Auto-enrolment And Small Businesses
The UK currently has a pensions crisis caused by an aging population
, longer life expectancy, inadequate saving for retirement and decreased pension fund values following a period of unprecedented financial instability. The UK governments 2008 Pensions Act outlined the Workplace Pension Reforms intended to increase the number of people saving adequately for retirement.The key feature of the reforms is the requirement that all employers must automatically enrol their employees in to a workplace pension scheme. The phasing in of auto-enrolment will begin in 2012 with businesses employing more than 30,000 people, then those with more than 350 staff in 2013 and finally those with less than 350 staff from 2014. The date when a business must begin auto-enrolment will be determined by the last two digits of the PAYE reference code.
Auto-enrolment will be mandatory for staff over 22 years of age who earn in excess of 5,035 per annum no matter how long they have been employed. Those aged between 16 and 22 and earning less than 5,035 can request that their employer enrols them. All employees have the option to opt out of auto-enrolment if they wish but must then be re-enrolled every 3 years.
The Government will offer a default scheme in the form of the National Earnings Savings Trust (NEST) for employers who have not got an approved alternative.
In the long run minimum contributions will be set at 8% of qualifying earnings between 5,035 and 33,500 of which 3% must be from the employer. This level of contributions will be phased in starting at 2% in 2012, rising to 5% in 2016 and then 8% from 2017.
Following the 2010 election the UK Government ordered a review of how auto-enrolment will occur. The terms of reference of the review suggest amendments will be made to the 2008 Pensions Act following a downturn in the economic outlook. The minimum earnings level for auto-enrolment may be increased,the age for enrolment may be increased,a minimum number of employees for enrolment may be introduced,a minimum length of service is likely as is the use of basic earnings to determine contributions instead of qualified earnings. However, the magnitude of the pensions crisis and the scale of the UK Governments budget deficit dictate that concessions are likely to be modest at best.
Approximately 40% of the UK's economic output is produced by small firms meaning the Government will put their role in addressing the crisis at the heart of its reforms. Currently, cost and administrative burden mean small businesses are unlikely to offer a pension scheme to employees and when auto-enrolment finally forces them to do so many will need advice and support. The complexity of setting up then running a pension scheme is considerable and small firms with modest human and financial resources will almost certainly need some assistance from either a public or private entity. The Governments budgetary predicament means it is unlikely that significant public assistance will be provided aside from making the NEST scheme relatively straightforward. Small businesses will most likely seek assistance from their accountant to help with the auto-enrolment process. The benefits of being able to avoid the day to day administration of a pension scheme will outweigh the extra accountancy costs. An accountant will have the skills and experience to set up and administer a scheme considerably quicker and to a higher degree of accuracy than most small businesses.
Outsourcing pension scheme administration will reduce legal risks associated with running a scheme and ensure accurate contributions are made. Payroll processing is often done in house by small firms and will need modification to accommodate deductions of pensions contributions. Outsourced payroll processing will greatly simplify auto-enrolment and will be more cost effective in the long term.
Copyright (c) 2010 Richard Barlow
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