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The changing face of pensions
What does it mean for small businesses?

» Posted on: 20 April 2012

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The countdown is well and truly for pensions auto-enrolment with the first stage taking place this October for large businesses with more than 10,000 PAYE employees.

With the government having recently delayed even further the staged process for other businesses to roll out the new regime, it may seem like a long time before the proposed changes will affect smaller companies. But employers should not be complacent, whatever the size of the payroll. At the very least businesses need to understand the basics in good time.

What is auto-enrolment and how will it affect my business?
Put simply, the government has concluded that not enough people have been saving for their retirement. A policy of auto-enrolment has therefore been introduced whereby all employers will be under a legal duty to enrol all eligible employees into a qualifying pension scheme. Further, employers will also have to make minimum contributions to these schemes, eventually of up to 3% of an employees’ earnings.

Eligible employees will be those between the ages of 22 and state pension age who are earning over the set minimum (being £8,105 for the year 2012/13, corresponding with the income tax personal allowance level). However, those who are not eligible (e.g. by being under the qualifying age of 22) may choose to opt in by giving their employer relevant notice.

Similarly, employees who are automatically enrolled under the new scheme will have the right to opt-out of the scheme within prescribed time-limits.

At present, there is no obligation on an employer to contribute to an employee’s pension. Instead, the only obligation is to provide employees with access to a stakeholder pension scheme. Even that obligation does not capture those businesses with less than 5 employees. The changes therefore represent a significant change to workplace pensions for employers.

When will my business be affected?
The changes will be implemented in stages depending on the size of the business with larger employers going first by the end of this year, down to the smallest companies with less than 30 employees at the end of the process.

The government have recently revised the staging deadlines in the hope of reducing the burden of implementing the reforms on small businesses in light of the ongoing difficult economic conditions.

The implementation deadlines for small businesses are currently as follows:

  • 50 – 249 employees: implementation between 1 April 2014 and 1 April 2015
  • 30 – 49 employees: implementation between 1 August 2015 and 1 October 2015
  • Fewer than 30 employees: implementation between 1 January 2016 and 1 April 2017

So should I just sit tight until the deadline?
The auto-enrolment scheme represents a significant change in workplace pensions. It would therefore be prudent for all employers, large or small, to consider their strategy sooner rather than later to ease the inevitable administrative and financial burden that these changes will bring. This would be particularly true for smaller businesses which may not have the same resources to draw on as larger companies.

The necessity to take action to ensure that new pensions requirements are met is further cemented when you consider that a failure to comply may lead to compliance notices being issued, fines of up to £10,000 (for the largest employers) and even criminal penalties in some circumstances.

In terms of the deadlines set, employers can choose to implement the changes at an earlier staging date than the one allocated to them if they wish to do so, but may not choose one later than the one specified. Therefore, if your company is prepared to make the changes as soon as possible then there is nothing to stop you from doing so before the staging date that your company has been allocated.

From a practical perspective, you should give thought early on as to how the business intends to manage the administrative task of ensuring all employees are enrolled in a suitable and compliant workplace pension, as well as subsequently dealing with those who may choose to opt-out. If you are planning any unrelated changes to the payroll system over the next few months, you should consider building in auto-enrolment procedures at the same time to allow plenty of time for new systems to be tried and tested.

Although it may not be possible to accurately predict the financial status of your business three years down the line, it is a certainty that these changes are going to come at a cost to all businesses, from the costs of the mandatory employer contributions, to the incidental costs of implementing the relevant administrative processes. It is therefore never too early to start considering how to reconcile these requirements with the business budget.

Note: This article is intended to give readers a brief overview of the proposed pension reforms. It is not intended to give comprehensive or specialist advice to employers. The UK pensions regime is complex and subject to ongoing changes. Therefore before action is taken, detailed guidance and advice should always be sought from relevant pensions practitioners.

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