Hopefully most firms approaching their auto-enrolment start date understand by now that they need to budget for the payment of employer pension contributions.
What they may not realise is that they could also face administration charges from their pension provider, unless they use the Government-sponsored National Employment Savings Trust (Nest) scheme.
Auto-enrolment is being phased in gradually over six years, starting with the very biggest employers in 2012, reaching employers of a single employee, such as nannies and carers, in 2017 and 2018. So while 60,000 employers have already reached their ‘staging date’, representing roughly half of the 10 million or so workers that will eventually be auto-enrolled, there are still almost 1.8 million more employers to go.
But with more than 500,000 employers required to auto-enrol their staff into a pension scheme within the next 12 months alone, providers are starting to get picky about who they deal with.
Schemes with fewer members are less profitable to pension providers than big schemes. In 2016 the auto-enrolment timetable reaches firms with 30 employees or less, and as the size of companies hitting their auto-enrolment deadline gets smaller, many providers are putting up their charges, levying fees not just on contributions, but also through administration charges to employers. Some are even turning away new business from small employers reaching auto-enrolment.
The reasons for these new charges are economic. Pension providers are not allowed to charge employees an annual management charge equivalent to more than 0.75 per cent of their fund value each year, which, given the low minimum contributions required by the auto-enrolment regulations, leaves them with such a small margin that they cannot make a profit on fund-based charges alone.
So almost all pension providers are levying an additional annual or monthly administration fee for employers. Some are also levying a one-off fee for the extra work it takes them to set up the scheme in the first year. Nest has a public service obligation to accept all comers, and is therefore not levying employer admin charges or turning away customers.
These pension provider charges are not the only new charges that employers approaching their auto-enrolment deadline may have to deal with. Some payroll providers are also increasing their charges for dealing with auto-enrolment, on the basis that they have to collect more data and deliver it to the pension provider in a particular format.
With fines looming for employers that do not meet their auto-enrolment obligations on time, some are finding they have little alternative but to swallow this extra cost. This is just one of many reasons why it makes sense for employers and those advising them to start preparing for auto-enrolment many months in advance of the staging date.
Auto-enrolment is not just about paying contributions – it also places a number of ongoing administrative burdens on employers, such as assessing workers for eligibility, maintaining records and sending out communications. Pension providers and most payroll providers will be able to do this for small employers, but firms should ensure they are not paying for the same service twice.
Just because an employer already has a scheme in place for some staff does not mean they can relax. Some employers that already have an existing pension provider for senior staff have found that provider is refusing to allow the rest of the workforce into the scheme. In this situation employers have actually had to change to a new scheme altogether.
Some pension providers are even ‘sacking’ their customers where an existing scheme does not meet the strict criteria in place for auto-enrolment, for example where it has an annual management charge of more than 0.75 per cent. A scheme could be profitable for a pension provider on a 1 per cent charge, but if the employer then needs the charges to be 0.75 per cent, they may find the provider shows them the door. In this situation, the employer will have to set up a new scheme.
All these issues highlight the importance of forward planning when it comes to auto-enrolment. The Pensions Regulator recommends employers start their planning up to 12 months ahead of their staging date. Smaller employers will probably need less time, but they should be aware that leaving it to the last minute is only going to create problems, giving them less scope to minimise the extra costs they will encounter on the way.
For more information on payroll, pensions and more click the image below
John Greenwood is the author of The Financial Times Guide to Pensions and Wealth in in Retirement.