Even the smallest employers in Britain — those with just one worker — will have to set up a workplace pension for staff by February 1 next year.
The vast majority of employers have already signed up to Britain’s pensions revolution, which forces bosses for the first time to pay money into a pension for their workers. The process began in 2012, with just 800,000, the country’s smallest and newest employers, left to join.
It is a fabulous idea to get workers saving for their retirement but the reality for bosses — and I am one — is a bit of a nightmare. I run a consumer financial website called Boring Money and have seven full-time staff. I also separately employ and manage payroll for a nanny. So I’m on the hook twice, exactly the sort of extra administrative headache that every busy working mother wants in her life.
I’m in two minds about the process, known as automatic enrolment. Professionally I’ve listened to the pensions minister, Richard Harrington, and his predecessors wax lyrical about how this will help our savings crisis. And they’re right.
But for a small business owner struggling to juggle the demands of staff, work and family life, it’s just another thing on that painful and ever-expanding to-do list. I’ve found it daunting — and I’ve worked in the industry for 20 years. So here are some experiences that I hope will help others.
Who have I chosen for my nanny?
First, you need to know which firms will actually deal with us minnows, as some pension firms just like dealing with the big boys.
I have not found it easy to choose a provider. It largely comes down to cost, hassle and the level of interest shown by your staff. If your team is not that interested, Nest is the workplace pension scheme set up by the government. I see it as the safe path of least resistance. It is also free for me, as an employer, and can be done entirely online. If you have just a couple of employees, it feels like a bit of a no-brainer.
I’m therefore setting up my nanny’s scheme with Nest. The group I use to do her payroll, Nannytax, will look after all of this for me for an additional £60 a year. Done.
From April 1, Nest will let workers transfer their other pension schemes into this pot and the cap, currently £4,900 a year, will be scrapped.
And for my team?
If you want to take this opportunity to communicate to your team just how beneficial it is to have a pension scheme, I think there are more interesting options than Nest.
My guys at Boring Money are generally aged under 40, savvy about finance and will want a say in where their money goes. So I chose a shortlist of three providers and put it to the vote. Here’s the email I sent them summing up the choices as I see them:
1 Aviva. Solid, OK. Default investment fund for our age bracket has done 21.8% over one year and 32.6% over three years. You will pay 0.75% a year in fees. I pay about £400 set-up fee.
2 True Potential. No set-up cost for me. 0.71% charge. This will be the best digital solution and you will be able to top up savings here too. Choice of about five default funds so you have more flexibility (and an extra 10 you can choose from) — there will be lots of different performances depending on how much you ”risk it up”.
3 The People’s Pension. £600 set-up fee for me, 0.5% ongoing charge for you. Suspect this will be a bit dull but efficient. It’s the cheapest option for you. The “up to 85% shares option global equity high/medium risk fund” did 20.5% over one year and 34% over three years. I think from adviser feedback that this will be efficient to run.
I was surprised that the consensus was to go with Aviva, which won five out of seven votes.
One of my researchers said: “In the short term I don’t see much between them. In the (very?) long term, I don’t want to pick a provider that’s likely to balls up a transfer. Experience with Aviva in the past has always been positive.”
Interestingly, brand and perceived solidity, rather than charges, won out.
The sting in the tail
It’s one thing choosing your provider. It’s another thing making this happen and getting the pension bit of the equation to talk to Boring Money’s payroll system. A hairdresser from Somerset, who contacted Boring Money about her automatic enrolment experience, said she is struggling.
Enza Popham, 48, said she thought Nest was the best option for her but was concerned that she would have to enter all sorts of details manually every month because the government’s free software does not automate the process.
HMRC provides a free piece of software designed to help employers deliver payroll and, so far, there is no automatic enrolment functionality within this tool. It is free to use, but the lack of any automation means that it will take employers a lot longer to complete the auto enrolment tasks than it will those using commercial payroll providers.
For our payroll we use Sage, which automatically produces the files we need to send to our pension provider and HMRC. At this stage, however, it’s still a manual process to send this file to the pension guys, so there’s room for improvement.
It is all quite small beer at the moment. I have to pay just 1% of my workers’ qualifying earnings — that is, the amount they earn before tax between £5,824 and £43,000. These figures rise to £5,876 and £45,000 on April 1.
But my contribution, and theirs, will ratchet up quickly. From April 2019, bosses such as me will pay 3% of staff qualifying earnings into this pension and staff will pay in 4% plus tax relief worth a further 1% — a total of 8%.
For example, a company with, say, 10 staff earning £35,000 a year on average, that would be approximately an extra £730 on the payroll costs every month from April 2019. Ouch. I don’t think many small employers understand enough about the costs to have factored this in to their three-year plan.
Any worker who earns less than £10,000 does not have to be automatically enrolled.
And what about employees? Richard Merrin runs a London-based PR firm called Spreckley with 20 employees and anticipates many will choose to opt out.
“We are rolling out automatic enrolment, but I am yet to be convinced that our employees — who have an average age of 28 and are saddled with student debt and the costs of living in London — are even going to look at this as an option. Additionally, it could not come at a worse time for a small business in the capital, given the expected hikes in business rates.”
Small business owners are feeling the pinch. Once again it feels as though the (salaried) powers that be have implemented a grand plan that puts a ridiculous administrative burden on working parents, start-ups and small business owners who lack big departments to manage this. Not only are we their VAT collectors, we’re now pension administrators too. Fab.
This article first appeared in The Times on 19th March 2017.