 By Neil Morrow, Director, The EB Partnership
Pension freedom is undoubtedly a good thing and from April 2015 people will no longer have to purchase an annuity. Instead, they will be free to either take their funds as a lump sum, use income drawdown, go down the annuity route or adopt a mixture of these. But that all depends on one fundamental fact – that they have contributed to a pension in the first place.
Many people have already taken out private pensions but mandatory Auto-enrolment pensions launched by the Government in recent years has brought on board those individuals who have simply done nothing. This year alone, all businesses with 50-249 employees will have to ‘stage’ their Auto-enrolment pension schemes.
With the larger employers in the UK having completed their own staging, worrying times now loom as SMEs may struggle to find a pension provider to take on their schemes. A market leading pension provider has already stated that they will not accept any more Auto-enrolment schemes unless long lead times are satisfied. This will become increasingly common, resulting in an inability for many businesses to find a provider. SMEs that leave staging until the last minute could face a capacity crunch and hefty fines from The Pensions Regulator (TPR).
In 2014 approximately 32,000 businesses must stage their schemes, roughly the same number of company schemes Standard Life transacted in total since the early 1970s. In the 2015/16 tax year 153,000 small and micro businesses employing less that 50 people will need to stage, with nearly 617,000 more similarly sized employers the following year. The figures speak for themselves and with these large numbers, it is clear that the SME sector will struggle to comply in the time left to complete the task.
Recent industry statistics from TPR show that over 30% of the businesses due to stage this spring simply missed their staging dates and went AWOL, creating a bottle neck in an already overcrowded system. Many employers are also scrabbling around at the eleventh hour, resulting in costly last minute solutions or missing their deadlines altogether.
Complying with the Auto-enrolment legislation is by no means a simple task. Choosing a pension provider is not straightforward and brings with it many responsibilities. A six month lead time is typically required to implement a solution and time is running out; particularly as providers close their doors. Technology can and will play a crucial role in addressing some of the capacity crunch but pension providers will cherry pick the schemes they want to take forward with many small schemes being deemed of no interest.
So what should you be doing?
The simple answer is take advice NOW and act upon it. More constructively, here are five pointers to get you started.
Know your staging date
Any company who employs just one person will ultimately need to implement a scheme and the date by which you have to be compliant is governed by the number of employees as of 01 April 2012 and your PAYE reference number. If you have 50 to 250 employee, the deadline is imminent - if not already passed. The earliest start date for a company employing 30 or less will be 01 June 2015. More about staging dates can be found on The Pensions Regulator’s website.
Know your responsibilities
All employers will be legally obliged to:
• Set up and register a suitable pension scheme for auto-enrolment.
• Assess all staff eligibility at every pay period.
• Automatically enrol and make contributions for all eligible job holders.
• Enrol and make contributions for non-eligible jobholders who wish to join.
• Manage the joining and opt-out process.
• Keep a record of how they have fulfilled their responsibilities.
Identify a provider
Pension providers offer different types of pension plans, with differing charges, investment funds and administrative processes. As an employer you will be expected to:
• Identify a suitable provider.
• Ensure that the provider is willing to accept all employees.
• Check that the default investment is suitable for your business.
• Ensure that the administration and services on offer will aid legislation compliance.
Tackling Auto-enrolment is outside the comfort zone for many small ‘owner manager’ businesses and they simply don’t have the infrastructure in-house to manage the process, so for many, depending upon outsourced help and advice is key. This may cause delays in staging and if left unchecked for too long it may leave the employer open to warnings and fines from The Pensions Regulator. Seeking that outside help now is crucial.
Understand the contributions required
In order for the scheme to be classed as qualifying it must meet minimum contribution levels. Different methods of assessing qualifying contributions apply but put in simple terms, until September 2017 employers and employees must each contribute a minimum of one percent of earnings. Between October 2017 and September 2018 this will rise to two for employers and three percent for employees. From October 2018 onwards, a minimum of three percent employer and four percent employee contributions will apply.
Fines you may face
SMEs risk financial penalties with figures of up to £2,500 per day, if an appropriate scheme has not been set up by the relevant deadline. News of ‘claw sharpening’’ by The Pension Regulator is also coming through loud and clear and the first round of non-compliance notices have been issued, with 785 potential non-compliant cases having been referred for investigation as at mid July 2014. No fines have been issued yet, but it’s surely only a matter of time!
The best advice businesses can absorb is to act now otherwise you could be left out in the cold with The Pensions Regulator for company and a fine on the horizon. -There’s not a moment to spare.
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