By Karen Bexley, Director of employment at MLP Solicitors LLP
Automatic enrolment, or auto-enrolment for short, is an issue that SMEs ignore at their peril.
In an effort to encourage workers to save for their retirement, the UK government has started requiring companies to enrol eligible employees into a pension scheme. The staging date at which businesses will be expected to comply varies – automatic enrolment is being rolled out over six years, beginning with the largest employers in 2012 – and many businesses are finding their staging date is now just round the corner.
Those who do not comply with their staging date can expect to hear from the Pensions Regulator, which has the power to order penalties rising to as much as £10,000 per day for the largest corporations.
The precise amount that employers will have to contribute towards the employee’s pension pot will increase in stages, but by 1 October 2018 businesses will be required to put in a minimum of 3 per cent of an employee's salary with staff chipping in 4 per cent and 1 per cent coming in the form of tax relief.
It's true that some employees can choose to opt out of auto-enrolment but our experience is that surprisingly few workers are choosing to exercise this option. To some extent, this may be because employees are not being asked to contribute much at present. Opt-out rates may rise significantly when people have to put away four per cent of their salary in 2018, but only time will tell.
The upshot is that auto-enrolment is something SMEs need to think about now. There are questions that need to be asked and decisions that need to be made.
For instance, companies should not assume that an existing pension arrangement for senior management can simply be opened up to all staff to satisfy the demands of auto-enrolment. We've encountered cases where a pension provider has refused to offer pensions to lower-paid workers at auto-enrolment levels of contribution. Equally, it may be that it makes sound business sense to offer different pension providers to different pay grades within the organisation.
Auto-enrolment may have a knock-on effect on other areas of the business as well. To give just one example, if an employee decides to contribute to their pension using a salary-sacrifice scheme, this could impact on their entitlement to other benefits such as maternity pay.
What should be clear, then, is that SMEs need to be aware of auto-enrolment. But more than that, they need to be taking steps now, and implement a pension before their staging date, to ensure that they can comply with the new rules, and to ensure they have the time and options of pension provider to implement the best decisions for their business and employees.