Pension auto-enrolment - How can I make it affordable?

New pension rules will cost small businesses £8,900 each.

This is according to new research from the Centre for Economics and Business Research (CEBR), which found that businesses across the country will spend a total of £15.4 billion complying with automatic enrolment changes.

The CEBR’s report also suggests that the process of preparing for auto enrolment could take up to 103 man days, with further administrative tasks taking up to three days per month.

Auto enrolment is a looming issue for small businesses. Although widely welcomed as an important way to encourage employees to save for retirement, the new pensions system confers potentially onerous new requirements on business owners. So what is auto enrolment, and how can you meet the requirements with the minimum expenditure?

What is auto-enrolment?

As a result of a new law, employers will be obliged to enrol workers in a workplace pension scheme. Employees must be enrolled if they are aged between 22 and the state pension age, earn more than £9,440 a year, and work in the UK. Employers must also make contributions for qualifying workers. The government will provide tax relief on contributions.

Employees between the age of 16 and 74 and earning between £5,668 and £9,440 a year have the right to opt in to the pension scheme, while those aged between 16 and 74 but earning less than £5,668 have the right to join. You do not need to follow the automatic enrolment process for employees in the latter group who decide to join.

What is the deadline?

The deadline by which you must fulfil your responsibilities under auto enrolment depends on the size of your business. These are known as staging dates. The deadline has already passed for the largest employers.

You can find out your relevant staging date by using the interactive tool on the Pensions Regulator website. Firms with fewer than 30 employees will have to comply by dates between 1 November 2015 and 1 April 2017. The exact date will depend on the final two characters in your PAYE reference. Businesses without a PAYE scheme will have to comply by 1 April 2017.

What do I need to do?

The new rules confer several key responsibilities on all employers. You must:

• Provide a qualifying workplace pension scheme
• Register with and provide details of the scheme to the Pensions Regulator
• Automatically enrol all qualifying workers into the scheme
• Make contributions into the scheme for all qualifying workers
• Provide relevant information to all qualifying workers

How can I make auto-enrolment affordable?

It is important to understand that you will be required to make minimum contributions for all eligible workers. These will be phased in, gradually increasing until October 2018.

• From October 2012 to September 2017 minimum contributions of 2 per cent must be made, of which you must contribute at least 1 per cent
• From October 2017 to September 2018 minimum contributions of 5 per cent must be made, of which you must contribute at least 2 per cent
• From October 2018 minimum contributions of 8 per cent must be made, of which you must contribute at least 3 per cent.

You can work out your relevant minimum contributions using the Pensions Regulator’s tool.

Larger businesses might choose to operate their own pension scheme, but small firms can choose to outsource their scheme to a private provider or use the government’s own provision. This could potentially reduce the total cost to small businesses quite significantly.

The government scheme is called the National Employment Savings Trust, or NEST. It has been designed for automatic enrolment, and may provide the most cost effective solution for small businesses. It is fully online, and can be administered almost entirely through NEST’s own online dashboard. Crucially it has no set-up charges, and boasts low costs for members. Employers do not have to pay anything other than their contributions when using NEST. Instead, charges are levied on individual members, at an annual rate of 0.3 per cent of the total value of the member’s fund, and at 1.8 per cent on each new member contribution.

If you already operate a PAYE scheme you can expect to receive a letter from the Pensions Regulator 12 months prior to your staging date. If you sign up for NEST now, you will also receive ‘countdown emails’. They will then guide you through the process of setting up.

It is important to understand that NEST is not the only available option, and you may wish to seek independent advice before making a decision.