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Britain’s smallest business should be concentrating all their energies on exploiting the country’s economic recovery to achieve ambitious growth target. Instead, hundreds of thousands of these firms are set to spend the next two years in a last-minute panic as it dawns on them that they’re running out of time to comply with changing pensions legislation.
The legislation, known as auto-enrolment, requires every employer in Britain to set up a pension scheme for staff by 2017 – and to enrol staff in the scheme unless they have specifically opted out. They’ll also have to make pension contributions on behalf of these employees.
Auto-enrolment came into effect in 2012, but the system is being rolled out gradually, with smaller employees given more time to make the necessary arrangements – but all employers must be compliant by 2017. For many smaller businesses, the deadline comes before that.
So how many employers are we talking about? Well, until recently, the official view, from The Pensions Regulator, was that 1.3 million small and medium-sized enterprises (SMEs) are due to join auto-enrolment over the next two years. However, the regulator has just updated that figure – it now thinks the actual number is 1.8 million.
The reason for the increase is that the UK’s economic strength over the past 18 months has seen more new businesses launched and fewer businesses going under. That’s good news, of course, but the concern is that the pension industry won’t be able to cope with the demand, particularly since employers are leaving it until the last moment to confront this issue.
“It’s going to be an unprecedented rush, with vast numbers of SME owners with no previous pensions experience setting up a scheme for their employees,” warns Will Wynne, the managing director of Smart Pension, one specialist adviser.
There is every chance many of these businesses have little idea about the difficulties lurking just around the corner. Research has repeatedly shown that smaller employers have little awareness of auto-enrolment. Some have no idea when their own deadline for compliance actually is, but even amongst those firms where managers understand auto-enrolment is coming, there’s a remarkable lack of knowledge. In one survey published last month by the business software group Intuit, 40 per cent of very small businesses said they didn’t expect setting up a compliant pension scheme to cost them anything – in reality, the average cost is likely to be close to £10,000 for each employer.
Intuit also found small businesses were remarkably sanguine about the prospect of falling foul of the auto-enrolment laws – even though some breaches carry criminal sanctions. It said 56 per cent of small businesses would be tempted to encourage staff to opt out of the scheme – behaviour expressly forbidden by the legislation – if they thought the regulator wouldn’t find them out. And 68 per cent said they were prepared to miss their own deadline for compliance, even though there is an automatic £400 fine for doing so.
Rich Preece, the UK vice president and managing director of Intuit, says: “It is worrisome that these vulnerable businesses may not be taking the necessary steps to ensure their business will not only comply with their initial staging date, but be set up for the ongoing impact that workplace pensions will have on their business.”
For now, however, these issues are getting little attention. The first few years of auto-enrolment went very well, with only a tiny handful of employers falling foul of the rules – but this is almost certainly because this was the period when larger companies, which are likely already to have good quality pension provision in place, were joining up. The next two years, by contrast, will be fraught, as smaller businesses that have never before dealt with pensions, rush to beat the deadline.
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