Articles - An auto-enrolment wake-up call for small firms

There’s a pile of papers in my study at home, for a number of vested pension contracts from previous employments. I know these are still paying trail commission for advisers I have never met, and I plan to transfer the funds to a single low-cost arrangement I can manage more pro-actively. I haven’t actioned this yet - there’s always something more pressing or interesting to do with a few spare hours.

 By Jon Dean, Consultant, Altus

 The same applies in business. As pension professionals, it is all too easy for us to take our subject knowledge for granted.

 We’ve been preparing for auto-enrolment since the 2008 Pensions Act – we know about it because it’s our job. For the typical small business owner, at least among the un-pensioned target market for auto-enrolment, the day job is much more likely to be retailing, building or manufacturing – anything in fact but financial services. The priorities for these businesses are operational ones – organising shifts, getting the right materials and tradesmen on site, making widgets to a cost and quality, filing accounts. Somewhere amidst all their other paperwork will be a letter from the Pensions Regulator telling them they may have a duty to auto-enrol some of their workers in 18 months’ time.

 It’s human nature to put off unpleasant duties, particularly anything that looks a bit hard, like pensions. Let’s hope this letter doesn’t stay at the bottom of the pile for too long. It refers to the Regulator’s extremely useful and informative website, laid out in chunks relevant to professionals like us, employers, trustees and individuals, and all in plain English (or Welsh).

 Assuming the TPR letter is getting to the right individual, and they have time to follow it up (a big if), there’s no shortage of information about what they need to do. Many will ask their accountant to help; others may ask a financial adviser. In the post-RDR world they may well be shocked at the cost of advice being quoted and worry about the affordability of complying with the regulations. Uncertainty over consultancy charging certainly isn’t helping. We await a decision by the DWP on whether they will ban charges from member contributions for advice given to their employers, a ban that would make advice less affordable “at source” for firms. HMRC’s decision to levy VAT on the employer adds yet more cost and could sound the death knell for consultancy charging.

 Earlier this year I predicted that we would start to see the emergence of “grouped advice” – where employers could access help to implement their auto-enrolment schemes while sharing the cost of advice with other local or same-sector employers. As yet we haven’t seen this but I believe it will have to happen as the demand for advice starts to outstrip the supply of advisers’ time.

 You might ask about the providers’ role in all this. At the moment most are on-boarding the AE schemes for their existing larger clients (the 4000-6000 worker range stage in the next two months) and these schemes are where they feel they will make their margins. Naturally the traditional life companies and large EBCs have been cherry-picking the employers they want to do business with – such as this year’s stagers or the smaller professional services firms with money to spend. This alone will be enough to stretch them to seven times’ normal capacity by the end of this year, according to recent Towers Watson research.

 Making a profit from smaller schemes requires an altogether simpler, more streamlined and automated approach. I’m not yet convinced this exists outside of NEST and the other big master trusts targeting the smaller employers. Besides, only NEST has a public service obligation, and let’s not forget that auto-enrolment is an employer duty, so what do the late-comers need to think about now?

 Without wishing to re-produce the Pensions Regulator’s information, employers need to follow a fairly straightforward set of steps to get themselves ready. The most important of these are
 • Ascertain their staging date and make a plan.
 • Assess their workforce and estimate contribution costs – the rules are well documented and a small business should be able to do this on a spreadsheet. Some providers have free on-line tools to help.
 • Select a suitable pension scheme. A good scheme will both protect the company from later regulatory comeback or reputational damage, and allow employees to retire gracefully.
 • Consult with their staff about the changes.
 • Work out the practicalities of ongoing assessment and enrolment – payroll, flex and pension providers all have software that can help. Small companies may feel equipped to manage this process manually, but will still have to keep adequate records to show the Regulator.

 In summary, then, a lack of push from providers and an under-supply of advice – at least advice that SMEs can afford – coupled with a natural tendency by employers to procrastinate, means many small firms are falling behind on auto-enrolment. It is with scheme selection and practical implementation that these businesses may need more help. There isn’t any kind of comparison website yet, but with the volumes of employers staging from next year, some kind of on-line support must surely emerge soon.

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