Costs: Part 1 – Pensions - It’s automatic

We are now currently mid-way through the biggest shake-up of pensions in a generation; and for nurseries, this means having to take full responsibility for providing employee pensions for the first time.

As many employers now grappling with this issue are aware, understanding how auto-enrolment works and absorbing the costs to the business is no mean feat.

Finding a scheme that meets the ‘qualifying’ criteria for auto-enrolment is just the start. NDNA chief executive Purnima Tanuku points out additional difficulties. ‘For nursery employers where many employees tend to receive relatively low pay, it can prove difficult to find a willing commercial pension provider,’ she says.

‘We would recommend that nurseries share information on pension providers and their own experiences, particularly through their local networks. Obviously they should check the references of pension providers before entering into contracts with them and try to speak to customers who are already working with them.’

Ms Tanuku adds, ‘Getting the right payroll and pension software in place is crucial.’

‘What small businesses, like nurseries, need is a good workplace pension for their workers, and a cost-effective, easy-to-manage way to enrol and manage the ongoing auto-enrolment requirement,’ says Julia Royle, a spokeswoman for auto-enrolment comparison tool Husky Finance.

Coupled with all this, as has been evidenced in a flurry of recent headlines, employers should beware opportunist pension providers setting up schemes that offer little protection should they go bust.

CHOOSING A MODEL

Leah Clarke is co-owner of Barney Bear’s Nursery, which has four settings in East London and Essex. She runs the business with her partner Sarah Hawkins and employs 69 staff.

While Mrs Clarke says she had kept up to date with coverage in the media about the introduction of pension auto-enrolment – and had attended a free seminar run by Barclays on the subject – it was still a shock when her staging letter dropped through the letter box.

‘When we received the timescale for enrolment, it was a bit scary,’ she says. ‘As a business we are focused on providing a great environment for staff, recruiting the best and retaining them. Sustainability and the affordability of our fees to our parents is also key. So the introduction of pension auto-enrolment was a big issue.’

Mrs Clarke says the staging letter was accompanied by little information, so she embarked on a nine-month mission to research the options, starting with the Government-run pension scheme NEST.

‘My first feeling when I looked at this was that it wasn’t right for us. Operating the scheme efficiently would have meant a lot of extra work, and we would also have had to employ an admin person. At that point I panicked. I decided to network with other nurseries to gather more information.’

Networking led Mrs Clarke to find out about the service offered by Husky Finance. ‘I would have had to research all the pension companies out there,’ she says. ‘As it was, Husky were able to send me a spreadsheet of all the best options, and I was able to choose a package from Legal & General that best suited my staff and budget. Husky linked the scheme to our payroll and set up a database, which we manage.’

Under this scheme, staff earnings, age and gender have been processed to see if they are eligible for auto-enrolment. Each month after the payroll is run, eligible employees’ pension contributions are stated on their payslips and sent to the pension provider, while employees will automatically receive a letter when they become eligible to enrol for a pension. Ms Clarke says she feels in control of the process and able to answer staff queries. She reports the monthly cost is currently less than £100, operating on a sliding scale according to the number of her employees. The nursery group’s contributions to Legal & General are around £550 a month on top.

She adds, ‘Providing a good pension scheme has meant that we have had to raise our fees slightly. However, we know that happy staff make for happy parents at the end of the day.’

When it comes to linking payroll with a workplace pension, the Pensions Regulator advises that those using payroll software need to find out how many automatic enrolment tasks it can carry out. It says, ‘Speak to the person who deals with your payroll to make sure your software, or other payroll processes you have, can perform set tasks.’ These include generating and sending the correct staff data – including information on pension contributions – to the pension provider in the format required. The regulator adds that some pension providers can carry these tasks out for you.

FURTHER INFORMATION

General

www.thepensionsregulator.gov.uk/docs/the-essential-guide-for-automatic-enrolment.pdf

www.thepensionsregulator.gov.uk/docs/detailed-guidance-1.pdf

www.pensionsadvisoryservice.org.uk/automatic-enrolment

www.gov.uk/workplace-pensions-employers

NDNA has put together a factsheet providing a step-by-step guide to implementing pension auto-enrolment, www.ndna.org.uk/factsheets

Which scheme?

Husky Finance provides a free workplace pension shortlist tool tailored to small businesses, https://huskyfinance.com/get-started

www.pensionqualitymark.org.uk/pqmreadyschemes

Details of the master trust schemes meeting the master trust assurance framework, which was set up with the Institute of Chartered Accountants, are available at http://bit.ly/1Phbkz2

PENSIONS NEED TO KNOW

What’s happening?

Every employer must automatically enrol their employees into a pension scheme if they are between 22 and the state pension age, earn more £10,000 per year and work in the UK. The amount an employer contributes must be at least 1 per cent of an employee’s ‘qualifying earnings’ (this could rise to 3 per cent in 2019). For a definition of qualifying earnings see the Pensions Regulator’s website. Those under 22 can also opt to join a pension scheme but an employer contribution is not mandatory.

When is this happening?

The scheme has rolled out gradually since 2012 and is now under way for small businesses, so you may have already received a letter from the regulator stating your date. You can check it here: www.thepensionsregulator.gov.uk/employers/staging-date.aspx

An employer can bring forward their staging date to align with the start of the financial year, if they wish, while some small employers can choose to delay their staging date until August 2017.

Do I need to set up a new scheme?

Not necessarily. Existing workplace pension schemes can also be modified to meet the qualifying criteria. If you intend using your existing pension arrangements, check with your current provider to see if it is already compliant.

What kind of schemes exist?

Pension schemes may be managed by the company and its trustees. These are sometimes known as occupational schemes, and include defined benefit and defined contribution. Contract-based schemes are workplace schemes that are outsourced to a third-party provider.

The Pensions Regulator is responsible for monitoring the running and management of all workplace schemes, while the more powerful Financial Conduct Authority regulates contract-based schemes.

Master trust schemes, which fall under the occupational bracket, are where a pension provider manages a centralised workplace pensions fund for several companies at the same time, and can be attractive to small businesses because of relatively easy set-up. However, many of these schemes emerged on the back of auto-enrolment and concerns have been raised that it is too easy for people or companies without the necessary experience or qualifications to set one up.

To help fill the regulatory gap, some voluntary frameworks are being introduced, such as the master trust assurance framework – but this does not consider the viability of the provider (i.e. whether they will be there by the time you need a pension). Among the various master trusts, the not-for-profit The People’s Pension is the largest in the market by fund size. It charges employers, but it allows transfers. The government scheme NEST (National Employment Savings Trust) is the second-largest. It is free for employers, but charges for employees are high. There is also a cap on contributions and transfers out.

Is there a formal timeframe?

For some parts of the process, yes. The Pensions Regulator provides full details. Declaring compliance has to happen within five months after the staging date. It also suggests choosing a pension scheme six months before your staging date.