Companies need to take action on auto enrolment, but, says Irwin Mitchell’s Tom Flanagan, some property businesses may not be as prepared as they think
Launched in October 2012, auto enrolment is regarded as the most significant change to occupational pension law in the UK for 60 years, affecting all businesses, including those in property.
The far-reaching rules make it necessary for UK employers to place all “eligible job-holders” into a qualifying pension arrangement.
Although auto enrolment currently affects only the UK’s largest businesses and is often perceived as something that only the biggest companies need to worry about, thousands of smaller firms will soon need to comply.
Indeed, during this summer, any organisation employing between 2,000 and 4,000 people will have to be ready and, from April 2014, businesses with ?250 or fewer employees will need ?to be compliant, including those in the property and construction sector.
Complexities
At its heart, auto enrolment rules state that UK employers must automatically place their entire workforce into a qualifying pension arrangement and contribute to that pension, then monitor the workforce and keep a record of their membership of the scheme.
In reality of course, auto enrolment is far more challenging than this, as the early adopters have found out. It can include complex issues involving contracts of employment and significant amendment or replacement of existing pension arrangements, as well as amendment or replacement of existing HR and payroll systems.
In many cases, project management and risk compliance skills have proved to be as valuable, if not more so, than a knowledge of pensions.
Employers also need to think carefully about costing. There are direct costs to consider, such as the additional contributions that need to be made for all employees in the scheme, and indirect costs, including expenditure on advisers and/or costs of new/replacement software in HR and/or payroll.
Employers should also allow enough time to consider ways in which these additional costs can be mitigated – for example, by the use of salary sacrifice arrangements.
Careful thought also needs to be given to the choice of pension scheme; in general, older schemes tend to have higher charging structures.
The government announced recently that it intends to prevent “consultancy charging”, whereby advisers provide guidance to employers which then charge the cost of that service to the accounts of each individual scheme member.
Auto enrolment applies not just to employees but to all workers within a business, so consideration also needs to be given to all types of worker, irrespective of whether they are strictly ?an employee or not.
Rule readiness
Almost all businesses should think about starting preparations for auto enrolment six to 12 months in advance of their ?staging date. Arguably, this is more important for those doing so between ?2014 and 2016 because, owing to the vast numbers of businesses staging each month, the government expects a shortfall in advisers available to assist them. In addition, as at the date of this article, ?there is no automated system available to bridge that gap.
Despite these complexities and the fact that the new rules have been in place for ?a while now, there is widespread speculation that some businesses are simply not ready.
Here at Irwin Mitchell we shared ?these concerns and earlier this year commissioned research into the readiness for auto enrolment of small and medium-sized businesses, including firms working in the property industry.
According to the survey, which questioned the bosses of more than 250 businesses throughout the UK, many organisations already had a pension scheme in place and were compliant with auto enrolment rules.
Eight companies in 10 believed they were ready for auto enrolment, with most giving themselves 12 months to gear themselves up for their staging date.
However, when we dug a little deeper, we found that many businesses had not fully considered some of the key issues that needed to be resolved ahead of implementation. For example, the study found that nearly 60% had failed to budget for the extra costs that could be incurred as a result of auto enrolment, while nearly 40% said that their payroll system was not compliant.
Six businesses in 10 had not checked the pensions provisions in their staff contracts and assessed how they affected plans for auto enrolment.
Nearly 80% of small and medium-sized businesses said that they had started ?their auto enrolment preparations but, on closer inspection, it appears they are not ready in some crucial areas. Many businesses seem to be giving themselves time, but perhaps they need to use their time better.
£10,000 a day fines
Of course, the new regulations carry both cost and time implications for all UK companies, and those that give sufficient thought to how to deal with the implementation of auto enrolment can use the onset of their staging date as an opportunity rather than a threat to their business.
However, for those companies that fail to deal with auto enrolment compliance adequately, the Pensions Regulator has been tasked by the government to ensure compliance.
The regulator has a significant arsenal of statutory remedies at its disposal, including the ability to levy fines of up to £10,000 a day, in certain circumstances, for non-compliance.
The risks are clear and, from the results of this survey, it is apparent that small and medium-sized businesses need further support with auto enrolment.
What is now called for, we believe, is a more streamlined and cost-effective tool to help these companies manage the transition, particularly in light of recent government statements about requiring the employer to meet the cost of advisers and consultants.
Tom Flanagan is head of employment at Irwin Mitchell
