In an attempt to deal with the looming pension crisis and the failure of people to make provision for their retirement, the UK Governments has introduced legislation that will require all employers to auto-enrol their staff in a qualifying workplace pension scheme.

The rationale behind the legislation is that it seems that currently many employees do not take advantage of workplace pension schemes simply because they cannot be bothered to join them. By bringing in the idea of auto-enrolment the hope is that the same inertia will mean that employees will not be bothered to opt out of the schemes so ensuring that more people will have their own pension on retirement and therefore not be such a burden on the state.

How auto-enrolment will work

The legislation requires employers to auto-enrol all their employees aged between 22 and the State pensionable age, (which is currently a moveable feast) who are earning at least £5,035 a year either full or part time. The enrolment has to be in an existing eligible occupational scheme (such as a final salary scheme or a defined contribution scheme) or the new National Employment Saving Trust (NEST).

Employers and employees will each also be required to make minimum contributions to their pension plan. These should amount to a minimum total payment of 8% of the employees’ annual salary, with the employer paying at least 3%, the Government giving 1% as tax relief and the employee paying the rest.

If an employee decides that they do not want to become a member of the pension scheme they can opt out of it, by giving notice to their employer of their decision during the opt-out period. However, every three years an employer will be required to re-enrol an opted out member of staff.

The problem for businesses

However much we might applaud the intention the fact is that it is employers who are going to have to bear the brunt of cost, not just of the 3% of salary but the administration costs. Giving what is tantamount to a 3% hidden pay rise and with employees looking at a reduction of 4% in their take home pay, the pressure on employers to further increase wages is going to be immense and can only really come from profits.

The indications are that 95 per cent of SMEs do not have any pension arrangements for employees into which the employer contributes. These are the businesses who are going to have to implement and finance auto-enrolment. This is particularly concerning since these businesses lack the specialist human resource functions that big firms can afford and are struggling to cope with their existing employment law obligations already.

The scheme comes into effect for the largest companies in October 2012 and then will gradually be extended over the next four years. This may seem a long time away but business owners and managers should start to consider their options now as there are opportunities to put schemes in place now which could reduce the administration and other costs.

The Government should consider fully the extra burden that this legislation is going to place on small businesses and perhaps in return consider removing some existing employment related regulations which have minimal impact but are costly to implement.

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  1. Auto Enrolment Pensions Will Hurt Small Businesses « greatbizinfo - September 21, 2011

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