Small businesses can't dodge pensions auto-enrolment

published 29 June 2018

902_MW_P23_Small-Business — Watchdogs will sniff out non-compliance

Regulators turn the focus on employers looking to circumvent auto-enrolment and lock employees out of pensions.

Small businesses take note: pension watchdogs have vowed to crack down on employers discovered to be encouraging their staff to opt out of the auto-enrolment occupational pensions system in order to cut costs. In the first three months of this year alone, the Pensions Regulator issued 35,862 enforcement notices against employers in breach of the auto-enrolment rules, relative to 28,446 last quarter.

Auto-enrolment obliges employers to enrol almost all their staff into the workplace pension scheme and to make at least a minimum contribution on their behalf, unless workers have specifically opted out. And so far, this application of the "nudge theory" appears to be working. Between the introduction of auto-enrolment in 2012 and last year, pension-scheme membership in the UK has hit record highs, with 85% of staff employed by small and medium-sized enterprises choosing to stay within the schemes set up for them, according to the Department for Work and Pensions.

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Be careful what you say

However, the increase in the number of warnings given to employers reflects concerns that an increase in the pension contributions required under auto-enrolment may prompt a spike in opt-out rates. In April, the minimum contribution required from employers doubled from 1% of staff pay to 2%, and this is set to rise again next April, to 3%. For employees, minimum contributions have gone up from 1% to 3%, and will go up to 5% next year.

While some employees may understandably be spooked by the increased cost of pension savings, regulators are determined to prevent employers from using the higher contribution rates as a means to thin out scheme membership and save themselves money. However, it is illegal for employers to offer staff any inducement or encouragement to opt out of the staff pension scheme or to put pressure on them to do so. Earlier this year, the regulator even warned employers to think carefully before writing to employees to point out the forthcoming increase in contributions, in case the communication was regarded as encouragement to opt out.

Nevertheless, there is now anecdotal evidence that some cost-conscious employers are seeking to influence their employees' behaviour. For example, unions complain about staff being unofficially told that opting out could increase their chances of getting a pay rise, or warned that the company's finances are in difficulties and that savings are needed. More seriously, directors of recruitment firm Workchain earlier this month pleaded guilty to gaining unauthorised access to computer data in order to opt temporary workers out of the company pension scheme, in the regulator's first criminal prosecution of individuals under the auto-enrolment laws. Although this is an extreme example, employers should be careful to avoid doing anything that could be construed as encouraging employees to opt out.

SMEs eye lucrative public-sector contracts

Small and medium-sized enterprises (SMEs) are winning more government contracts than ever before, new data shows, with hundreds of millions of pounds worth of deals coming up for renegotiation before the end of the year.

SMEs accounted for 62% of the 23,100 suppliers that won government contracts last year, up from 51% in 2016, according to Tussell, a market intelligence consultant specialising in public procurement. The consultant urged SMEs to exploit the opportunity of an unusually high number of tenders due for completion before the end of the year, with £565m worth of government contracts due to be awarded in the technology sector alone.

Ministers have faced criticism in recent years for failing to increase the value of public-sector work awarded to smaller contractors, even if the numbers of such companies winning contracts have increased. However, the collapse of Carillion, which prior to its downfall was operating contracts worth £5.7bn with 208 government bodies, is widely seen as a potential watershed moment for SME contractors. The government is now rethinking an approach that has often seen it award large tenders to a single big company. The break-up of such work could see more work generated for SMEs.

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.