AE for smaller employers: Have a plan and tackle it early

Comment

By Morten Nilsson | December 16, 2015

For smaller businesses, auto-enrolment can feel daunting. The vast majority have no experience of pensions, no dedicated in-house resource and do not have the support of an expert adviser.

Key points

Plan early to avoid unnecessary stress
Advisers can help identify a good quality pension schemes
Professionalising payroll can ease much of the burden

Next year auto-enrolment gets serious. In 2016, a staggering 512,000 companies will be affected by auto-enrolment regulations and, by law, they will have to offer and contribute to a workplace pension. This compares with just 47,000 in 2015.

Step one: Plan ahead and prepare

The Pensions Regulator recommends employers begin planning 18 months in advance of their staging date, but research we recently conducted revealed 75 per cent of micro firms and 46 per cent of small firms have not given any thought to auto-enrolment.

One of the biggest stumbling blocks for all firms tackling auto-enrolment is ensuring payroll data is complete and up to date. A missing date of birth or national insurance number can cause untold problems further down the line

Leaving auto-enrolment to the last minute will inevitably result in increased administrative pressure and unnecessary stress. The simple truth is the longer businesses give themselves to implement the changes, the easier the process will be.

Step two: Include auto-enrolment in your budget forecasting

The cost of implementation, planning, payroll modifications, assessment, communications and recordkeeping will depend largely on the decisions an employer makes regarding suppliers, providers and their current internal structures.

Initially, contribution levels are set quite low. But by 2019, employers must pay a minimum of 3 per cent of qualifying earnings per employee into a pension scheme.

Some employers may also want to seek external advice so will need to budget for this.

Step three: Think carefully about scheme selection

When it comes to choosing a provider for auto-enrolment, employers should take time to consider the options; the decision they make will have lasting consequences for their workforce and should not be taken lightly.

For employers completely new to pensions, it may be wise to seek guidance from an expert adviser.

Good quality schemes should be able to demonstrate their quality through third-party assessments such as the regulator’s mastertrust assurance framework or the Pensions and Lifetime Savings Association’s Pension Quality Mark. These are designed to highlight schemes that are well governed with low charges and good member communications.

Step four: Think about your contribution structure

The reality is auto-enrolment minimum contributions will not be enough for most people to be sure of a comfortable retirement.

As a result, research suggests nearly one in five small and medium-sized companies plan to contribute more than the legislative minimum when they introduce auto-enrolment.

Auto-enrolment update

The Work and Pensions Committee this week launched an inquiry into auto-enrolment. It will cover:

How small and micro employers can be helped with their duties;
Contribution limits and the earnings trigger;
The effect of the six-month delay to contribution increases announced in the Autumn Statement;
The interaction between auto-enrolment and other pension reforms.

This was followed on Tuesday by a review of its annual auto-enrolment thresholds. This included:

Earnings trigger proposed to remain frozen at £10,000;
This would bring an additional 130,000 individuals into scope of being auto-enrolled;
Estimated further £23m of pension savings in 2016/17 as a result of the change;
Level of earnings at which contributions do not have to be paid due to remain unchanged at £5,824, but upper limit due to rise by £615 to £43,000;
180,000 workers at risk of receiving no tax relief. Government estimates 180,000 workers earn between £10,000 (the proposed earnings trigger) and £11,000 (personal allowance for 2016/17). If these workers are enrolled into certain types of workplace pension (net pay) they will miss out on tax relief.

Source: Hargreaves Lansdown

More than half of those planning to contribute more say that doing so will help with the recruitment and retention of employees. This approach makes sense, as behind holiday entitlement, generous pension contributions are the most highly rated benefit cited by employees.

Step five: Harness the power of payroll

For auto-enrolment to run as smoothly as possible, your payroll system needs to have an automated exchange of data with your pension system.

Middleware is the term for a piece of software that links payroll and HR systems to the pension administration system, and it pays to talk to your payroll software provider sooner rather than later to find out which pension providers they interface with.

One of the biggest stumbling blocks for all firms tackling auto-enrolment is ensuring payroll data is complete and up to date. A missing date of birth or national insurance number can cause untold problems further down the line.

Experience shows that employers supported by a payroll bureau are significantly better prepared for auto-enrolment than those managing the administration of their schemes alone.

Professionalising your payroll ahead of introducing auto-enrolment is wise and the benefits should not be underestimated.

Auto-enrolment is complex and there are lots of things to consider – but tackle it early and there’s little to fear.

Morten Nilsson is the chief executive of Now Pensions