Auto-enrolment – will it be boom or bust for SMEs?

By Sue Beaumont, pensions consultant at Linder Myers Solicitors

One year since its launch and auto-enrolment has been hailed as a great success with far fewer employees opting out of the scheme than predicted prior to the launch of the government’s ‘flagship’ pension reform.

Only time will tell if this success will continue however, with the unexpectedly low opt-out rate can smaller businesses whose staging dates loom afford it if the trend continues?

Prior to its launch, the government predicted that 30 per cent of employees would opt-out. The reality is that only nine per cent have done so in the first tranche of those auto-enrolled onto the scheme.

This is good news for the government in its quest to encourage individuals to save for retirement but for small to medium sized businesses who may not have factored in the additional costs, this could be a car crash waiting to happen.

For some, the unexpected financial burden may prove the tipping point between survival or otherwise – many business owners may also not be aware that the costs of auto-enrolment are not exclusive to simply the cost of the initial one per cent contribution per employee (which is set to rise to eight per cent over the next five years).

The initial set up and administrative management thereafter are additional costs some employers may have overlooked in their financial planning.

Some will remember the days of OPRA, the pensions regulator which had little powers.

Those days are gone with the new Pensions Regulator (TPR) gaining greater powers and the complacent legacy left behind by OPRA could come back to bite.

The Pensions Regulator has sent out a very clear message that it will heavily fine schemes which are found to be non-compliant. Issuing 38 warnings already to large employers in the first round of staging, TPR is taking no prisoners.

This is worrying for small to medium sized businesses who are unlikely to have the large teams of people afforded by the bigger players to advise and manage the auto-enrolment process.

A further complication and risk will be for businesses who are reliant on short term temporary and casual staff because they operate in markets with fluctuating demand such as the catering industries or tourism sector.

If not handled correctly, all employees have to be automatically enrolled on day one of their employment, for a casual employee hired for a week’s stint as an example, this can prove an unnecessary administrative and financial burden.

This can be addressed by putting in place waiting periods of up to three months before an employee needs to be automatically enrolled into a qualified pension scheme – but without appointing the right specialist advisors, few employers will be aware that they can do this to protect themselves from the consequences of not doing so.

Getting ready for auto enrolment takes time, a round a year to be precise, to ensure compliance. For those who have left it to the last minute, not least of their issues will be in finding an insurance provider willing to take on their scheme. With a limited number of providers on the market, insurance companies are cherry picking the schemes which will prove the most profitable for them.

Without insurance, employers will be left high and dry and will find themselves defaulting to the government’s National Employment Savings Trust (NEST). The terms offered by NEST however, may not be beneficial to either the employer or its employees. Fraught with potential risks and pitfalls, auto enrolment could prove the biggest threat to the survival of SMEs if they don’t act quickly and appropriately.