Posted: Wed 3rd Feb 2016
Will Wynne, co-founder and managing director of Smart Pension, shares advice on how small business owners can select a pension scheme for their employees to comply with the government's auto-enrolment regulations.
The Public Accounts Committee's revelation last week that "the real test is still to come" in the battle to encourage more people to begin to save for their retirement, was possibly the most obvious statement we've heard in a while.
The government report revealed that while the on-boarding of large and medium-sized firms with experienced HR departments and dedicated finance staff to handle the process has been a success, the enrolment of 1.75m home and micro businesses is likely to be a bit more problematic
You don't say?
Many of these entrepreneurs and home-based companies are firmly focused on the running of their business. They may not even have a pension themselves, let alone have considered providing one for their employees.
Meanwhile some of the bigger pension providers have already priced themselves out of the market for small employers with a tight budget, so what are the key things entrepreneurs need to consider when researching a pension provider?
Eight key things to know when researching auto enrolment:
Up front set-up fee: These vary and range between free to Â£1,500. A fee attached does not mean extra support or that it is a more reliable scheme. Smart Pension and NEST are both still free to enrol.
Annual maintenance fees: You should avoid annual maintenance fees. This is often a fixed fee and can be anything up to Â£1,500 a year for a company or a per employee fee. Look out for schemes that are free to employers to set up and run ongoing.
Set-up time: This can vary from minutes to hours, days and weeks. It largely depends on the efficiency of the system and time taken to authenticate data. Check the small print as it should be clear how long the sign-up process is estimated to take and if official papers need to be submitted, meetings held or if the process can be simply completed online.
Payroll compatibility: Look out for schemes that offer data links via your existing accounting or payroll software, the free industry standard PAPDIS or pensionsync. It will take the pain out of the whole process.
Administration costs to employees: This is the annual fee taken from an individual employee's fund under administration. The government introduced a fee cap in April set at 0.75% per annum and some providers charge up to 20% a year per employee. Your employees won't like it.
Day-to-day management: Some schemes include employee assessment and letter generation for free. If they don't this legal requirement will be on you. This involves manually assessing all staff every payroll and creating the specific communications with employees. It is easy to get wrong. It's much simpler to choose a provider that does this automatically. Failure to comply with this could lead to a Â£400 fine.
Universal acceptance: Not all auto enrolment schemes guarantee to accept all types of employers or employees. Some advisers think some of the bigger players will withdraw from the small business scene quite soon. A lot of time can be wasted in application for schemes that simply won't accept you business or your employees. It's wise to check this before enrolling.
Pension quality: You want a pension that's fit for purpose and will be affordable and sustainable. Look out for the Defaqto rating. Defaqto is an independent research company that rates pensions on a scale of one to five stars. You can see Defaqto's auto enrolment ratings here. Also make sure they have high quality underlying funds.
Founders who want to find out their staging date (government mandated deadline) should use this calculator.