In January 2016, an estimated 135,000 firms are due to take part in the auto-enrolment (AE) process. While this first tranche of organisations with 30 employees or fewer staging is a significant number, it is just the beginning, with 1.3m micro businesses set to stage over the next two years. Capacity crunch is clearly a valid concern given the sheer scale of activity, but surely enough lessons have been learnt from larger companies over the past few years to avoid problems?
From the contradictory messaging and apparent confusion now overwhelming businesses, it appears not.
Now that the Pension Regulator (TPR) has given every small and micro company an auto-enrolment (AE) date, the fear and uncertainty regarding staging should be dissipating. Yet in reality, the divergence in advice being proffered to small and micro businesses is not only creating confusion and stress but could result in large numbers of companies actually missing their staging dates.
In fact, every recent industry survey has come back with the same result: the vast majority of industry figures expect large numbers of employers will miss their staging dates in 2016. So what is going on?
Capacity crunch is clearly a concern – especially for smaller companies that simply don’t offer the revenue generating opportunities required to get advisers interested. The sheer logistics of getting 135,000 companies ready to stage – from the HR requirements to finding a pension provider and managing the payroll changes – are clearly challenging.
Given the fact that every company now has a staging date, why is there still so much confusion and inertia? At the recent Capacity Crunch Conference, Neil Esslemont, head of industry liaison for TPR and Payroll World columnist, explained that TPR is taking steps to ensure small and micro employers are aware of their duties, using methods such as television advertising. A month down the line the TV ads, featuring “Workie,” have only just started to materialise. But should this communication programme have started some time back?
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Clarity is essential
Small and micro employers may be fooled into thinking that they can leave things to the last minute and get everything sorted within a few weeks. This is plainly wrong. There are many aspects of the process that smaller companies may actually struggle to achieve – not least finding providers willing and able to help.
For example, small business owners may already have some form of directors’ company pension – it is a very tax efficient and prudent approach. However, can the business simply assume that the same provider will be able to offer a good pension product for the rest of the employees? More often than not, companies are discovering this is not the case. Providers now look at the profitability of a potential scheme over the longer term much more closely and employers may be turned away by their current scheme provider.
Costing the Earth
Indeed the cost of AE is another area that is raising significant concerns within the industry due to a lack of understanding regarding the up front and on-going business investment required. According to industry commentary, AE costs are estimated to be £8,900 per small business. However, 40 per cent of the UK’s smallest businesses either don’t know or don’t think it will cost anything to set up; while a further 11 per cent think it will only cost up to £5,000.
The other problem associated with the lack of good AE information is that companies simply do not see the benefit. Yet good pensions contributions are an important part of boosting employee morale and improving retention. In an era of low unemployment and skills shortage, smaller companies that fail to step up to the pension requirements could find employees heading off to more supportive organisations.
Which raises another concern – one recent study revealed that a significant number of smaller companies are looking to fund AE by reallocating existing employee payments – with 34 per cent of small companies considering capping salaries and cutting bonuses and 11 per cent raiding other benefits to offset the cost of pension provision.
Smaller organisations may also be tempted to ‘encourage’ employees to opt out of auto-enrolment. Don’t – the potential implications will be serous, ranging from fines to significant damage to reputation and the ability to recruit in the future.
Timing is everything
The truth is that everyone involved in the payroll and pensions industry believes there is going to be a capacity crunch in delivering auto-enrolment – there are simply not enough providers to deal with the volume of companies staging. And that is assuming a good proportion of those companies plan ahead. If, as is feared, a large number buy into the myth that AE is a simple, low cost, 20 day process or that existing providers will simply step up to the mark on time, the problem could be explosive – AE Armageddon.
Non-compliance is an expensive mistake. Is it really worth the risk?
Paul Gibbons is implementation and technical development manager at Bond Payroll Services.
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