Over the last decade, participation in pension schemes has been steadily declining. This has prompted the Government to introduce Pension Auto-Enrolment PAE) in an effort to overcome this. The aim is to make it easier for people to save for retirement by compelling businesses by law to automatically enrol eligible employees into a qualifying workplace pension scheme. 

Introduced in October 2012, Pension Auto-Enrolment saw larger employers enrolling first with smaller businesses subject to staged implementation. The date a business must auto enrol its employees is determined by the size of its workforce as measured by the total number of people on its largest PAYE scheme (based on information held by the HMRC on 1 April 2012). 

The larger a business’s workforce, the earlier s the date by which it must auto-enrol its employees into a workplace pension. By April 2017,all current employers will have had to auto-enrol their employees. Employers with more than 2,000 employees should have auto-enrolled their employees by now. Businesses with fewer than 30 employees will not be required to launch auto enrolment until June 2015 at the earliest.   

However, despite the later staging dates, SMEs (usually defined as businesses having 250 or fewer employees) should not be complacent. All organisations, including SMEs,with between 30 and 2,000 employees will have to auto-enrol their workers into a workplace pension scheme via PAE in the next 24 months. The impact of this on small to medium sized businesses will likely be far greater than anticipated.

This is primarily because many smaller employers have not previously needed to engage very much with pension plans and subsequently have little experience of dealing with and managing the required administration, adherence to legislation, and necessary communication with employees. Therefore, they are likely to find it more difficult to come to terms with the extra responsibility when the scheme becomes mandatory for their business. 

It is vitally important for SME employers to start preparing now to avoid penalties for non compliance and ensure a smooth transition and less disruption when the time comes to enrol staff. Key steps include: 

1. Familiarise yourself with your staging date;
2. Seek expert advice to determine what your PAE requirements are based on the HMRC definitions;
3. Ensure you have all the necessary details to effectively communicate with employees;
4. Be certain that the pension plan or scheme you have in place is the right one for your business and employee needs; and
5. Understand your minimum employer contribution

Know your staging date

The first thing employers should be doing right now is familiarising themselves with their company staging date (the date from which they must enrol). This will leave enough time to develop a comprehensive plan that accounts for any pitfalls and will ensure effective and smooth implementation. The Pensions Regulator (the Government body responsible for ensuring employers comply with the auto-enrolment legislation) recommends employers start planning for auto-enrolment 18 months before their staging date.

Ask the experts

Get advice now ahead of your staging date to ensure you know exactly how the process works, take into account any related costs and develop a strategy that will help you avoid any possible fines. Employers who don’t comply with auto enrolment face potentially serious charges, starting with a £400 fixed penalty for those who ignore their initial staging date followed by uncapped penalties for further non-compliance of up to £2,500 a day if you have fewer than 250 employees and up to£10,000 a day if you have 250 or more employees.

Effectively communicate with your employees

Employers are obliged to communicate the pension scheme changes to their employees. By law, all employers are required to write to their staff within one month of their staging date explaining what auto enrolment is and what it means for them, so make sure you are ready to do so by this required date.   

With this in mind, the following steps should be considered

• You need to tell your employees whether they will be auto enrolled – only those aged between 22 and State Pension Age and earning over £9,440 a year have to be auto-enrolled;
• You must tell your employees when they will be auto enrolled – know your company staging date prior to making any announcement;
• You must tell you employees how they can join – workers earning less than£9,440,or those who are aged 21 or under, or those between State Pension Age and 74can still opt in to auto enrolment even though they aren’t required to do so; and
• You must tell your employees how much they will be contributing.

You also need to think about how you plan to communicate with your workers. Texts, emails, online articles, posters or letters are all ways suggested by the Pensions Regulator. Of course, not all of these methods may be available.. If your workers can’t be reached through email or work intranet, you need to make sure you have an alternative method to contact them by. 

Furthermore, employers should be aware that employees can opt out of the scheme at anytime they want. Some will think that they can’t afford it, and others will want to continue with or make their own arrangements. The upshot is that SMEs must have clear communication with the worker and must also be sure to keep diligent records so that they can prove they are complying with HMRC requirements. 

However, employers should take caution, influencing an employee’s decision to opt out of auto enrolment is against the law. For example, making an employee’s contract conditional on them not joining the employer’s auto enrolment scheme is strictly forbidden.

Minimum employer contributions

PAE law has set a minimum level for employer contributions. This is set at one per cent of “qualifying band earnings” until all employers are included in 2017 when it will increase to two per cent and then to three per cent from October 2018. “Qualifying band earnings” means all earnings between £5,668 and £41,450 for the 2013/14 tax year, including salary, commission, bonuses and overtime.

These required contributions amount to a pay rise for employees who are auto-enrolled followed by more pay rises for them in 2017 and 2018. You need to be considering how to make provision for these extra costs. This could be done via your salary review process and/or by allowing employees to exchange part of their salary for these pension contributions.

The Government has recently launched a £3.5m advertising campaign featuring Karren Brady from The Apprentice, and Theo Paphitus from Dragon’s Den. However, although the advert benefits the employee, it is limited in its appeal to employers. All but the smallest employers have staging dates within the next 18 months yet recent research shows that 56 per cent of these employers either do not realise auto-enrolment applies to them or do not know about it at all. 

Therefore, employers should be challenging Government to supply better communication to help them gain a full understanding of the scheme, how to implement it, the legal requirements and the impact it will have across their business. While it is the employer’s responsibility to get to grips with auto enrolment, they should expect better help and information to be made readily available by Government.

Pension auto enrolment is not going to be plain sailing for SMEs. How well it addresses the pension crisis will only become clear some years after implementation. A further issue, key to PAE’s success or failure, will be the extent to which workers exercise their rights to opt out of the scheme. A study by Aviva earlier this year found that more than a third of workers (37 per cent) will opt out after being automatically enrolled. But the fact is, for many businesses, it is already here, and for those who have yet to launch a scheme, your day will come soon. Careful preparation is essential and will help ensure a pain free implementation.

Chris Blundell is a tax partner at accountancy firm MHA MacIntyre Hudson.