Are SMEs heading for an auto-enrolment pensions provider crunch?
Auto-enrolment looms for small companies yet many are dreading the prospect as traditional pension providers become choosy. But there are ways to overcome this impasse
For large employers, staging for auto-enrolment has already been consigned to a slightly unpleasant but increasingly distant memory. But for smaller businesses, the work is just beginning. The Pensions Regulator forecasts that, between April and September this year, 27,400 organisations will be staging for auto-enrolment, compared with the 5,431 that did so between July 2012 and December 2013.
To put that into greater perspective, Jamie Jenkins, head of workplace strategy at pensions provider Standard Life, says the industry has been setting up defined contribution schemes at an average rate of one every three hours. That will increase to one every six minutes this summer.
Although it remains unclear whether these increases in the volumes of businesses auto-enrolling in the months ahead will create a ‘capacity crunch’, where the system will struggle to cope with the volume of demand, one thing is clear: we are entering uncharted waters.
Naturally SMEs tend to have less awareness of auto-enrolment issues than larger corporates. Many don’t have an HR department, and some have not previously offered any kind of pension scheme.
Early preparation is key, but there’s another issue smaller organisations must consider: there is no guarantee the first pension provider they approach will take them on, even if they have an existing pension scheme with them.
According to Garry Crackle, sales and implementation manager at Source Pensions, the traditional providers are “cherry-picking” new schemes. “They are not necessarily geared to dealing with smaller companies,” he says. “A number have indicated they will be monitoring the market and may be forced to close their doors to auto-enrolment later this year or next year if they don’t have the capacity.”
There’s also a risk that advisers could start declining business if they become over-stretched, which could cause a big problem for SMEs. Although it can be possible to take suitable advice from an accountant or payroll provider, independent financial advisers (IFAs) or employee benefit consultants tend to be best placed to help. The key is to establish that they already have experience in handling auto-enrolment cases.
Jason Wouhra, director and company secretary of Asian food producer East End Foods, says he found the assistance of IFA Webb Holton invaluable ahead of his company’s February staging date. Furthermore, in his capacity as chairman of the West Midlands branch of the Institute of Directors he can’t recall coming across another SME that hasn’t used an intermediary.
“SMEs don’t have the economies of scale to set up their own departments like large corporates and their managements are often thinly spread,” he says. “So, bearing in mind the time constraints and complexity involved, it’s essential they get support from a professional adviser. Without one I would have struggled to have pulled together the right people in the business.”
But before small business owners start having panic attacks, there are some recent developments that are making it easier for SMEs to auto-enrol. The payroll industry, which was previously preoccupied with the implementation of Real Time Information (RTI), has become much more supportive. In addition, more sophisticated middleware has become available and providers such as Standard Life and NOW: Pensions have produced online formats that enable pension schemes to be set up in minutes.
Intermediaries have also produced auto-enrolment packages aimed at SMEs. For example, last October Lorica Employee Benefits launched its Littleblue solution to engage employees through an online hub and streamline the auto-enrolment process without advisory support; and this January Jelf Employee Benefits launched Jelf AEase, a streamlined and affordable consultancy service aimed at employers with fewer than 150 staff.
Nevertheless, businesses should start to prepare at least six to 12 months before their staging dates. Being able to set up a scheme quickly online is all very well but this was never the most time-consuming part of the process. Obtaining and cleansing employee data has historically taken far longer.
Jamie Clark, business development manager at Scottish Life, explains: “We’ve seen people on systems or spreadsheets who’ve moved address or died five years ago and, even with people actually on payroll, you get missing digits on NI numbers and decimal points wrong on salaries.”
Employers also still have to carry out all the required communications processes, consider all the legal implications and ensure that their auto-enrolment arrangements dovetail with payroll.
“Some payroll providers have unusual cycles for sending information to pension providers, which may mean that employers have to change the way payroll works so that it fits neatly with auto-enrolment regulations,” explains Helen Buchanan, managing director of distribution and marketing, corporate division, at Legal & General. “They should realise that they may need to make changes to payroll they might not have anticipated.”
Businesses with between 50 and 249 employees can be fined £2,500 a day for failing to comply with auto-enrolment requirements. But there is no need for anyone who already has fewer than six months to go to their staging date to panic. At the time of writing The Pensions Regulator has yet to fine anyone and is likely to give more time to firms that look as though they are trying to comply.
Furthermore, in practice many businesses have managed to complete the entire auto-enrolment process in well under six months. WorldOne, a data research company for the pharma industry, had expected its staging date to be in July 2014 because it has 58 employees. However, it eventually discovered its date was eight months earlier, in November 2013 because HMRC had acquired the relevant data at a time when the company had many more employees on the payroll.
Because correspondence had gone missing, WorldOne did not learn the news until September 2013, leaving it only two months to prepare. Scottish Widows, with which it had an existing pension scheme, wouldn’t take it on because of the short window and small size of scheme but, after enlisting the help of Lorica Employee Benefits, a scheme was established with The People’s Pension within the deadline.
“We would have struggled without Lorica,” says HR director Jackie Scarfe. “They gave it all a timeframe, provided us with draft communications and negotiated with The People’s Pension after selecting it from other options. It really helped that we are with Sage and used its newest payroll model, which dovetails payroll with auto-enrolment.”
Equally reassuring is the fact that NOW: Pensions reports that those businesses it is signing up which haven’t given a thought to auto-enrolment are on average managing to complete the whole process in a month, although it does demand dedication. That said, businesses that leave it to the last minute should be aware that they may well have to pay advisers extra on their fees.
“We are commonly helping businesses who have reached staging or are within a couple of weeks of it,” says Jon Baker, head of financial services marketing at Jelf Employee Benefits. “But,” he warns, “if you are right on staging date it could cost you half as much again.”