HEADLINE: SMEs Think Pensions Auto Enrolment Is Too Expensive – But Ignoring The Law Could Cost More
By Alex Littner, managing director of Boost Capital

TALK about pensions, and many people switch off, thinking the topic too boring, too complex, or too far into the future to merit attention. And many small business owners are currently taking a similar approach to funding their own employees’ old age. The Government’s auto-enrolment rules are forcing companies to provide workplace pensions for staff, causing bosses to fret over the extra cost and paperwork. But ignoring pensions is no longer an option, so SMEs must face up to new legislation, and find ways to pay for it – or risk serious fines.
The elephant in the room
Business owners may not like the new pensions rules, but they can’t avoid them now they’re law. The Government’s auto-enrolment advertising campaign reflects this, featuring an enormous, benign monster ( ) which is impossible to ignore, reminding employers they now need to offer workers over the age of 22 earning more than £10,000 a year a pension scheme through work.
But many companies are still acting as if they can’t see this elephant in the room. Roughly 250,000 employers have enrolled more than 6.7 million employees into workplace schemes since the initiative launched in 2012. But, about 1.2 million small and micro firms are set to come under the new rules between now and 2018 - and many are ill-prepared both logistically and financially.
Ignorance is cost – not bliss
Pensions staging dates ( ) – the point by which businesses must provide a workplace pension for eligible staff – started for companies at the larger end of the scale in 2012, and are set to continue until February 2018 when even the smallest micro businesses must be on board. But, small firms with fewer than 30 employees began to come under the new rules from October, and, worryingly, the number being fined for non-compliance is on the rise.
Those who shirk their responsibility face stiff penalties – the Pensions Regulator has experienced a fifteen-fold increase ( ) in the number of fines issued against small and micro businesses for failure to implement auto enrolment. Negligent companies face a daily fine - £50 every day for firms with between one and four workers, £500 daily for those with five to 49 members of staff, rising to £2,500 a day for those with 50 to 249 employees. More than 3,700 firms were penalised between July and the end of September, and experts fear this figure will grow in coming months as smaller employers fail to fulfil their pensions obligations. All in all, it’s an expensive mistake to make.
The reasons why
It’s not that businesses don’t care about their workforce. Some are simply confused about what their duties are, and how to address them. But, for many, it comes down to money. There are business owners who admit they’ve avoided complying with pensions changes from fear of the potential cost. Almost half of SMEs are worried about the expense of auto-enrolment and matching employee contributions, according to research by accounting giant Sage ( ). And about a third are concerned about an impact on their enterprise’s cashflow.
Their worry isn’t ill-founded – pension provision will cost them more. The Centre of Business and Economic Research ( ) has calculated the average bill for micro firms of implementing auto-enrolment will be £8,900, while those with up to 100 employees will spend £12,600. Plus, getting a pension scheme ready could take each business an extra 103 man days, with administration requiring a further three days a month for some firms. It’s a lot for a small business to absorb.
Breaking down the numbers
Since businesses have no choice but to be compliant, they must crunch the numbers to see how they will cover the extra costs. First, think about which pension provider to use. There is a free, state-run option, the National Employment Savings Trust (Nest) ( ), which doesn’t charge a fee for setting up a scheme. About two million workers are currently signed up to Nest, but its offering is quite limited, not allowing workers to transfer savings to other providers. The next cheapest option is offered by People’s Pension ( ) and Now Pensions ( ), which both cost £500 or £36 a month. Many other pensions providers also exist, but these are some of the least expensive choices, so are proving popular with the smallest enterprises.
Set-up costs can also include external professional advice, plus paying for outsourced payroll help, or extra investment in in-house payroll software – ensuring your finance department can manage the additional demands of auto-enrolment is essential. Then, aside from any initial expenditure, there’s the expense of actual pension contributions. These start at one per cent of workers’ gross earnings, but then rise incrementally to reach a minimum of three per cent per employee by October 2018. Some pension schemes will also have ongoing monthly or annual administration charges.
Covering the costs
So, how to pay for it all? Many small companies have said they may introduce pay freezes, or even cut staff bonuses and overtime to fund pension provision. It’s certainly sensible to revisit employees’ salary and benefits packages, as a workplace pension is a type of staff perk. If you do opt to restructure salaries, be aware that lower salaries could also mean lower National Insurance contributions, which itself would be a cost saving. But any such tinkering with rewards must be approached sensitively, so staff members don’t feel you’re taking with one hand to give with another. Retaining valuable employees and improving staff loyalty should be an advantage of providing a pension, so consider any pay decisions carefully, and communicate with workers before acting. And, of course, look at budgeting and cost cutting on other areas. Is there any waste in the organisation, might day-to-day processes be run more efficiently, or could money be saved by changing suppliers, utility providers, or moving premises?
If you’re facing a cash shortfall, it may be necessary to find bridging finance to help with the initial set-up phase of the pension scheme. Short-term loans like those provided by Boost Capital ( could smooth the way during this period of transition, while the operation adjusts to its new financial arrangements. SMEs are always adaptable to change, and most will find a way to shoulder the extra costs of pension provision, but sometimes a little external support is needed with a bigger-than-usual outlay, such as setting up a scheme of this sort. Plus, re-enrolment occurs every three years, so many firms will need to find funds for these extra costs again in future.
Most small businesses want to do the right thing for their employees, but the logistics of setting up a pension are understandably worrying. Small firms should seek the right professional help from an accountant or credible pensions advisor, and look closely at the Pensions Regulator website ( ) to determine their duties and financial obligations. The truth is there is no longer any time to waste. Delaying further will just mean more expense in the form of hefty fines. Pensions aren’t boring – they’re now a fact of SMEs’ lives.

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