By Anthony Carty, Group Financial Planning Director of pension specialists Clifton Wealth
Perhaps the most dangerous assumption so far — made by both employers and The Pensions Regulator (TPR) itself — is that around a third of employees in the UK will choose to opt out of the government-imposed auto-enrolment into an employee pension scheme.
In fact, according to government figures published recently, fewer than 10 per cent have opted out from among the one million workers signed-up to schemes since the initiative began in October 2012. Admittedly, these are employees of the UK’s largest organisations, which have strong employee communications infrastructures to explain the implications of opting-out. But, this does show that business owners within small firms could have a nasty surprise around the corner if a large proportion of their employees remain opted in.
We believe this is likely to be the case for one simple reason. On average, the weekly contribution by an employee to their pension scheme will be between £2 and £3. Clearly, this is not a significant enough amount for them to consider opting-out and, thus, opt-in will almost certainly be the norm for most employees.
The second killer assumption, particularly amongst business owners with less than 50 employees, is that there will be plenty of time to sort out auto-enrolment before the staging deadline of April 2015 and beyond. Not true. We are already encountering the issues being faced by business owners seeking financial advisors, payroll providers and software suppliers. It’s easy to sit in a cocoon believing it won’t take long to set up a scheme for a small business with just a couple of employees. But, SME’s make up more than 90 per cent of the UK’s business economy, which means hundreds of thousands of other companies are facing the same issues and fishing in the same, relatively small pool. Planning has to start now.
This leads to assumption three: “TPR won’t worry about a small business like mine.” Wrong again! In reality, auto-enrolment isn’t actually about pensions, it’s about compliance and the Regulator is taking this extremely seriously. With the introduction of Real-Time Information (RTI), the institutions involved in taxing and regulating the UK’s businesses can now access the relevant information at the click of a mouse. TPR has already launched 89 enquiries into auto-enrolment compliance issues and there is no indication they will be any less lenient with small businesses, given the long implementation dates.
Example; price of getting it wrong:
• Valentine Industries Plc employs 20 people and decided that the DIY approach to AE would be fine.
• Over the last 18 months they have made two separate mistakes in administering the scheme.
• They have now got it wrong for a third time, and they are likely to receive a fine of £15,000 per month until they get it right.
So, how can SMEs avoid death by auto-enrolment? Here are Clifton Wealth’s five vaccines:
1. Don’t be complacent - auto-enrolment is not going away, will be rigorously monitored and is likely to see most employees remain opted in. Accept this and work towards a smooth transition to the brave new world.
2. Plan ahead - Research employer/employee liabilities, costs, appropriate schemes and options. Most importantly, know your staging deadline date and work backwards. Do not underestimate the time it will take to set up a pension scheme and integrate its administration into payroll and other systems needed to manage the process. A good starting point is the Pensions Regulator website [nurl= http://www.thepensionsregulator.gov.uk/]www.thepensionsregulator.gov.uk
3. Understand the schemes - choosing the right kind of employee pension plan involves a clear understanding of what's available. There are plenty to choose from including trust-based, contract-based and stakeholder schemes.
4. Communicate - one element of compliance is clear employee communication so they fully understand their options and the implications of auto-enrolment. This is a difficult process, requiring simplification of complex financial issues.
5. GET HELP! — Most of these challenges can be resolved by using experts already set up to manage the whole process, from planning to design and implementation of an appropriate solution, including employee communication and payroll integration. There are a number of companies in the UK that can handle this, but there is only so much capacity and an already lengthening queue.