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Plan now for pension auto-enrolment, SMEs warned

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Smaller firms should think ahead to avoid unnecessary costs, says CIPD

Many small and medium sized businesses (SMEs) set to adopt pension auto-enrolment next year need to begin preparations now, the CIPD has warned.

While many large organisations have successfully completed the process, smaller companies will have to overcome different challenges around limited resources and expertise, as well as the cost of implementing the reforms, the institute said.

The CIPD’s report, ‘Pensions automatic enrolment: the lessons for small and medium-sized employers’, has found that the new system of workplace pensions is likely to be more complicated for SMEs, with many fearing that they will struggle to meet the cost of administration and employer contributions. 

A CIPD survey of 400 private sector organisations found that a quarter of SMEs anticipated they would need to reduce pay growth, while a fifth expected to freeze pay to absorb the costs associated with auto-enrolment. A quarter also predicted a knock-on effect for other elements of the pay package, such as cuts to bonuses or overtime.

But SMEs could avoid having to resort to such drastic measures if they started planning now, said the institute. To support SMEs with staging dates coming up next year, the report includes guidance on how companies can take a more strategic approach to auto-enrolment and effectively integrate it into existing HR and reward strategies. 

Pension auto-enrolment was launched by the government in 2012, and has so far been rolled out to larger firms. Organisations are obliged to sign up qualifying employees – those aged 22 and over (but under state pension age), who earn more than £9,940 per year and are not already in a workplace pension scheme.

Companies surveyed by the CIPD which had already implemented auto-enrolment reported that average contributions from employees and employers were high, at around 4 per cent and 6 per cent of employee salary respectively. This is more than the scheme’s initial minimum requirements of a 1 per cent contribution from employer and employee. 

Opt-out rates have also remained relatively low – at or below 10 per cent, according to the research.

The CIPD’s performance and reward adviser, Charles Cotton, said that while large companies tended to have long established traditions of paying into employee pensions, for many SMEs this would their “first foray” into the world of pensions.

“They are unlikely to have access to the same levels of expertise or support networks as their larger counterparts and, as our survey reveals, many fear that it could be a costly exercise for their business,” he explained.

“However, with early planning and preparation SMEs can overcome any challenges and realise the opportunity that auto-enrolment offers,” Cotton continued.

“With some 30,000 employers due to go through the auto-enrolment process between April and July 2014, demand for professional advice and guidance from pension advisers and providers is going to be high. We would therefore urge SMEs to act now to guarantee access to the best advice, to negotiate the best rates and secure the most appropriate pension scheme for their business.” 

Meanwhile, chancellor George Osborne announced last week that young people entering the workplace will have to wait until they are 70-years-old before they can retire on a state pension.

His Autumn Statement outlined plans to increase the state pension age to 68 in the mid-2030s, 69 in the late-2040s and 70 by the 2060s. The chancellor said that the age would vary according to average life expectancy, so that people spent no more than one-third of their adult life drawing a pension.

*The CIPD has also produced a free podcast, Pension auto-enrolment: the lessons for SMEs


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