Employers with less than 50 members of staff will have to implement the new auto-enrolment workplace pension scheme between June 2015 and April 2017. However, firms should begin preparations as soon as possible if they want to reduce the costs of the new scheme, warns law firm Adams & Remers.
Simon Jeffreys, solicitor at Adams & Remers comments: “Smaller businesses may be increasingly worried about complying, but burying your head in the sand until close to your own staging date could be a costly decision.”
“There are several things small business owners can begin to look into now to ensure that the new system does not cost them any more than it absolutely has to. These cost saving opportunities will be missed if you don’t plan and act well in advance of your staging date. The Pensions Regulator advises that businesses should start planning 12-18 months ahead of their staging date.”
First, small business owners need to understand who is automatically enrolled and check their own workforce. Workers are auto-enrolled into the workplace pension if they are aged between 22 and State Pension age; earn more than £9,440 a year; and work in the UK. New employees must be enrolled once they have completed three months of employment. But non-executive directors of a company, or partners in a partnership and other genuinely self-employed contractors don’t count as workers. So, there may be scope for changing the status of some people like directors, to avoid having to enrol them into the workplace pension and in other cases the realization that some workers won’t be eligible can itself reduce the anticipated cost.
Second, owners can choose a contribution base that suits them best. There are 5 different bases to choose from. The default “qualifying earnings” option won’t always be the best fit for the way they pay their staff, especially where commission, allowances and overtime make up a big proportion of employees’ pay.
Third, the minimum amount employers will have to contribute to workplace pension will be 1% of the employee’s earnings, rising to 2% in October 2017 and then to 3% a year later. An effective pay sacrifice arrangement with staff could save employees and employers money and benefit both. For example, if all the pay sacrificed by an employee was paid as an extra employer pension contribution, an employee paying basic rate income tax would get £100 of pension contribution for every £68 of pay sacrificed, and the employer would also save £13.80 per £100 in NICs. Of course, pay sacrifice won’t suit every employee and they have to have a free choice about it.
Fourth, the owner gets to choose which qualifying workplace pension to join. It is possible an existing pension scheme already used by the business might qualify as a workplace scheme. But if you have to pick a new scheme, choosing a good quality one which has no set up costs and is easy to work with could save the employer a lot of time and money. The Government’s own National Employment Savings Trust (“NEST”) has no set up charges and is promoting itself as the good value and on line efficient workplace pension. At the other end of the scale, setting up your own trust-based scheme is, according to the Pensions Regulator, unlikely to be cost-efficient unless you have at least 1,000 employees in membership. Other schemes are of course available!
Fifth, owners may need to update or even change existing payroll software to enable them to administer workplace pensions, so checking for software compliance and matching it with a workplace pension scheme is important.
Sixth, businesses can, given time, go the self-help route, as you don’t have to use an accountant, financial adviser or employee benefit consultant to help you make your decisions. But making your choices, then getting set up for your staging date and managing the scheme could use up considerable management time, and you might choose to hire in outside expert help instead. Making the right choices is itself a significant long term cost saver, so expert help could pay for itself over time.
Seventh, talking to staff about the scheme is important, but business owners must tread carefully. Despite there being an additional financial outgoing for the business, staff cannot be pressured into opting out and you can’t imply that someone is more likely to get a job or be promoted if they decide to leave the pension scheme, or else they can take you to Employment Tribunal and get compensation.
Eight, while pay can’t be cut to meet the cost of the employer’s pension contributions, small business owners concerned about the cost can take it into account in planning what they can afford for future pay increases or discretionary bonuses. Pay sacrifice may help reduce the cost impact. Owners should also assess now if there are any area of the business in which savings can be made to help meet the new cost.
Last, employers will need to check their employees’ written contract statements and change them as necessary, as they may not enable them to deduct employee contributions from their pay and anyway they will need to be updated to reflect the introduction of the particular workplace pension the employer has chosen. Failing to update contracts within a month of the change being effective can expose the employer to a claim for compensation in the Employment Tribunal. If they don’t already have written contracts, this will be a good time to remedy the omission and avoid the even larger compensation exposure for not giving them written contract statements in the first place.
Simon Jeffreys concludes: “Remember that responsibility for compliance rests with the employer and for small businesses which fail to meet their auto-enrolment obligations in time, the penalties can be severe with fines of up to £500-a-day. Plan now before it becomes a headache.”