Pension reform - what does it mean for your small business?

Recent announcements regarding pension reform have attracted the ire of small business groups. The proposals, outlined last by the government last month, will dramatically increase the legislative obligations of small businesses across the UK.

It is vital that you understand the new rules, and that you are ready to comply with them.

What are the plans?

The new proposals mean that businesses of every size will be legally obliged to offer their employees automatic enrolment in a pension scheme.

Every employer will have to enrol employees in a pension scheme within three months of their joining the company. Employees will then be required to contribute a proportion of their salary to the scheme. This will start at 1 per cent of earnings in 2012, and will rise to 4 per cent by 2017. Employers will also be expected to make a contribution on their employees’ behalf, starting at 1 per cent in 2012 and rising to 3 per cent by 2017.

How are they different from previous proposals?

The new rules have generated significant anger amongst the small business community. The proposals were originally drafted by the Labour government, but have been extended by the coalition which, perhaps surprisingly, has increased the legislative burden on the smallest businesses.

Under the previous proposals, the smallest businesses would be exempted from the automatic enrolment requirement. However, under the new rules businesses of every size will be expected to comply. There is no exemption for so-called ‘micro’ firms.

It is worth noting, though, payments into the scheme will only begin if an employee’s earnings exceed £7,500 per year.

How will my business be affected?

The proposals mean that you may have to make significant changes to your pension arrangements in order to remain in compliance with the law.

The Federation of Small Businesses has said that the changes will cost the average small business some £2,550 a year – despite government claims that the extra administrative burden will cost firms just £46 per employee per year.

The smallest firms will not be expected to set up their own pension schemes. Instead, they will be encouraged to use the government’s National Employment Savings Trust (Nest). This has been designed as a low-cost alternative to dedicated occupational pension schemes.

It is also worth noting that employees are entitled to opt themselves out of the scheme. So, if you run a small firm with a number of other directors, you may choose to opt out as soon as the legislation comes into force, and simply make your own pension arrangements. Needless to say, the government will likely take a very dim view of firms that are found to pressure their employees into opting out.

What if I’m self-employed?

Self-employed people are not affected by the new proposals, and you will not be expected to contribute to a scheme. Of course, you should still think carefully about making your own pension arrangements in order to ensure that you have an income if and when you choose to retire.

What do I need to do now?

The new rules are set to be phased in over a number of ‘staging dates’. There are around 20 such dates beginning from 1 October 2012, and the time at which you are expected to comply will depend on the size of your organisation. Broadly speaking though, firms with fewer than 50 employees will be phased in from 1 October 2013.

You can expect a letter from The Pensions Regulator 12 months before your relevant staging date. This letter will explain exactly what you need to do to comply with the legislation. They will then write to you again three months before the staging date.

While 2013 might seem a long way off, you must start thinking about the implications of the changes now. The requirement to make contributions, along with the added administrative costs, could have a significant impact on your cashflow. You are likely to have to factor this into your financial projections.

If you have employees, the government’s new plans are likely to affect you. You should seek professional advice if you are in any doubt.