less than 500 employees need not participate until 1 January 2014 at the earliest, with those with less than 50 employees not having to be compliant until after April 2015. Bear in mind that the later staging dates have been postponed already and could be again if we don’t see signs of a decent economic recovery.
The contributions themselves are also not particularly onerous for employers’ in the early years – with minimum contributions commencing at one per cent per annum of qualifying earnings up to 30 September 2017 and reaching the long-term minimum of three per cent per annum of qualifying earnings by 1 October 2018.
What then should smaller firms do the interim period?
My advice, in the short term, is nothing at all. SMEs should let the bigger companies take the strain of auto-enrolment and NEST, iron out the problems and deal with the undoubted pitfalls of the new legislation.
There is certainly no need for SMEs to jump into the NEST at this point in time. Smaller firms are currently able to sit up and watch the market develop before deciding their own course of action. There are a lot of alternatives to NEST emerging, some of which will prosper and achieve a reputation for providing good service which could better suit their needs.
A key consideration for those firms which currently make contributions to schemes is whether an extending structure should be adopted as the auto-enrolment vehicle or whether there should be tiered arrangements where some enter a full scheme and some receive the statutory minimum. For those SMEs which don’t make contributions, the choice is likely to be a compliance-only arrangement with the main decision being which of the auto-enrolment providers to select.
I would also advise SMEs to start looking into some of the more complex issues around auto-enrolment including contribution calculations and identifying which employees are eligible. It is very likely that you will need assistance with this. While some of the alternative providers will do this for you, NEST will not. NEST have also recently made it clear that they will not be able to provide direct support to smaller employers when their staging dates come around.
As we find ourselves in the era of what the Government has called the biggest change in pensions in over 100 years, SMEs will need to start addressing matters preferably within twelve months of their relevant staging date. However, in the meantime, there is no need to panic as they are in a good position where they can take note of how the new pensions landscape develops before making any key decisions on how they implement auto-enrolment within their own business.