What it Means for your Business
The Facts About UK Pensions
Over the next three years EVERY business in the UK will be OBLIGED to enroll each of their employees in a pension scheme. It may sound like we’ve been here before but this is a significant change to the previous, more casual pension arrangements, and affects businesses big, small, medium or tiny.
When will it affect your business?
The auto enrolment pension process is being rolled out right now; it began with the largest UK businesses and within two years will cover the entire SME market.
- As part of this process we are already well into seeing mid range SMEs being affected by these new government obligations.
- As at 1st May 2014, those businesses with between 90 and 159 employees are required to implement an auto enrolment pension scheme.
- Other key dates include 1st October 2014 for businesses with 60 employees and 1st April 2015 for businesses with 50 employees.
As a result, in less than a year we will see the vast majority of the business population needing to be ready to implement such a scheme. With an estimated 1,173,000 businesses employing between 1 and 49 people* becoming subject to the new rules, that is a huge constituency that needs to get up to speed and fast. Indeed employers with fewer than 50 people in their PAYE scheme will be staged between 1 June 2015 and 1 April 2017. Being ‘staged’ is effectively the incremental date by which your business based on its employee size, must have implemented an auto enrolment pension scheme. *BIS Business Population Estimates 2013, UK Private Sector https://www.gov.uk/government/publications/business-population-estimates-2013
What does it mean for your business?
Not only does the auto enrolment pension scheme represent another administration burden on small business, there is cost to consider, these costs stem from three broad elements:
- The cost of setting up the pension scheme, a cost that many small employers have not previously had to bear
- The cost of administering the scheme, both through internal resource and external fund management fees, and
- The cost of the mandated level of employer contribution your business will need to make into each employees fund.
How much will it cost your business?
Firstly it’s important to point out that as the result of a major review of the financial markets under the Retail Distribution Review, Independent Financial Advisors can no longer charge commissions for setting up pension products for businesses. As a result the industry now charges a fixed set up fee (depending on your business’ profile and circumstances), in addition the advisor and pension provider will charge an ongoing annual management fee. The government and regulator felt this was a better way to manage the financial advice industry and it is intended to have a cost neutral impact for businesses. However it does mean that businesses are now required to fund the setting up of these mandated pension schemes upfront, a cost, that if it was incurred, was previously spread over the contract life. Under the new rules a typical small business can expect to pay around £1,500 to set up a very simple scheme and in the region of £1,500 per annum to administer the scheme on an annual basis. These charges can be significantly greater depending on the size and scope of your business and pension scheme requirements. This notional £1,500 does not include the third element of cost however. This third element is the cost of the mandated level of employer contribution your business will need to make into each employees fund.
- Between now and 2017, businesses MUST pay an amount equivalent to 1% of the total earnings of each employee into their pension fund.
- This increases to 2% between October 2017 and September 2018 and 3% from October 2018.
- This % figure is levied against ALL earnings including basic pay plus any commission, incentives or bonuses.
- These figures increase to 2%, 3% and 4% respectively where only basic pay is taken into account.
What can I do about it?
Like with business energy, the first thing you need to do is to understand that though you must ‘buy’ the commodity, in this instance a pension scheme, you don’t need to take the first offer that comes along, and there are experts out there to help you through a potential minefield. However, what you can’t do is avoid your obligation or attempt to persuade your employees to reject your ‘offer’ of a pension scheme. Failing to comply is not an attractive option as fines of up to £10,000 PER DAY can be levied on businesses who fall foul of the obligations. However your employees can opt out, but they can only do so AFTER you have enrolled them in the scheme. Regardless of the employee’s choice, every three years they will automatically be re-enrolled in the scheme and will need to opt out once again if they do not wish to take part. In addition, you must communicate openly and uniformly with your entire workforce, laying out your obligations and their required actions as well as the decisions they need to make. It is essential therefore to get good advice, strong support and a workable solution for your business. Just like with business energy it pays to get the right advisor to get a solution that exactly fits your business’ needs both now and in the future.
How does it work?
One of the impacts of the change in sentiment of the financial industry from the boom days is that insurers (pension providers) are no longer tripping over each other to offer you their products. Nowadays their approach is very much about whether you, as a business, fit their desired criteria. This is a huge change and throws up some very real challenges that could mean a mainstream pension provider won’t accept your business. Like in business energy, your chosen financial advisor will gather all your details such as:
- Number of employees
- Age of employees
- Salary and other earnings
- Staff attrition rate
They will then calculate how much setting up a scheme is likely to cost your business and secondly will put your ‘contract’ out for tender to the pension providers. Again in a strong parallel to business energy, the suppliers, in this instance the pension providers will bid for your contract based upon the criteria provided. Their ‘offer’ will take into account the attractiveness of your employee profile, the more attractive, the lower the cost, and vice versa. A pension provider is likely to find a young, well paid, loyal workforce far more attractive than an ageing, low paid, high attrition workforce, so as a result the latter business may well find itself short of offers for something they didn’t want in the first place!
What if I get no offers?
The government has recognized that this could well prove an issue and has created a supplier of last resort for those businesses that prove unattractive to pension providers. The NEST, National Employment Savings Trust has been established to do this job. It is not clear how many businesses will be forced down this route however it is expected that the numbers could be significant and that the schemes provided will be at the lower end of the market in terms of value and offerings. Crucially NEST cannot refuse to support a business’ pension requirements, so whatever your business’s circumstances you will have them to fall back upon.
Who can I talk to?
Unless of course you are and Independent Financial Advisor yourself, your business will need to source one. There are many out there, as there are many energy brokers, however some will specialize and others will not, some will have the expertise and capability to support your business and others will not, and of course some will take the opportunity to charge significant sums for a captive market audience and others will not. The key therefore is to search the market and engage with an IFA you can trust and who can deliver for your business’ needs. The pensions regulator, whilst they cannot help you directly, have produced a guidance document that further outlines the first steps a business needs to take in order to be prepared for their new duties and obligations: https://www.thepensionsregulator.gov.uk/docs/detailed-guidance-2.pdf
Merito Financial Services Limited
Business Juice can highly recommend the services of Merito Financial Services Limited; we have used them ourselves for establishing the requirements of our auto enrolment scheme and have found them to be knowledgeable, fair and supportive in their dealings with us. In common with most SMEs, for a business like ours, a mandated pension scheme is a huge undertaking and something we have not previously been exposed to, we worried as to what we needed to do, how we could get it right and of course how much it was going to cost us. All these were very real concerns and Merito worked with us every step of the way to ensure that we knew both what we were doing and the implications and benefits of our actions.