The Association of Consulting Actuaries has called for action to help alleviate the financial pressure on small companies resulting from the statutory increases in auto-enrolment contributions.
An ACA report released this week recommended safeguarding auto-enrolment by using national insurance as a way of redirecting relief towards rising auto-enrolment contributions.
Chair David Fairs said in the report: “The government may need to be pragmatic and consider some targeted financial incentives to help deliver the desired policy outcome of wider and deeper pension coverage in smaller firms.”
The report outlined how an increase in the current NIC employment allowance for UK employers from £2,000 a year to £4,000 would help offset growing auto-enrolment costs for small and micro employers.
Such a move could be enacted after all companies had staged, Fairs later said.
The report also backed auto-escalation as a long-term solution to maintaining low opt-out rates among low-income employees in small firms.
A practice already implemented by a number of UK employers and very popular in the US, auto-escalation encourages people to commit to increasing pension contributions at a future date, potentially in line with wage increases, therefore removing active decision-making by the employee to increase their saving.
“It does work but there is a question about whether an employer gets bang for their buck,” said Will Aitken, senior DC consultant at Towers Watson.
“If you’re going to increase company contributions from 6 per cent to 10 per cent you’d need to feel that you were getting appreciation for that extra 4 per cent contribution.”
The report added that only the relatively larger companies within the smaller companies sector were likely to move in this direction, leaving questions over the future of opt-out rates of micro companies with up to four employees.
Danger ahead
The ACA gathered responses from 414 smaller employers with 249 or fewer employees, and identified a number of key ‘danger signs’ ahead for the sector.
The initial task of enrolling presents the most onerous logistical challenge. The rise in combined contributions from 2 per cent of band earnings to 5 per cent and then 8 per cent over two years could place huge financial strain on small employers, the report said.
Data collected during the survey revealed that just 29 per cent of employers with up to nine employees have budgeted for the cost of the reform.
Two-thirds of micro employers with prior pension provision yet to reach their staging date had failed to check whether their current provision meets the minimum standards to be a qualifying auto-enrolment scheme under the legislation.
Saq Hussain, head of DC consulting for the north at consultancy PwC, said: “Awareness of the task at hand is the biggest immediate challenge for small and micro employers.”
Hussain said while the onus for early preparation and provision regularly falls on employers, a number of other industry bodies had a duty to raise awareness across the sector.
“The Pensions Regulator, the Department for Work and Pensions and the government have a duty. Going to speak with advisers that engage with the smaller business community and small accountants will also help raise awareness,” he said.
