What to watch out for on workplace pensions
17th October, 2014
COMPANIES of all kinds need to take account of the new landscape when it comes to workplace pensions.
New businesses created after April 2012 need to plan ahead for automatic enrolment (“AE”).
They will be reaching their “staging dates” between May 2017 and February 2018, just as the statutory minimum contributions for employers start to ratchet upwards, from a 1% to 2% in October 2017 and to 3% in October 2018.
Employee contributions will rise at the same time to make total contributions (including tax relief) step from 2% up to 5% and then up to 8% on the same dates, adding spice to early wage negotiations.
This can be a hefty burden for a new and growing business, battling with narrow margins and the need to invest every penny into securing growth to pay back seed funding.
We have helped employers of all shapes, sizes and corporate ages through the process of meeting their AE obligations, and finding the additional money has been a challenge for many of them.
However, the money must be found to comply with the law, so it is vital to make every penny count.
The right decisions have to be made from the outset, to avoid having to start all over again after staging date – as many businesses around the country are now finding they have to do.
There are many reasons for this, but too many businesses find that they are serving their AE solutions rather than their AE solutions serving their business.
We have learnt from experience not to underestimate the disruptive power of AE. It is a finely tuned piece of machinery and the Government requires every business to integrate it into their existing systems, big or small, sophisticated or basic. That approach has consequences.
Think of AE as a new engine for a car. It runs perfectly on the test bed. Once bolted into the engine bay it runs in exactly the same way, but the vibrations it produces start to shake loose other parts of the car.
We are often brought into the process at the very last minute, or even after staging date, to stop things from rattling.
The more obvious things might need tightening up, like the wording of employment contracts or the operation of salary sacrifice arrangements, or it can be more involved things like reviewing business plans built on staff being self-employed or provided by an agency or any number of service companies in a group. Sometimes, these things suffer from being shaken down.
It’s often the simplest practical things that cause compliance issues: will part-time payroll staff be in the office on the crucial dates?
Are the spreadsheets in the format required by the pension provider?
The Pension Regulator will not tolerate non-compliance for long. It has powers to impose hefty fines and demand improvements, which will disrupt business even more.
Another way to think of AE is as a search light. If there’s a crack in any HR or payroll function, AE will find it.
AE is built as a “one size fits all”, but all businesses are different with their own cultures, personalities and quirky ways of doing things. AE will snag on any rough ends.
Sometimes it is very difficult for a business to change its ways, especially when these have worked perfectly well so far or when doing things their own way is the reason why people set up businesses. But AE will demand change. It doesn’t do quirky. It’s all about standard practice.
None of these business-specific problems are addressed in the regulations or the extensive guidance available online.
Planning for AE involves getting to know the business it will fit into, a bit of introspection, as well as knowing the steps for compliance.
There is a tidal wave of small and micro employers approaching their staging dates over the next few years.
In order to cope, the pensions and advisory industries are releasing more and more online tools where businesses can do AE by themselves, cheaply, without advice. However, being left to do it all alone is not comfortable, and it takes precious time.
Investing in practical, pragmatic advice, based on accumulated experience, early on in the process can save time and money later.
Associate, Head of Pensions
* For more information on the issues raised by this article please contact Tristan Mander.