The clock is ticking for even the smallest employers to comply with the auto-enrolment pensions legislation. By April, every employer in existence in 2012 when the legislation came into effect must be compliant, even if they have only a handful of employees. And by February next year, all employers set up since 2012 will also be covered by the rules.
The legislation requires employers to offer their staff a pension scheme that meets certain basic standards usually through a plan set up with a specialist pension provider. Staff must be automatically enrolled in the scheme, unless they have specifically asked to opt out, and employers must make pension contributions on their behalf. Minimum contributions are currently 1% of salary, rising to 2% in April 2018 and to 3% in April 2019. Employees have to make their own contributions as well.
Larger companies, which came under the auto-enrolment rules several years ago, have mostly coped well. But small employers, which may lack specialist human resources and payroll departments, are finding the going tougher. The Pensions Regulator, which has powers to censure and even fine employers that fall short of their responsibilities, issued more than 15,000 compliance notices to small employers in the third quarter of last year alone, the most recent period for which figures are available.
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The pensions provider Aviva has said that one in seven small employers contacting it for help are doing so after their deadline has passed. One problem is that many smaller employers don't know exactly what their responsibilities under auto-enrolment are. But another issue is that many are leaving it too late to start preparing, particularly since the huge numbers of employers trying to set up pension schemes at the same time is stretching the resources of pension providers and specialist advisers. The Pensions Regulator thinks a total of 1.8 million businesses are affected by auto-enrolment, including 500,000 for which the compliance deadline falls due during 2017.
If you're a small employer yet to address auto-enrolment, you need to do so as soon as possible. Start by checking what to do and by when the Pensions Regulator's website has a list of "staging dates" for employers but also give yourself time to put the arrangements in place. Depending on what your firm requires, it could take at least six months to set up a compliant scheme. See the column on the right for tips on how to choose a provider.
What options do small firms have?
The vast majority of employers use a specialist pension provider to offer their staff a scheme that complies with auto-enrolment, but choosing the right one for your business will require some basic research. Look for a provider whose scheme has been independently verified as meeting the standards required, ideally with a kitemark such as the Pension Quality Mark or the Master Trust Assurance Framework. Bear in mind that not all providers are interested in working with smaller employers.
Compare charges carefully both what you're expected to pay as an employer and also what your staff will be charged. High members' charges will eat into the value of their pension savings, while expensive administration fees will add to your costs, and come on top of the contributions you'll have to make. Communication is another issue to consider. Will the provider communicate directly with scheme members, or require you to do so, perhaps with template letters and brochures? Some employers may prefer one approach or the other.
While most large pension companies provide auto-enrolment solutions, three businesses dominate the market for schemes for small employers. The People's Pension (ThePeoplesPension.co.uk) is run by B&CE, which started out several decades ago as a specialist provider of industry-wide pension schemes. Now: Pensions (NowPensions.com) is owned by a Scandinavian business that moved into the UK market several years ago to specialise in auto-enrolment. Lastly, Nest (NestPensions.org.uk) is a scheme set up by the government, which has some limitations but may appeal to the smallest employers. All three of these options have enrolled hundreds of thousands of workers in their schemes and offer a range of simple investment choices.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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