Pensions auto enrolment: Just another admin burden for small businesses?
Auto enrolment is coming and no doubt if you are a small business owner the cost and admin burden of having to comply has already crossed your mind. All employers with > 30 staff already have to comply and the remaining businesses are being brought onboard over the next 18 months. If you haven’t started thinking about what you are going to do, you can check your staging date to see how much time you have here: The Pensions Regulator
If you do not already have plans underway, the worst thing you can do it put your head in the sand, as failure to comply can result is some hefty fines. Penalties are charged daily at a rate of £50 per day for employers with 1-4 employees and £500 per day if you have 5-49 employees, with fines increasing for larger employers.
How does it work?
The table below outlines your duties depending on the age and salary of your staff members, but in the vast majority of cases staff will be automatically enrolled onto the scheme.
|From 16 to 21||From 22 to SPA||From SPA to 74|
|£486 and below||Has a right to join a pension scheme|
|Over £486 up to £833||Has a right to opt in|
|Over £833||Has a right to opt in||Automatically enrol||Has a right to opt in|
Staff who are automatically enrolled have the option to opt out. However, as an employer it is important you are not seen to encourage or persuade this, it has to be their choice. If the pension regulator does consider that you are encouraging staff to opt out, this is an offence known as inducement, which is punishable by fines of up to £10,000 a day and possible criminal proceedings.
Three years after an employee has opted out, you must re-enrol them and if they want to opt out, they must go through the process again. As you can see, keeping track of who is eligible, managing opt outs and re-enrolments is going to become an administrative burden for the average small business owner who cannot afford to invest in expensive software. Many employees are also likely to become frustrated with being automatically re-enrolled into a scheme that they have already opted out of.
How much will it cost?
There are minimum contribution levels required in order to comply with your duties as an employer. These are based on a percentage of the employee’s salary, as shown below.
|Date||Employer minimum contribution||Total minimum contribution|
|Before 30 Sept 2017||1%||2%|
|1 Oct 2017 to 30 Sept 2018||2%||5%|
|1 Oct 2018 onwards||3%||8%|
What is it trying to achieve?
Pensions auto enrolment legislation is designed to encourage a retirement saving culture in the UK. People are living for longer and the cost of supporting our ever ageing population is increasing. This is putting increased strain on the taxpayer and the government is trying to find a way to encourage individuals to save towards their own retirement.
But will it work? For employees who want to actively save for their retirement, this legislation will make achieving that easier, as well as obliging their employers to contribute. However, most small employers are telling us they think the majority of their staff will choose to opt out – if you are a low earner, losing 5% of your salary in pension contributions is quite significant and many people will feel they simply can’t afford it.
If this is what happens, then pensions auto enrolment legislation may simply result in an administrative burden for small businesses having to manage the opt out and re-enrolment processes. Or will the simple inertia of automatically being enrolled and laziness of employees to actively opt out, mean a certain proportion of employees will end up with a workplace pension they wouldn’t otherwise have had?