What is auto-enrolment?
The scheme is designed to help increase retirement savings because the UK population is living longer and most of us are not saving enough for retirement. Employers will be obliged to automatically enrol employees in a workplace pension scheme.
The aim is to get up to 11 million extra people saving for their retirement who have never done so before.
To qualify you have to be aged 22 or over and below the state pension age and earn more than £9,440 and work in the UK. The earnings limit will be reviewed each year. Employees can opt out of auto-enrolment.
UK employers with over 250 employees have a deadline of February 2014 to launch their schemes and small and medium-sized employers will launch their schemes over the next five years.
Medium-sized employers with between 50 and 249 employees will enrol workers from April 2014 to April 2015. Small employers with 49 employees or less will enrol workers between April 2015 and April 2017. New employers who set up in business after April 2012 will set up schemes and enrol workers between April 2017 and February 2018.
How much will it cost?
The scheme is set up to link employer and employee contributions and tax relief together to provide a percentage that is paid into a workplace pension. Until 30th September 2017 the combined minimum contribution is two per cent. This is made up of a 1 per cent contribution from an employer, 0.80 per cent from an employee and a further 0.20 per cent through tax relief.
The minimum combined contribution rises to five per cent for the next 12 months and then to eight per cent from 1st October 2018.
This means employers will eventually have to pay a minimum of four per cent of an employees’ annual salary into an auto-enrolment workplace pension scheme.
Pension fees for schemes under auto-enrolment are set to be capped at between 0.75 and 1.0 per cent. The government has launched a new consultation paper to take responses from interested parties and will decide in 2014. Auto-enrolment schemes under NEST will have fees capped at 0.3 per cent.
What are the costs of setting up a scheme to small and medium-sized employers?
A report from the Centre for Economics and Business Research found that the total cost to businesses of setting up auto-enrolment is estimated to be £15.4 billion.
It found that the cost of setting up a scheme for a very small business with just one to four employees would be £8,900, rising to £12,600 for firms with 100 workers, up to £15,600 for companies employing 250 staff and an average bill of £22,300 for the one-off costs of implementing auto enrolment for firms employing 500 or more staff.
Regional variations in costs could affect some of these figures with costs for the biggest companies in London forecast to reach £28,300.
The cost is proportionately higher for smaller firms with fewer workers to enroll in the scheme and less staff to complete the task of setting up a new pension scheme.
David White, Managing Director of Creative Auto Enrolment, who commissioned the CEBR report said: “Businesses must start thinking about what they need to do as soon as possible, as they can’t escape auto enrolment. The staging dates for each business are coming, and each and every company, regardless of size, will need to prepare.”
The administrative burden
A part of the financial cost and a further requirement of employers is acquiring new knowledge and learning how to tackle the 33 separate administrative tasks and complete them before the deadline.
The CEBR report found that it would take 103 total working days to get ready for auto-enrolment in the first instance and then three days each month to run the process on a recurring basis. The report said that it will take this long even for employers who use the Government’s National Employment Savings Trust (NEST).
What does an employer need to do?
The main tasks facing employers in setting up an auto-enrolment workplace pension scheme are to establish a company’s staging date, the date when they need to have enrolled qualifying employees into a scheme.
One of the most time-consuming parts of the process is developing a pension plan. This involves deciding if any pension provider already used by the company is suitable to be used under auto-enrolment or whether to source a new pension scheme.
The firm needs to decide what type of pension scheme should be used, a defined contribution or defined benefit scheme. This places a big responsibility on whoever is making this decision because they will be selecting where all their employees’ money will be invested for their future.
Other tasks that will take time include classifying workers into auto-enrolment categories to see if they qualify for the scheme, putting in place suitable business processes, addressing staff queries about auto-enrolment and processing opt-outs, opt-ins and joining requests.
What help is available to SMEs?
The Pensions Regulator is in charge of ensuring all employers comply with the new law to automatically enrol all eligible workers into a workplace pension.
They have a number of resources available to help employers such as employer staging information, detailed guidance, interactive tools and letter templates.
The Pensions Regulator will write to each employer before the date they are required to operate a workplace pension. They have produced detailed guides and interactive tools on their website to take employers through the process step by step.
NEST Corporation is a pension provider open to all employers who want to use it. NEST has been designed to complement existing provision. For more information visit the NEST website at www.nestpensions.org.uk
Employees and employers can also find out more on the DirectGov website at www.gov.uk/workplacepensions
The knowledge requirement
As well as learning all of the new administrative tasks which place a big burden on smaller firms, employers also need to learn about pension funds, fees and how to invest in a pension on behalf of their employees.
Employers have been given a big responsibility to choose the right pension fund to invest their workers money into on their behalf.
Employers need to select a staff member who is either qualified as an accountant or has some experience through working in human resources of selecting a pension scheme for an employer.
As well as learning about different types of pension schemes, pension administrators need to learn about different types of pension funds, how to select a balanced portfolio, options on what level of risks investments should have, how to assess the performance of a fund and how to change funds as the scheme progresses.
There is lots of free information available either from the government and its agencies or through articles available online.
There are also courses available in which employers can enrol staff in to learn how to become a pension administrator and how to invest using different types of pension schemes.
Independent financial advisors can be hired to help firms with the crucial decision of which type of scheme to invest in or this task could be outsourced to a payroll or accountancy firm.
If a company is in any doubt about how to manage the auto-enrolment workplace pension scheme, it is best to contact a qualified financial advisor.
The content published on this website is intended to provide information only. The reader should seek advice from experts on the subject matter and independently verify the accuracy and relevance of any information provided here before relying upon it or using it for any reason. You can view our terms and conditions here.