A study by the Federation of Small Businesses (FSB) found that 45% of small businesses are still confused about auto-enrolment. If you haven’t already heard about auto-enrolment or you’re still a little confused, read on. It’s coming to all businesses over the next couple of years, with millions already affected.
What is auto-enrolment?
Auto-enrolment means that employers are obliged to enrol employees in a qualifying workplace pension scheme. Auto-enrolment was brought into law in 2012 and originally affected larger 
companies but was rolled out to smaller ones last year. The date by which a company has to enrol is called the ‘staging date’ and depends on how large the company is. More than 500,000 small businesses are obliged to enrol over the next two years and if you don’t already know your date, you should find out as soon as possible.
Who is eligible?
Workers are split into three main groups, eligible, non-eligible and entitled.
Eligible workers:
- Aren’t already involved in a pension scheme
- Aged between 22 and the state pension age
- Work in the UK
- Earn at least £10,000
Non-eligible workers:
- Aged between 16 – 22 or state pension age – 74 and earn more than £10,000
- Aged between 16 – 74 and earn between £5,824 and £10,000
Entitled workers:
- Are workers who can ask to join but companies are not required to pay for
- Aged between 16 – 75 and earn less than £5,824
How much do you have to contribute?
Contributions are 1% of a worker’s ‘qualifying earnings’ and are set to increase to 3%. Qualifying earnings are defined as the earnings over the minimum amount, £5,824.
So a worker earning £20,000 would have their contributions (1%) based on the difference between £20,000 and £5,824 = £14,146. An employer would have to contribute a minimum of £141.46 per annum, though they are free to contribute more. The employee is also expected to match that contribution.
Due to an increase in the minimum amount of earnings (going from £9,440 to £10,000) 170,000 fewer people will be included in their employer’s scheme. 120,000 of these are women, according to research by Scottish Widows. This is thought to be because women are more likely to work part-time than men, often due to childcare obligations.
Opt-outs
Any worker can opt out of the auto-enrolment within a month of enrolment, but most workers agree to stay on the scheme. Only about 10% are expected to opt-out.
However, it is illegal for an employer to try to force a worker to opt-out, either by offering a pay rise or threatening a pay cut. Businesses who don’t comply or ignore their staging date could also be liable for a £400 fixed penalty notice per day.
Problems for small businesses
Three out of four SMEs feel that regulations will put too much pressure on them and one in four believe that their business will be unable to cope with added financial demands. Business who struggle to take on this new expense might be forced to cut overall pay, scrap bonuses, or put a halt to business expansion and new recruitment.
The Auto-Enrolment Advisor was set up to help companies with the process. Graham Robinson from the Auto-Enrolment Advisor says that small businesses are struggling in particular because ‘they don’t have in-house human resources departments to manage the process, like many of the early employers who met their obligations.’ This has led to more confusion and many say the government could be doing more to inform smaller businesses and employees who have otherwise missed out on this crucial information.
Another problem for small businesses is finding a pension scheme. Larger businesses have more options and can afford to use private pension schemes. Smaller companies have fewer options and end up using the cheaper, publicly owned company Nest (National Employment Savings Trust) which has been criticised for its restrictions.
What can you do for your SME?
The Auto-Enrolment Advisor stresses that preparation is crucial and that businesses should seek legal advice if necessary. Auto-enrolment is expected to be busier this year so businesses should seek advice as soon as possible to ensure that they have enough information and time to act without delay when their staging date arrives. Businesses are also advised to plan ahead in order to account for any potential financial difficulties this extra expense may cause.
Employees should also be aware of the effects of auto-enrolment because of potential changes to bonuses and pay rises in the future. Some companies may need to review these policies and make adjustments to balance out the extra cost of contributions to employees.