Two million SMEs will have to auto-enrol staff over next three years


The Pensions Regulator revealed that hundreds of thousands of small employers are now facing higher employment bills as they set up their workplace pensions and automatically enrol employees in them. One of Britain’s largest financial advisers, Lighthouse Group, says firms can tackle some issues around auto-enrolment (AE) by budgeting well in advance and following a few simple steps to reduce the cost of the process.

According to new figures released by The Pensions Regulator, 1.8 million small and micro employers will need to meet their pensions duties over the next three years, compared to the previous estimate of 1.3 million.

Under the new regulations, employers must contribute at least one per cent of eligible employees’ qualifying earnings, rising to two per cent in October 2017 and to three per cent from October 2018. These contributions are not subject to National Insurance and they can be offset against business profits for tax purposes.

Some employees may decide to opt out, but businesses cannot assume that they will do so. The Pensions Regulator estimates that current opt-out rates are around 12 per cent.

Roger Sanders OBE, MD of Lighthouse Group Employee Benefits, comments: “The contributions must be paid in to your scheme at each pay reference date, usually weekly or monthly. It is therefore advisable to work out roughly how much you are likely to have to pay in contributions at each date, and budget accordingly.

“Typically staff-related expenditure represents around 85 per cent of the average UK employer’s costs. Any increase in staff costs could have a marked effect on profits. For businesses with a tight cashflow, paying regular contributions could have a significant impact.

“However, auto-enrolment is likely to cost you more than just your contributions. You also need to take into account additional payroll, technology and administrative expenses, not only for setting up your scheme, but also for running it on an on-going basis. There are other fees that need to be considered but taking a few simple steps can help reduce the cost to your business.”

Pension providers are also likely to charge businesses an annual management fee. While cost should not be a firm’s only criterion when choosing a provider, it makes sense to choose a scheme with competitive charges, Roger advises. However, it should also consider the investment options available to members, scheme governance and the support provided, both online and in person. Many of the ‘new breed’ of independent, trust-based schemes have competitive charges and offer good flexibility in terms of contribution levels, investment choice and transfer options.

Businesses could be hit with further costs if they fail to comply with their duties as an employer.  For instance, if a firm’s scheme isn’t up and running by its staging date, the cost could escalate rapidly, with fixed penalty fines ranging from £50 to £2,500 a day.

Roger adds: “There are a number of ways which I would suggest businesses could lower costs. Firstly, choose a pension scheme that is going to be PAPDIS (The Pensions and Payroll Data Interface Standard) ready – this will ensure that it is compatible with most leading payroll software packages, making integration and data transfers easier.

“Businesses should choose a pension scheme with competitive charges, and should talk to their pension provider to work out the best way of sending them the data they need for each pay reference period, and for receiving information from them. They must check that this process is replicable – once set up the system should more or less run by itself.

“They must also ensure their scheme is launched on or before their staging date to avoid hefty fines. They can reduce administrative costs by making sure that all the data they need is in one system, preferably the payroll system. They also should check that this data is accurate and up-to-date, as well as having a mechanism for checking data regularly is put in place.

“Finally, be organised in your record-keeping. The Pensions Regulator can ask to check a company’s auto-enrolment records at any time. “

Lighthouse Group is currently helping thousands of SMEs auto-enrol across the UK and has a team of experienced regional advisers to help people through every step of the process. It is urging companies to choose a pension provider that helps throughout the whole process of auto-enrolment and beyond; one that “does it all for you” and takes away the pressure of getting everything right and allows business leaders to concentrate on actually running their businesses.