There are a lot of changes ahead for SMEs as the UK prepares for a complete overhaul in pension rules. The TV adverts and billboards telling people change is coming are already appearing and pension reform and auto-enrolment can seem daunting to SMEs and owner-managed businesses.
Fear not, you’ve got time to prepare. By investing the time to plan now will mean that when pension reform does hit your business you’ll be prepared and already have systems to cope integrated into the business.
What the new pension laws look like
So what is changing in pension law? Starting from October 2012 new pension rules will be phased in gradually over four years depending on the number of employees in the company.
- Larger employers are required to comply before smaller ones.
- When fully in force, all businesses will be obliged to pay a minimum employer pension contribution equivalent to 3% of a band of earnings (£5,715 to £38,185, in 2011/12 prices).
- Once a business becomes subject to the new laws, an employer will be required to automatically enrol an eligible jobholder as a member of the firm’s auto-enrolment scheme.
- A minimum of eight per cent of employees’ earnings will have to be paid into the scheme; this will be made up of an employer contribution of 3 per cent, an employee contribution of four per cent and tax relief of one per cent.
- An eligible jobholder will have the right to opt out of the scheme if he or she chooses For eligible jobholders who are auto-enrolled and do not opt out, the employer will be obliged to pay mandatory minimum contributions to a defined contribution (DC) scheme or offer a minimum level of benefits in a defined benefit (DB) scheme. By default, workers who have opted out will be automatically re-enrolled every three years.
- Currently there is no obligation to make employer contributions to an employee’s retirement savings (unless the contract of employment provides for it). However, for those companies employing at least five qualifying workers, you are obliged to have in place at least a stakeholder pension scheme for employees to join.
- The duty will not apply to employers with less than 30 employees until the end of the phasing-in programme in 2017.
How to prepare
This will have a huge impact on SMEs and the sooner they start to prepare planning strategies for this the better to avoid being stung when the new rules are enforced.
MLP Solicitors has prepared eight tips on how SMEs can prepare:
1. Don’t underestimate the importance of compliance. The new laws won’t impact smaller SMEs until 2017 but it’s important to take advice early and not wait until it’s too late. Failure to comply may result in fines of up to £10,000. Get your ducks in a row and start introducing plans to cope with the changes in your financial strategies now.
2. Employees may worry pension contributions will mean they receive less in their pay packet. Avoid unnecessary confusion by communicating your plans and timeline clearly to all staff.
3. Being a step ahead may help to lessen the blow of employee contributions, so consider creating a phasing-in period. By introducing a one per cent, two per cent and then three per cent contribution over the next three years would allow employees to get used to the idea of making contributions to their pensions, therefore lessening the shock of a big step up when auto-enrolment is enforced.
4. Employers could consider moving forward their staging dates and start paying pension contributions to demonstrate they are a responsible and proactive employer who cares for employees’ current and future interests. This will have a positive impact on morale and productivity
5. SMEs should think about a combined pension package – better pensions over and above auto enrolment with higher employer contributions for senior people. This will help retention, job satisfaction and morale. Start thinking about how to structure this now. These would sit next to auto enrolment pensions for, perhaps, junior staff.
6. Now that the default retirement age has been abolished, there is an opportunity to use the pension changes as a way to open up a dialogue with staff about intended retirement dates with a view to agreeing a date with employees.
7. Don’t forget to re-write or update your business policy on pensions. The pension reform may also mean contracts of employment may need to be reviewed or updated.
8. Seek advice from your professional support team – discuss your plans with legal employment experts, your accountants and financial planners. They will be able to provide clear direction and insight how to prepare for pension reform. Don’t leave it too late!
