Act now to comply with workplace pensions
All businesses employing at least one member of staff will soon find themselves having to enrol employees into a workplace pension scheme. Staging dates vary, but now is the time to take action. By Peter Crush
Every so often, there’s comfort to be had when major employment legislation is introduced but there’s no ‘big-bang’ requirement forcing all businesses, large and small alike, to fall into place at exactly the same time. This has been the case with pensions auto-enrolment – the Government’s big idea for all employees, above a minimum earning threshold, to be automatically enrolled into a workplace pension (unless they specifically opt out).
Starting with the largest employers in 2012, the process of requiring employers and employees to contribute 1 per cent each to form a total 2 per cent pension contribution has been rolling out at a steady pace. It was introduced to counter the ‘double whammy’ of woeful private pension-saving figures – in 2012, just 38 per cent of British working adults had any pension at all – and rising life expectancy.
So far, the evidence suggests the process has been a success.
Official figures from July 2015 show that 70 per cent of eligible employees (13.9 million people) paid into a workplace pension in 2014 – a 15 percentage-point increase compared with two years previously.
During this period, smaller firms have had the luxury of being able to sit back and watch how larger firms have figured it out. But now, time is fast running out. With small businesses employing 48 per cent of all private sector staff, it’s this tranche of firms that is the key to the policy’s success.
From now on, around 1.8 million small firms – 500,000 more than the Pensions Regulator originally estimated, owing to increases in business starts and fewer closures –employing 5 million people, will need to enrol their own staff.
Each business has been given a unique ‘staging date’ – the date by which it must start auto-enrolling staff into a pension scheme – based on the last two digits of its PAYE references. In June, a trial group of employers with 30 staff or fewer began auto-enrolling their staff. The number of employers reaching their staging date will increase from around 16,000 in the final quarter of this year to almost 100,000 from January next year, and will reach 200,000 per quarter by 2017.
“Most members haven’t staged yet, and won’t do until next year,” says Sandra Dexter, FSB National Vice Chairman. “But because most small business bosses are not pensions experts and don’t have an in-house HR team, suddenly they will have to become knowledgeable about this topic. Our advice is that they need to be thinking about this now, and starting to make their plans for auto-enrolment.”
Taking action
“Some employers still won’t be familiar with the rules, or will think it won’t apply to them – but they’re wrong,” says Mrs Dexter. “Our members are among those who are the most aware of their obligations, but the deadline is fast approaching. The Pensions Regulator suggests a minimum of six to nine months is needed to select a provider, sort out payroll, test it and then communicate the scheme to employees. It could take longer than people think.”
Apart from not wanting to fall foul of regulator fines for lateness – of £500 per day for firms with five to 49 employees and £50 for those employing one to four – it’s the background legwork that takes time.
Because the onus is on the business itself to demonstrate it has selected a compliant scheme, it has to do the homework. It’s also for firms to prove they’ve checked whether their accountancy/payroll provider is up to scratch – and this can be done only with testing.
One problem is that because so few small firms have yet to stage, there’s little upfront documentation of the problems they might face. However, a handful have staged early, and First Voice spoke to one – charity Bag Books, which has just 10 staff, but decided to stage four years early, in 2013.
“It wasn’t straightforward,” says Bag Books Chief Executive Dean Caswell. “We decided auto-enrolment was going to happen anyway, so there was no point putting it off.
“What we discovered, however, was just how many variables we had to think about – things such as defining what someone’s salary actually is, bearing in mind overtime and bonuses – and whether the agencies we use providing contractors were ready and compliant, too. To avoid changing what people’s defined pay was, we sought advice and decided it was contracted pay only, so not overtime.”
Eligibility triggers
Other issues for Bag Books involved ensuring people’s data was correct – for those staging in 2014/15, auto-enrolment starts only for those over 22, earning more than £10,000 – so that triggers could be set up for when people start earning above the minimum amount, or have a birthday that takes them into eligibility, says Mr Caswell.
“You then need policies for dealing with different outcomes,” he adds. “We had a part-time employee who fell below the earnings minimum, but we felt it was right to offer her the chance to be in a pension if she wanted, which we are able to do. That person – even though she earned less than she technically needed to – actually chose to contribute.” (Employees who earn less than £10,000 can take part if they want to, but most opt out).
Overall, the process took around six months longer than Mr Caswell anticipated, he says, citing another component as being budgeting planning – actually planning for the cost of the employer contribution. For as well as a sliding scale of staging dates, there’s also a contributions escalation, where total contributions need to hit 8 per cent (4 per cent from employees, 3 per cent from employers, with 1 per cent as tax relief) by 2018. “We decided we’d go straight in at the 3 per cent level,” he adds. “We didn’t want the admin burden of changing it each year. To pay for it, we’ve simply worked the cost of this into any applications we make for funding or grants.”
However, this offering a 3 per cent contribution straight away is something Mrs Dexter says she hasn’t seen much appetite for from small firms. It’s unlikely to happen much, she says, especially since the Emergency Budget introduced the new National Living Wage, which will push up salaries at the same time as most small employers will be starting their contributions.
“Small firms need time to adapt to the new requirements, and that’s why it’s important that minimum contributions for employers start low, at 1 per cent,” she says. “Over time, minimum contributions are set to increase – but it’s important that this happens gradually, as some firms will struggle with the extra costs.”
