By Neil Lagden, Head of Bond Payroll Services
Smaller businesses are at a crossroads. Pensions Auto Enrolment (AE) is fast approaching and every organisation that employs at least one member of staff will need to take action, irrespective of size or turnover. This raises a raft of questions for business owners, from how much will it cost to actions required and who needs to be involved. As with any legislative change, there are benefits to planning ahead: getting the AE strategy and timing right will create an engaged and motivated workforce, driving up retention. However, getting it wrong could affect the business financially — from substantial regulatory fines to tying up senior personnel who should be focused elsewhere, as well as undermining employee morale.
So what does AE mean for the smaller business? The essence of AE is simple: a company must automatically enrol jobholders into a qualifying pension scheme and make contributions on their behalf to that scheme. The minimum non-contributory employer rate starts at 2% but will rise to 8% over the next three years.
The scheme affects any employee who is not already in a pension scheme, who is aged between 22 and state pension age, who earns more that £10k a year for 2015-2016 and who ordinarily works in the UK.
Employees have some control however, and can opt out of the scheme — for example older employees may have already made their own pension arrangements, but there are specific criteria that must be met. In fact, Government research suggests that around 12% of eligible employees will opt out, but companies must offer the opportunity for all eligible employees who have opted-out to re-enrol every three years.
If an employee doesn’t contribute towards the pension the employer is expected to contribute the full minimum amount — up to 8% by 2018.
From 2015 onwards, small businesses will need to start staging and companies need to determine their staging date as a priority to begin effective AE planning. But businesses have different staging dates — so it is essential to find out which date applies.
While until now the Pensions Regulator has essentially staged companies by size, with the largest going first, for the SME market this model is changing slightly.
From June 2015 to May 2017, companies’ staging dates are not determined by business size but by the last two characters in their PAYE reference. From May 2017, businesses that started after April 2012 will begin to stage.
The good news is that AE administrative processes have been streamlined. This eases some aspects of the burden but does not guarantee a smooth transition to AE. Furthermore, organisations will require support in achieving AE and there is a growing concern that ‘capacity crunch’ could result in some organisations failing to find the help and expertise required to implement AE.
It’s all about communication
Successful AE relies on great communication. All communications with employees must be legally compliant and meet specific requirements laid out by the Pensions Regulator. All workers must be informed in writing (by traditional letter or email) about the changes and the timescales involved. The information must be specific to the individual — a company cannot send a blanket communication to all employees and while email is most cost effective, it is important to consider employees in different job roles. Do those working in the field, in retail or on the shop floor have a relevant email address?
Well thought out employee communication will help build a committed and loyal workforce. The duty is on the employer to provide the right information to the right individual, at the right time.
An outsourced approach
The great news is that a significant amount of the AE burden can be outsourced to trusted third parties. Key tasks that can be handled by a trusted payroll provider in conjunction with a financial advisor partner include:
• Initial workforce assessment — to determine who needs to be enrolled
• Verifying staging date — and creating an action plan to meet the timeline
• Choosing and applying for a qualifying pension scheme
• Ensuring payroll staff understand the new AE requirements — including worker types, pension scheme design and communication
• Enrolling staff through the payroll — including staff communication templates
• Registration with the Pension Regulator to meet the declaration of compliance process
The right help and guidance can ensure the business meets automatic key enrolment dates and avoids heavy fines.
AE demands a payroll services provider with both technical ability and in-depth understanding of pension requirements. AE may be daunting for SMEs but great preparation will ensure that enrolment goes smoothly and opt outs are minimised. The benefits of planning ahead and being prepared are clear, minimising time spent by key senior personnel that could distract from essential business development.
AE is a reality — it cannot be ignored. Companies need to get ahead of the game now.