Smaller businesses are at a crossroads.  Pensions Auto Enrolment (AE) is fast approaching for SMEs and every organisation that employs at least one member of staff will need to take action, irrespective of size or turnover.

This raises a raft of questions for business owners:

  • How much will it cost?
  • How long will it take?
  • What actions are required?
  • Who needs to be involved?
  • When does AE come into effect?

There are benefits to planning ahead: getting the AE strategy and timing right will create an engaged and motivated workforce, driving up retention.

However, getting it wrong could affect the business financially – from fines to tying up senior personnel who should be focused elsewhere, as well as undermining employee morale.

Employers have a legal obligation to enrol eligible jobholders into a qualifying pension scheme – it is time to get the process started.

Auto-Enrolment – The Basics
The essence of AE is simple: a company must automatically enrol jobholders into a qualifying pension scheme and make contributions on their behalf to that scheme.  The minimum non-contributory employer rate starts at 2% but will rise to 8% over the next three years.

The scheme affects any employee:

  • Not already in a qualifying pension scheme
  • Aged between 22 and State Pension age
  • Earning more than a set threshold – £10,000 a year for 2015-2016
  • Working or ordinarily working in the UK.

Employees can opt out – for example older employees may have often already made their own pension arrangements, but there are specific criteria that must be met:

  • Government research suggests that around 12% of eligible employees will opt out
  • Companies must offer the opportunity for all eligible employees who have opted out to re-enrol every three years.

If an employee doesn’t contribute towards the pension the employer is expected to contribute the full minimum amount – up to 8% by 2018.

Take Action – But When?
From 2015 onwards, small businesses will need to start staging and companies need to determine their staging date as a priority to begin effective AE planning. But businesses have different staging dates – so it is essential to find out which date applies.

While until now the Pensions Regulator has essentially staged companies by size, with the largest going first, for the SME market this model is changing slightly.

This means many small businesses – even those with just two employees – will stage before larger businesses that were founded after April 2012.

  • The staging date is determined by the size of a company’s largest PAYE scheme on 1st April 2012
  • The PAYE reference can be found on a P6/P9 coding notice or on in the white payslip booklet P30BC.

This reference will enable a company to determine the staging date – and planning should start at least 12 months ahead.

The Practical Steps
Every employer will need to make sure that all eligible employees automatically become members of a qualifying pension scheme with a sufficient level of contribution.  This means the business must:

  • Complete workforce assessments
  • Ensure employees are provided with a qualifying scheme
  • Carry out the AE process
  • Facilitate any opt outs and employee refunds
  • Implement good record keeping to meet the Pension Regulator’s on-going requirements.

The good news is that AE administrative processes have been streamlined.  This eases some aspects of the burden but does not guarantee a smooth transition to AE.  Furthermore, organisations will require support in achieving AE and there is a growing concern that ‘capacity crunch’ could result in some organisations failing to find the help and expertise required to implement AE.

Timelines for AE are still challenging and organisations need to consider a number of issues to ensure they are prepared.

Understanding Costs
Planning ahead is vital for a number of reasons – not least determining, and minimising where possible, the overall cost to the business.

  1. Fines are a reality.  Those businesses failing to hit staging dates are now receiving significant regulatory fines – no business can afford to ignore AE.
  2. Pensions contributions.  The number of eligible job holders will clearly determine the business’ contribution investment.  With the contribution rising from 2% in 2015 to 8% in 2018, this is not an insignificant corporate cost.  In addition, even if some staff are not eligible they will still have a right to opt in or join a pension scheme; while those that initially opt out may opt in at a later date.  Understanding these permutations is key to determining the potential bottom line impact.
  3. Business focus: In small businesses, company directors and core company employees are likely to be involved in some aspects of the AE process such as determining the right pension provider.  Minimising the time taken is key to avoiding the distraction of key individuals from essential day to day and strategic activity.

Outsourcing AE activity to third party providers can minimise the impact on senior staff and avoid the risk of penalties for non-compliance.

Pension Scheme Qualification
Smaller businesses may have an existing pension scheme in place for workers – but that does not mean it can necessarily support AE.

An AE qualifying scheme:


  • Provide a minimum rate at which benefits will build up or minimum contributions must be made.

Must not:

  • Impose barriers to joining the scheme, such as probationary periods or age limits for members
  • Require staff to make an active choice to join or take other action prior to joining
  • Require the provision of additional information in order to stay in the scheme.

If the existing scheme qualifies, the company could enrol all eligible jobholders into this scheme.  If not, the business may need to run more than one scheme to cover all staff.

A good payroll provider should be able to provide some guidance and point the business towards a trusted IFA or pensions provider with an AE track record.

Communication is Key
Successful AE relies on great communication.  All communications with employees must be legally compliant and meet specific requirements laid out by the Pensions Regulator:

  • All workers must be informed in writing (by traditional letter or email) about the changes and the timescales involved
  • The information must be specific to the individual – a company cannot send a blanket communication to all employees
  • Email is more cost effective – but it is important to consider employees in different job roles (do those working in the field, in retail or on the shop floor have a relevant email address, for example?)

Well thought through employee communication will help build a committed and loyal workforce.  The duty is on the employer to provide the right information to the right individual, at the right time.

Outsource Services
The great news is that a significant amount of the AE burden can be outsourced to trusted third parties.  Key tasks that can be handled by a trusted payroll provider in conjunction with a financial advisor partner include:

  • Initial workforce assessment – to determine who needs to be enrolled
  • Verifying staging date – and creating an action plan to meet the timeline
  • Choosing and applying for a qualifying pension scheme
  • Ensuring payroll staff understand the new AE requirements – including worker types, pension scheme design and communication
  • Enrolling staff through the payroll – including staff communication templates
  • Registration with the Pension Regulator to meet the declaration of compliance process.

The right help and guidance can ensure the business meets automatic key enrolment dates.

After Staging
There are a number of essential tasks that must be carried out after staging:

  • Register with The Pension Regulator – to demonstrate that AE has been achieved – use the Government Gateway User ID (already used for tax and VAT returns) to complete the declaration
  • Retain good records – with the volume of new pensions data keeping accurate records should be a priority for small businesses (errors can be costly and difficult to unravel)
  • As with real-time PAYE, auto enrolment activity records must be retained and include information sent to the pension provider, and copies of any opt-out requests
  • All correspondence should be recorded and held for at least six years
  • The scheme will need to be re-registered every three years to stay compliant.

AE demands a payroll services provider with both technical ability and in-depth understanding of pension requirements.

Getting it Right
AE may be daunting for SMEs but great preparation will ensure that enrolment goes smoothly and opt outs are minimised.  The benefits of planning ahead and being prepared are clear:

  • Minimise time spent by key senior personnel that could distract from essential business development
  • Ensure the right third party skills and expertise are available in time – and avoid the capacity crunch
  • Provide staff with an essential retirement plan – as the economy continues to grow, pensions will be an important component of an overall employee retention strategy
  • Meet the Pension Regulator’s deadline – and avoid expensive fines.

AE is a reality – it cannot be ignored.  Companies need to get ahead of the game now.

This information is produced in collaboration with Bond Payroll Services.  Click here to find out more.