Ongoing process
At Bag Books, only one person hasn’t enrolled, and when most small firms are enrolling people for the first time, Mr Caswell will be sending letters to encourage re-joining, as re-enrolment has to be done every two years. “Auto-enrolment is an ongoing commitment,” he says. “Letters will need devising; re-enrolment communication will be needed; adhoc communication – what pension plans can grow into and where to go for more advice – will be required.”
Plenty of help is out there, from the Pensions Advisory Service and the Pensions Regulator, while the FSB has resources that explain pensions in easy-to-understand terms, and has partnered with Legal & General to provide an auto-enrolment solution that is exclusive to FSB members.
Adam Bicknell, founder of Bicknells & Sons jewellers in Birmingham, says that he, for one, will now be focusing on assessing exactly what auto-enrolment means for his business.
“We employ 15-20 people, depending on demand. Pensions will be good for staff. While employers might begrudge it at first, everyone will have to pay it, so there’s no point complaining. We plan to use some consultants on a one-off basis to work out the details soon.”
Indeed, those who embrace the process could steal a march on their rivals, by using pensions as a recruitment differential. “While auto-enrolment may cause headaches at first, over time it may bring hidden benefits for small employers,” says Mrs Dexter. “In complying, employers will be communicating that they value their workforce and supporting their financial future. A good pension package might help to reduce staff churn, and make employers look attractive to join.”
Peter Crush is a freelance business journalist
How to prepare for auto-enrolment
The Pensions Regulator offers the following guidance for small firms that have yet to reach their staging date:
What is automatic enrolment?
The law on workplace pensions has changed. Every employer with at least one member of staff now has new duties, including enrolling those who are eligible into a workplace pension scheme and contributing towards it. This is called automatic enrolment.
It is called automatic enrolment because it is automatic for your staff – they don’t have to do anything to be enrolled into your pension scheme, but it is not automatic for employers.
You need to take steps to make sure your eligible staff are enrolled into a pension scheme. Even if you already pay contributions into a pension scheme for your staff, you still need to check if it is suitable for automatic enrolment.
What do I need to do?
All businesses need to find out the date their automatic enrolment duties come into effect. This is known as your staging date. The Pensions Regulator will write to you 12 months before your staging date and ask who they can contact with more information.
You will need to check if you’ll have to automatically enrol any of your staff. Knowing this will help you plan what you need to do. We recommend you work out how much your regular pension payments, and set-up costs, are likely to be.
Payroll software with automatic enrolment functionality can simplify the process of assessing your staff and providing information about them to your pension provider. If you don’t use payroll software that does this, you may want to consider doing so.
It is also essential that you ensure your staff records – including their dates of birth, salaries, National Insurance numbers and contact details – are correct and up to date. You’ll also need to keep track of records of your staff details including the amounts paid into the scheme each pay period, once you’ve automatically enrolled them.
When do I need to do it by?
You should have everything in place and be ready to enrol your staff into your automatic enrolment pension scheme from your staging date. You must write to your staff to let them know how automatic enrolment applies to them within six weeks of your staging date.
You can choose to postpone automatic enrolment for up to three months for some or all of your staff, which can be useful if you have temporary/short-term staff or are aligning automatic enrolment with other business processes. It’s important to note that using this flexibility does not change your staging date or your declaration-of-compliance deadline date. You must also write to your staff to tell them you’re postponing automatic enrolment for them.
You will need to let the Pensions Regulator know how you’ve complied with your duties. To do this, you must complete a declaration of compliance after your staging date. Although you have five months from your staging date to complete your declaration, you shouldn’t leave it to the last minute.
Even if you haven’t had to enrol anyone (but had staff on your staging date), you still need to complete a declaration. Completing your declaration is a legal duty and, if you fail to complete yours within five months, you could be fined. Once you’ve put your staff into your pension scheme, you will have ongoing responsibilities: paying contributions; keeping records; and constantly reviewing your staff, including new starters.
Can I do it myself, or will I need extra help?
The Pensions Regulator provides the information and tools necessary for you understand what you need to do to meet your duties. Information on basic steps, simple-to-use tools and answers to frequently asked questions are all available on its website at www.tpr.gov.uk/ae-guide. It has recently launched a Facebook page, making it easier for small and micro employers to seek and exchange information, at www.facebook.com/ThePensionsRegulator.
Research suggests many small businesses are likely to seek support to help them with their new duties, and intend to turn to trusted advisers. If you use a business adviser, make sure you are clear on what automatic enrolment support services they offer, and remember that legal responsibility for automatic enrolment remains with the employer.
What happens if I don’t comply?
Not only will your staff not get the pension contributions the law allows for but you could also face enforcement action. This starts with statutory notices and is followed by a £400 fine. Further non-compliance may result in escalating fines and court action.
The Pensions Regulator takes a risk-based, proportionate approach, in line with its compliance strategy, to ensuring that employers comply with automatic enrolment duties.
Use your membership for pensions advice
With the changes surrounding workplace pensions now in full swing, your FSB membership provides you with expert advice and guidance on auto-enrolling into a workplace pension, making it one of the most popular FSB member benefits.
The FSB Pension Scheme for Members offers an easy-to-arrange and simple-to-understand pension, from one of the UK’s leading providers. To find out more, visit www.fsb.org.uk/pension-scheme or call 0808 16 88 275, with your membership number to hand.
