The workplace pension scheme and SMEs
You may have seen this cuddly fellow 'Workie' on the TV within the last year and wondered what he was selling. Or you may have seen adverts with lot's of employees, including Theo Paphitis and Karen Brady, telling us that 'we're all in'. But even now, you're still not sure what it's all about. Or even if it will affect you.
In a word. Yes.
If you're a business owner and currently operate a payroll then you have to put a pension scheme in place for your eligible job holders by 2018. There are exceptions, especially if you operate a director led payroll paying only yourself, but in the main you will have a responsibility to your employees to provide them with the ability to save for retirement.
Why is this happening?
In the past, employees were not offered a pension scheme or decided not to join a scheme offered by their employer. This left and will leave many without sufficient savings for old age, putting a strain on local finances and a deficit in the state pension needs of future retirees, especially as the majority of us are living longer and therefore potentially retiring relitively much earlier in the scale of our lifetime. A major shake up was therefore needed and a scheme was set up where employees, employers and the govenment all contributed to each individual's future pension pot.
So what do I need to do?
There are a series of things that need to happen, not least of which is finding a pension provider. There are also legally required administrative duties informing your employees of what is happening and when. But first things first ...
- Find out your pension staging date (this should be done immediately) - this is the date that your pension will become live and all employees paid from that date onwards will need to be assessed for their eligibility. This will have been sent to you in a letter from The Pensions Regulator but if you can't find that check on their website - Find out your staging date
Update: From 2018 all new employers will be required to stage immediately at the same time as applying for their PAYE account with HMRC.
- Confirm who to contact (this should be done as soon as you have your letter code) - each company needs a contact, whether this be a responsible director, payroll clerk, HR administrator or your payroll bureau, as long as it's someone who will be reponsible for the administration of the pension scheme - Confirm who to contact
- Choose a pension provider (this should ideally be done 6 month before staging) - there are many out there, all offering a variety of schemes at different costs, some will only work with large employers, whilst others have been set up specifically with SMEs in mind, there are even government backed providers. You can find a list of regulated providers for small employers on The Pension Regulator's website - Choose a pension scheme (or check your existing one)
- Issue general notification letters to employees (this should be done on or before staging to help simplify the process at staging) - depending on the level of service you have asked for from your payroll bureau or pension provider, you will have to inform all employees of their eligibility; basically anyone between the ages of 22 and state pension age earning over £10,000 are eligible will be automatically enrolled, other employees will be able to opt-in or join. This will give employees information on who will be automatically enrolled and guidance on how to opt-in or opt-out. Template letters can be found on The Pensions Regulator's website although most payroll software and all pension providers can offer this service - Write to your staff
- Work out who is eligible to be included in the scheme (this will be completed on your staging date and will reassess employees each payroll period from your staging date) - Those who are eligible and those non-eligible employees who have opted-in will be included in the pension scheme from the staging date; entitled workers, anyone earning under £5,824, are also allowed to join. Payroll is run in the normal way and once approved, either an online submission or file upload will be submitted to your pension provider to inform them of that employment period's pension contributions so that they are able to collect this by direct debit and pay into the workplace pension scheme. Your payroll bureau or pension provider will help you with this.
- Declare your compliance (this is done within 5 months of your staging date) - this simply means an online form completion on The Pension Regulator's website - Declare your compliance
How much will it cost me?
A series of recent studies suggested that almost half of SME owners did not understand auto enrolment and of those asked, 82% couldn't even offer a rough estimate on how much auto enrolment would cost their business. 90% hadn't even prepared for auto enrolment.
The obvious initial cost are contributions, these are governed by government and at the moment are:
|Minimum contribution||Employer||Employee||Employee Tax Relief *||Total|
|Up to Oct 2017||1%||0.8%||0.2%||2%|
|From 1st Oct 2017||2%||2.4%||0.6%||5%|
|From 1st Oct 2018||3%||4%||1%||8%|
* Where an employee pays income tax, the government will add money to the pension in the form of tax relief
Other costs will almost certainly include the initial set up of the scheme as well as ongoing increased payroll costs if using an outsourced bureau.
And of course, there will be fines for those that choose not to compy with the legislation, which will range from £50 per day (workplaces with 1 to 4 employees) for an escalating penalty notice once a fixed penalty notice hasn't been adhered to - who can forget the fine that
Swindon Town Football Company Ltd received of over £22,000 for failing to meet it's duties.
Don't leave it too late. The sooner you start the process, the more time you'll have to complete each step, and you'll be able to make the best informed decisions for both you and your staff, including how much it will cost to administer the scheme. And if you're still in the dark, find a payroll bureau who can help you through every step, as they are best placed to guide you easily and seamlessly into auto enrolment.