Small businesses with little cash reserves face costly cash-flow and administration hurdles - as well as fines - if they delay setting up a pension scheme for their employees under the Government's mandatory auto enrolment initiative, according to Standard Life.
In missing auto enrolment deadlines set by the Pensions Regulator, employers could be forced to backdate pension contributions for all their employees - a possibility reiterated by Pensions Minister Steve Webb at an industry conference last month.1 Standard Life estimates that it could cost SMEs up to £34,000 to backdate contributions for just 3 months* - a major financial and administrative setback for companies with cash flow constraints.2 Moreover, employers may even need to meet their employees' contributions if the employee is unwilling to do so.
The Pensions Regulator also has the power to fine employers with less than 250 employees a maximum of £2,500 per day if they don't comply with their new duties on time.
London dominates the small and medium enterprise (SME) market with almost 220,000 businesses employing 250 or fewer people.3 Auto enrolment will remain crucial as more and more small firms increase their headcount in the coming months. The Federation of Small Businesses estimates that 10.5% of small firms are likely to increase headcounts over the next quarter.4
Jamie Jenkins, Head of Workplace Strategy at Standard Life, said: "Having a workplace pension is rapidly becoming the social norm. More than 3.6 million people have already been automatically enrolled into their company pension by the largest UK firms, with opt out rates low at 10% or less. Smaller firms need to ensure that they are protecting their employees' right to this valuable workplace benefit.
"We understand that SMEs are particularly vulnerable to unexpected costs and large administrative burdens and many do not have the same resources to implement auto enrolment as larger employers. They may be grappling with significant payroll, benefits, data management and accountancy issues. If they don't prepare well before their staging date, they will inevitably encounter problems down the line. All employers need to understand their new pension obligations and the impact auto enrolment will have on their businesses going forward."
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