New laws require businesses to offer pensions in the workplace from October this year, and this means a looming extra cost for employers in the form of contributions and administration.
The impact will be huge.
Within five years everyone on and with a payroll will be contributing towards a retirement fund, painful thought it will be for many struggling firms.
The changes are supposed to deal with the so-called ‘pension timebomb’ caused by our ageing population, something that is certainly scary, whatever your view on who should paying to defuse it.
Our state pension operates on a pay as you go basis - effectively an unfunded promise to retired people paid for on an ongoing basis by people in work through taxes and national insurance.
Over the years, there have been enough workers to cover the cost. But in a perfect storm of problems, people are now having fewer children just as medical advances ensure that the baby boom generation lives longer. In addition, a vast proportion of the population has no pension provision other than the basic state offering to look forward to anyway.
In 1900, there were 10 people of working age for every one of retirement age. Today there are just 4 people toiling away. By 2050, the forecast is for only 2 people of working age for each retired person.
The pension changes will be phased in between this year and 2018, depending on payroll size, which does mean there is time for small and medium sized firms to start planning.
Employees will automatically become members of a qualifying workplace pension scheme, or alternatively, the new National Employment Savings Trust (NEST).
At the time that an employer is automatically enrolled, both employer and eligible employees will have to start making contributions.
Only employers with over 30,000 staff will be forced by law to offer their workers a company pension scheme in 2012.
However, by next year any employer with more than 350 staff will be obliged to set up and contribute into a workplace plan for its employees.
And between 2014 and 2017, those employers with less than 350 staff will be subject to the same rules.
The contributions are also being phased in. Initial contributions will be 2%, with at least 1% from the employer and potentially 1% from the employee.
Thereafter contributions will rise to 5%, with a minimum employer payment of 2% and a potential employee payment of 3%.
Finally, from October 2018 the minimum total contribution will equal 8% with a minimum employer contribution of 3% and a potential employee contribution of 5% (4% after tax relief).
These percentage contributions will be based on qualifying band earnings – probably between £5,564 and £39,853 per annum.
Eligible workers are all employees aged between 22 and state pension age. Contributions will have to be against total salary within band earnings, which may fluctuate to reflect overtime and bonuses.
Individuals can opt out of the new regime by taking affirmative action, but will effectively lose the opportunity for compulsory employer and employee contributions if they do. They will automatically be opted back in every 3 years.
NEST is designed to work alongside existing pension provision offered by commercial providers, but is aimed at low to middle income employees, offering a simplified pension solution. It may be the best bet for small businesses.
Given the low cost of NEST and the requirement to capture earnings on a variable basis, it is likely anyway that for many smaller employers with low salaried employees, NEST may become the scheme of choice, rather than an existing commercial arrangement.
For other employers, NEST may run alongside existing arrangements. Alternatively, certain employers may meet the relevant obligations required of the new regime and as such, NEST will not be applicable to their staff.
What is very clear is that the changes need to be communicated to employers and employees. Whilst individual companies may not be staged for several years, planning is needed now to allow efficient implementation and maintain budget control.
Employers need to consider which type of scheme or schemes best suits their needs – irrespective of whether they employ one person or many thousands of employees.
Mike Parkinson is a senior partner at London accountancy firm Barnes Roffe LLP, which specialises in helping small and medium sized businesses. He has more than 22 years of experience working with the hotel, retail and service sectors in the Greater London area. He is based in Uxbridge.