Pensions have rarely been out of the headlines in recent years. From the rather unsuccessful introduction of stakeholder pension schemes in 2001 to the procession of companies opting to close their gold-plated final salary schemes in favour of cheaper options, it’s fair to say there’s been a reasonable amount of upheaval.
Now, the Government is at it again, updating pension regulations, and to a typically mixed response. Its auto-enrolment scheme, as announced in September, will mean that any company employing one person or more will have to provide and contribute to a pension for their staff. Any employee aged 22 or over earning more than £8,105 who has been employed for three months or more will qualify for the scheme, which will be phased in over five years from October 2012. It is expected the rollout will begin with the UK’s biggest companies, gradually filtering through to SMEs and micro businesses with just a few members of staff.
As with any new pension scheme, the rules and regulation are complicated, but understanding them is vital for any business as non-compliance could result in fines – or worse. Elite Business consulted one of the pension industry’s leading experts, Jennie Kreser, partner at Silverman Sherliker, to explain the ramifications for small businesses in the UK.
Elite Business: What effect will the auto-enrolment scheme have on businesses in the UK?
Jennie Kreser: The downside for many employers is, at a time of financial constraint, they’re going to have to look at their salary overheads and account for the new pension contributions. They’re going to have to pay a minimum, ultimately, of 3% of the worker’s salary. There are also additional administrative costs that running a pension scheme can involve.
EB: Is the Government introducing any measures to help businesses get to grips with the new system?
JK: The Government has introduced the National Employment Savings Trust (NEST), which will be the default option if employers do nothing else. The problem with NEST is that, although administratively it’s relatively simple, it does come with certain constraints, including a cap as to how much employees and employers can pay into it. Also, once you’re in it you can’t transfer to another pension scheme. But there are now other organisations jumping on the bandwagon and saying they can do as well as NEST in terms of the annual management fee, but won’t be constrained by some of these limits that NEST is. They could be more flexible.
EB: Are these companies a viable option for SMEs?
JK: It can be quite attractive for employers because some of those companies are also offering an admin service and the rules around eligibility will be an administrative nightmare, especially for small employers.
EB: Do you think the type of auto- enrolment package offered could serve as a differentiator when employees are considering employment options?
JK: I’m not really sure that it will. If companies were offering a good final salary scheme, with significant contributions going in both from the employer and the employee, I think you might sometimes find some people who, if they’re offered two jobs, one that’s got a really good final pension scheme and one that’s only got a very basic auto-enrolment scheme or NEST, all other things being equal, will consider taking the one with the better pension scheme. But I think that’s a slightly old-fashioned approach now; I really don’t think people think that way any more.
EB: What’s the worst-case scenario for non-compliance?
JK: One would hope that the pension regulator would take a rather flexible and understanding approach to the complexities of auto-enrolment, particularly with smaller employers. And there are many: if someone had sat down and said to the DWP, we want you to come up with the most complicated and difficult process to manage auto-enrolment that you possibly can, they couldn’t have done a better job. It is appalling.
Personally, I’ve fully supported the principle of auto-enrolment. I have no problem with that at all. I do have a problem with the way it’s been implemented. The Government doesn’t want to make it easy for people to opt out, so it is a criminal offence if an employer does anything that can be construed as encouraging their members – their employees – to opt out of the pension scheme. They can’t even send the opt-out form to employees if requested to do so. Although, how that’s going to be applied in practice, we will have to wait and see.
The price for non-compliance will be fines. One would hope that initially they would start by way of warning notices. I don’t think that large organisations will get quite so much leeway, as they will be expected to be the early pioneers. But I still don’t think anybody should be sitting back, folding their arms and thinking it’s going to go away. Even those who have got a 2014 or 2015 staging date have to start thinking about it now, if they haven’t already done so.