Chartered Financial Planner and Director of Midland Financial Solutions Kevin Edwards explains what SMEs need to know to avoid big fines and his five major concerns for firms that have yet to start the auto-enrolment process.
The Auto-Enrolment rules have existed since October 2012 and were designed by the Government to encourage more people to save for retirement by automatically enrolling individuals into a pension scheme at their company. To do this, the company has to have a pension scheme. Not a problem if you’re a large corporate, more of a problem if you’re an SME. In fact, it’s much more of a problem than most SMEs, their advisers or the Government initially realised.
When it comes to SMEs and the auto-enrolment, there are five key concerns that I have for SMEs yet to embark on the auto-enrolment process:
1. Pre-planning: It now appears that before an SME can enrol anyone, we have found that there is a ‘getting ready’ timescale of at least six months – so any firms that have expected it to be the equivalent of a five minute job have had a nasty surprise. But don’t just take our word for it. A report by the Centre for Economics and Business Research (CEBR) recently found that it will cost British SMEs up to £28,300 per business and take up to 103 man days. The dates for most SMEs to comply are nearly here and, unfortunately, it takes more than a few phone calls to set everything up!
2. Pension providers: Smaller companies are struggling to find group pension providers. Independent group pension providers are looking at SMEs and deciding that there’s just not enough profit in providing pensions for them, leaving many SMEs with no other choice than to use the Government’s own workplace pension scheme NEST (National Employment Savings Trust), whether the SME feels it suits their needs or not. It’s not that there is anything untoward about NEST, it’s just that it may not be as flexible as companies may desire. For example:
• Some SMES are keen to introduce a Group Pension scheme that goes ‘above and beyond’ the minimum legal requirements, as part of an overall Employee Benefit package to attract and retain high calibre staff. This may not be possible if an SME has to use NEST.
• With NEST, a firm will only have a small range of investment options to choose from.
• There is currently no facility to transfer other pension funds into NEST, or to transfer out of NEST (apart from at retirement).
• As minimum contributions are based on ‘Band Earnings’ (between the lower and upper NI thresholds), high earners may find that their contributions are only based on a proportion of their salary.
• NEST currently makes a Contribution Charge of 1.8% i.e. per contribution. Most Group Pensions have no such charge. This charge may eventually be removed, but it means that currently anyone with less than 15 years to retirement is probably going to be worse off under NEST.
3. Practical IT issues: Ridiculously, there basic IT issues that are inhibiting companies’ ability to progress with the Auto-Enrolment process. For example, there appears to have been an incompatibility issue between the NEST website and Google Chrome.
4. Big fines: A Daily Telegraph article in October 2013 reported that around one third of SMEs, according to a survey by employee benefits company Secondsight, have said that they will be ignoring the Auto-Enrolment legislation. This could be a costly mistake. Non compliance in time with the Auto-Enrolment deadlines dictated by Government results in disproportionately large fines. Most SMEs don’t realise the extent of the fines, for example, it’s a whopping £2,500 per day for employers with 50 to 250 workers – find out more by visiting the Pension Regulator’s website at http://www.thepensionsregulator.gov.uk/employers/what-happens-if-i-dont-comply.aspx
5. Payroll impact: The additional administration requirement of Auto-Enrolment in SMEs is likely to result in many having to outsource their payroll function, due to the complexity of the rules. In addition, an Eversheds survey of 300 SMEs last October found that a quarter of SMEs anticipated that the additional costs for their business resulting from Auto-Enrolment will be more than 5 per cent of payroll, with 40 per cent of firms believing that it will be additional 1 per cent to 5 per cent of payroll.
What if your SME has not yet considered Auto-Enrolment?
The starting point for any SME is to discover its exact ‘Staging Date’ – the date when it is required to comply with the Auto-Enrolment legislation – and to take professional advice as soon as possible. SMEs need to protect themselves from incurring large fines, as well as ensuring the planning process is manageable within the required timescales and the ongoing costs are kept to a minimum.
And if you’re hoping that your employees will choose to opt out of the Auto-Enrolment pension process, then you might need to think again. Nationally the opt-out rate is running at around 10 per cent, according to a survey of 400 organisations, released in December 2013 by the CIPD (Chartered Institute of Personnel & Development), so you can’t count on your workforce defying the national average.
The same CIPD survey found that, because of the costs associated with Auto-Enrolment, a quarter of SMEs anticipated they would need to reduce pay growth, a fifth expected to freeze pay and a quarter predicted negative knock-on effect for other related payments such as cuts to bonuses or overtime. Auto-Enrolment is a serious issue for SMEs and to minimise its impact, it’s vital to take it seriously and plan ahead.
Kevin Edwards is an IFA, Chartered Financial Planner and Director at Derbyshire-based Midland Financial Solutions. Kevin has seen his expert comment published in titles such as FT Money, The Guardian, The Times on Saturday and the Sunday Express, as well as being a regular contributor to Business Matters Magazine.
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