What small businesses need to do to avoid pensions pain as they are forced to put workers into auto-enrolment funds

Thousands of small businesses in the UK will take on the daunting task of launching workplace pension schemes under the Government's auto-enrolment project in the coming years.

Between now and 2018 up to 11million workers not currently on workplace pensions will be automatically placed onto savings schemes, though they can choose to opt out within a month of joining.

And it is the smaller employers - those with up to 50 staff - with little experience of pensions who are more likely to find it difficult to cope with the administrative and cost burden of auto-enrolment, rather than large firms well versed in workplace schemes.

So to help them out, This is Money has put together a guide of how small businesses should be preparing for auto-enrolment, with the help of Karen Barrett, of Unbiased.co.uk;  Robert Ward, of Investment Management Ltd; financial planner David Smith, of BestInvest; and Jon Dixon, of AWD Chase de Vere.

The message for small businesses is clear: Start preparing now to ensure a smoother transition and less upheaval when the time comes to enrol staff.

Need to know: Small business owners will take on an extra burden when it comes time to start auto-enrolling staff.

Getting your facts straight

Before starting preparations for auto-enrolment, small business owners need to acquaint themselves with exactly what will be required of them, at what time, and to what extent.

The key information employers need to be armed with is:

• Who will I need to offer auto-enrolment to? Workers who are over 22, under the state pension age, and earn more than £9,440-a-year (a threshold which may rise between now and when small businesses reach their start date - known as the staging date) must be enrolled if they are not already part of a qualifying workplace pension scheme.
• When will I need to enrol staff? Small businesses will start auto-enrolling from 2015. But the roll-out is staggered over three years and when a business starts depends on which category they fit into, based on size but also their tax status. Staging dates - can be found on this Pensions Regulator information page.
• How much will I have to contribute? The minimum requirements expected of firms auto-enrolling staff have already been set by the Government, and how much firms will initially need to contribute will depend on when their staging date falls. Check the table below for contribution levels and dates.

Seeking advice

It would be prudent for those with no experience of running workplace pension schemes to seek the help from a financial adviser for guidance on the auto-enrolment process - as soon as possible.

Despite attempts to simplify the industry - and particularly auto-enrolment - pensions are still dauntingly complex and not the sort of thing businesses should be entering into with a blasé attitude.

But Robert Ward has warned businesses of a possible logjam in the advice sector the closer small businesses come to their staging dates, and that businesses seeking advice now will have more choice and in all likelihood cheaper advice.

Otherwise businesses could find themselves turned away by advisers who simply cannot take on the work the closer it gets to staging, leaving them in trouble when it comes to things such as...

Budgeting

Naturally, contributing to employees' pension pots is an expense for companies, and for many small businesses it is an expense that will present itself for the first time.

For the first few years of auto-enrolment, when contribution levels are at a total of 2 per cent, firms will be spending an extra 1 per cent on their employees on top of their salary, which will rise to 3 per cent by 2015. Fortunately it will not produce any additional tax liabilities for firms, as employer contributions can be offset against corporation tax and are not subject to employer National Insurance contributions.

Employers need to assess how much they can expect their costs to rise with auto-enrolment, whether that can be accommodated within existing budgets and, if not, where savings can be made to ensure the firm begins enrolling on time.  Other things to consider include:

• Opt out rates: The proportion of people expected to opt out from auto-enrolment is estimated at anything from 25 to 50 per cent, but obviously it would be best for businesses to prepare as if 100 per cent of eligible employees are enrolled.
• Infrastructure: Are the firm's payroll and HR departments adequate to handle the extra burden of employee pensions? This sort of thing should be discussed with a financial adviser.
• Salary sacrifice: By employees agreeing to reducing their salary in exchange for the lost income being put into their pension plan, employers and employees can lower the amount they spend in National Insurance contributions, reducing a firm's costs.

Finding the right pension

Search: Finding the right pension plan for your staff is crucial.

Since firms will now be responsible for their employee's retirement savings as well as their salaries, it is vital that they pick a pension scheme that works best for their staff.

There are a glut of providers catering for all kinds of firm, but the advent of auto-enrolment has also brought more providers who offer simplified pensions into the mix.

Firms such as B&CE - with its People's Pension - and NOW offer flexible pension schemes that come with low charges (working out at around 0.5 per cent of the pot a year), as does the taxpayer-backed National Employment Savings Trust (NEST), though this has added restrictions in place.

But low-cost and simple is not for everyone, it might be that firms want their employees to have a access to a wider range of, for example, investment options.

To help firms choose, The Pensions Regulator provides guidance on questions that need to be asked before settling on an auto-enrolment pension product.

Reviewing your employee benefits package and pension offering

While it is clearly vital to comply with the new regulations within the deadlines, the introduction of auto-enrolment presents an opportunity for companies to review the benefits they offer their employees.

With the Government setting minimum levels for employer contributions (see table above), firms could get a leg-up on the competition in their industry by contributing more to their employee's pensions, thereby improving the firm's chances to attract higher quality employees, and retaining those already employed.

David Smith, of BestInvest, said firms should also review other benefits they offer employees in case there could be improvements made to them, as well as reviewing its insurance and share protection provisions in case it could get a better deal elsewhere.

Communication

Companies are required by law to provide their employees with the correct information in writing about auto-enrolment at the right time, so that staff know how auto-enrolment will affect them.

The Pensions Regulator (TPR), in conjunction with the Department for Work and Pensions (DWP), provides letter and poster templates for employers to use in the workplace, which can be accessed by clicking here.

Naturally, the Government is keen for as many people as possible to stick with auto-enrolment and save towards their retirement, so included on TPR's website is a series of very pro-pension saving 'messages' that employers need to get across to employees.

For many, the messages - which can be seen below - smacks of teaching grandmother to suck eggs, but one supposes it's best to cover all the bases.

The Pensions Regulator's jargon and language booklet even provides responses that managers can regurgitate to staff questions.

MESSAGES THE GOVERNMENT WANTS EMPLOYERS TO TELL THEIR STAFF ABOUT AUTO-ENROLMENT

1. When you pay into your pension, your employer and the Government will too.

2. As your employer will automatically enrol eligible workers into a workplace pension, it's a hassle free way of saving while you earn.

3. Saving into a workplace pension means you can continue to enjoy the things you like when you retire.

4. Don't miss out on the money from your employer and the Government.

5. You could have 20 years of retirement - average life expectancy is increasing, and living longer means a longer retirement to fund.

6. The state pension is a foundation for your retirement, but you may want more.

7. Starting sooner means your pension will be bigger - the earlier you start, the more time your money has to grow.

8. Starting sooner makes saving more manageable - saving smaller amounts over a longer time period has less impact on your current lifestyle.

9. Even if you're not being automatically enrolled into a workplace pension, you can still ask to join. You might also get a contribution from your employer and the Government too.

Risks to consider

Failing to comply with regulations: Small businesses which do not meet their auto-enrolment obligations in time, or are offering pensions which do not comply with regulations, can be hit with fines of up to £500-a-day (£10,000 for large businesses) .

Not budgeting properly: Unsurprisingly, the risk of not adequately preparing for auto-enrolment could see firms landed with pension bills they cannot afford, meaning cutbacks may have to be made elsewhere. Planning early is the way to avoid this added expense.

Encouraging staff not to join: Employers are banned from offering incentives to their workers to opt out of an auto-enrolled pension. They are also not allowed to refuse to employ someone because they want to join the company pension scheme. The Pensions Regulator provides a whistleblowing facility to combat this and may issue penalties to those firms found breaching these rules.