One year after auto-enrolment came into effect for Britain’s largest companies, smaller businesses will soon also have to join the system, which requires employees to enrol all their staff in a company pension scheme unless people have specifically opted out.
While the first 12 months of auto-enrolment passed by with few hitches, this period was always going to be something of a phoney war. The largest employers generally had pension schemes that already met the auto-enrolment criteria, as well as access to specialist pension advice in-house and externally, to help with the transition to the new requirements.
Many smaller businesses, which must all sign up to auto-enrolment over the next four years – in tranches of companies grouped by number of employees – do not share those advantages. And there are increasingly worrying signs that auto-enrolment is going to be an unpleasant experience for a good number of them.
Ros Altmann, the former Downing Street pensions adviser, is just one of several industry gurus who fear a car crash.
“The real challenges are yet to come,” she warned. “Employers have no idea of the complexities they could face and need to be warned about preparing well ahead.”
One big problem is that small and medium-sized enterprises (SMEs) may struggle even to find a pension provider prepared to offer a scheme to all their staff.
Research by Close Brothers Asset Management warned that pension providers, for whom employees now represent a captive market, have become increasingly picky about whom they want to accept.
They may turn down economically unattractive temporary and part-time staff, for example, even though employees are legally required to offer such workers access to a pension. Close said one-in-five employers yet to auto-enrol have already been warned by their current pension provider that they aren’t guaranteeing access to all.
A related issue is that pension providers are struggling with the workload created by auto-enrolment and setting conditions accordingly. Scottish Life, for example, has said it won’t accept any auto-enrolment business from new or existing customers without at least six months’ notice. With other providers now following this lead, SMEs that don’t get themselves organised risk missing the deadline to comply with the law.
It’s a similar story at the firms which provide the administration processes that sit between employer and pension provider, particularly in the software sector. Many of these firms are warning it will now take many months for them to get new customers up and running.
Nor are the compromise solutions particularly appealing. Nest, the Government-backed pension scheme aimed at employers who can’t or don’t want to use a pensions-industry provider, is charging an initial fee of 1.8 per cent on contributions, as well as an ongoing annual fee of 0.3 per cent. The high, upfront cost will make it expensive for all but those who stick with Nest over the very long term.
Then there is the cost to SMEs of members’ contributions. The experience over the past year has been that opt-out rates have been much lower than expected – somewhere between 10 and 25 per cent of staff.
If SMEs see similar take-up of auto-enrolment, the cost of their compulsory contributions may come as a nasty surprise. And that’s leaving aside the fact that there is an increasingly vociferous campaign for higher minimum contributions.