Since the Pensions Act 2008 the law on workplace pensions has changed. Now, every employer must put staff into a pension scheme and contribute towards it. It's called automatic enrolment, but are you ready for it and can you afford to pay for it?
For big companies, automatic enrolment and workplace pensions are usually swallowed up and dealt with by their large administration and finance departments, but what about for the small businesses funding this with bad credit?
For small employers (i.e. those with less than 50 employees) this can be an enormous administrative task and an additional financial strain.
What Happens When You Don't Comply?
The Pensions Regulator has already issued 15,073 fines for breaches or failure to comply with the new automatic enrolment regulations. Interestingly, these fines were all for companies with more than 50 employees, who also benefit from large finance and HR departments, well used to processing large amounts of payments and able to absorb the costs of setting up such schemes.
How then, will this affect the vast majority of smaller businesses, many already with bad credit and funding gaps, who are now expected to have their automatic enrolment pension schemes set up?
The answer is clearly that many will not be able to cope, at least not without some sort of external financial input.
What Is The Workplace Pension Scheme and Automatic Enrolment?
So with that being said, how will the workplace pension scheme affect your company and what are the timescales of it all?
By 2018 all employers must provide a workplace pension scheme (automatic enrolment). Even if you only employ one person, you now have a legal duty to provide and contribute to a workplace pension.
However, there are certain situations where you don't have to automatically enrol your employees:
- They are in their 'notice of leaving' perio
- You've already provided them with a work pension
- You've given a one-off payment from your workplace pension that's closed (i.e. a winding up sum) and they rejoin within 12 months of being paid
- They are from another EU member state and in a cross-border pension scheme
- They are in a limited liability partnership
- They are a director without an employment contract.
However in most cases, if they want to join, they still can, even if you don't have to automatically enrol them.
There are also situations where you don't need to contribute to their pension when your employees have a low income:
- Less than £490 per month or £113 per week or;
- Less than £452 per 4 weeks.
There are also two ways in which you can delay automatically enrolling by up to three months; if they have chosen a 'defined benefit' pension; or a 'hybrid' (a mix of defined benefit and defined contribution pension).
When Does Enrolment Start For New Employers and Start-Ups?
There is a high probability that, as an employer, you will have already set up your workplace pension and are also well underway to implementing automatic enrolment.
However, if you are a new employer or a start-up then the date when you will need have your automatic enrolment in place will vary:
- If you are were a new employer setting up from April 2012 to March 2013 then you need to have automatic enrolment set-up by 1 May 2017.
- For new employers setting up between April 2013 to March 2014 then automatic enrolment must be completed by 1 July 2017.
- For new employers setting up between April 2014 to March 2015 then automatic enrolment must be completed by 1 August 2017.
- For new employers setting up between April 2015 to Dec 2015 then automatic enrolment must be completed by 1 October 2017.
- For new employers setting up between January 2016 to September 2016 then automatic enrolment must be completed by 1 November 2017.
- For new employers setting up between October 2016 to June 2017 then automatic enrolment must be completed by 1 January 2018.
- For new employers setting up between July 2017 to September 2017 then automatic enrolment must be completed by 1 February 2018.
- Any new employer setting up from October 2017 will have an immediate duty to enrol their staff.
How Much Will Automatic Enrolment Cost My Business?
The costs for setting up your pension scheme can vary. Although there are plenty of pensions schemes available for small businesses, some of them have set-up charges and then some might also charge you monthly for managing it.
The main costs of automatic enrolment will be the monthly contribution charges. While the amount some employers and employees might contribute will vary you will still have to make the minimum contributions towards the scheme.
The amount you MUST contribute to your pension scheme is 2% of employee earnings which means you, the employer, must pay at least 1%.
These minimum contributions though will increase over time.
For instance between 6th April 2018 and 5th April 2019 it will increase to 5% of which the employer must contribute at least 2%. From 6th April 2019 onwards this will increase to 8% and minimum employer contributions will be set at 3%.
Which makes automatic enrolment a potentially expensive exercise for many employers.
If you have twenty employees all earning £35,000 then your annual pension contributions are going to be £7,000. But in three years time that figure is going to rise to a pretty significant £21,000.
And remember, this isn't a bill you can treat like any other supplier or creditor invoice. This is a monthly cost that must be paid on time, every month, without fail. If you don't you are likely to be fined by the pensions regulator as has already happened to those bigger companies we looked at earlier.
How Will Small Businesses Afford This Extra Cost?
Obviously any small business, especially those funding with bad credit, will need finance (of one type or another) in order to cope with the additional fiscal demands of making pension contributions.
Will the business's payroll and finances be able to cope with the burden?
It can mean companies have to budget even more than they already are doing in order to afford it, and this can mean cutbacks and savings elsewhere.
The Chairman of the Federation of Small Businesses agrees:
"The adjustment for automatic enrolment into pensions considerably increase the cost burdens facing members. The UK's small businesses face very different challenges when enrolling their staff into a workplace pension compared to large businesses...they are not pension experts and will be reliant on clear guidance and support to comply with the requirements."
So while bigger companies can afford expensive set-up fees which are likely to range from £500 to £2000, smaller ones cannot and are going to be reliant on the free, but ultimately inflexible NEST (National Employment Savings Trust) pension scheme, which doesn't allow pensions to be either transferred in or out.
Already small businesses have to worry over rising costs throughout their businesses:
- Fuel costs
- Rising utility bills
- Increased insurance premiums
- Business rates
- Rental costs.
So having to deal with another expensive overhead can quickly become an administrative nightmare for some.
Clearly not complying isn't an option to take, with the potentially large fines associated with any transgressions. As these fines are racked up daily, they can quickly get out of hand for any business already struggling to break even.
Finance Options For Funding Small Business Pension Schemes
While borrowing from Peter to pay Paul isn't ultimately going to be a sustainable business practice. It can certainly give you the breathing room with which to find a better solution.
Even small business with only a handful of employees are quickly going to find that regular payments made into pension funds, will mean less money elsewhere in the business. The first thing this will affect will be your cash flow.
Alternative lenders have lead the way in using technology to assess creditworthiness even for those with bad credit and business loan options are still available.
While having bad credit limits your ability to obtain business loans from the high street banks, there's still a huge choice available for businesses looking for loans.
The alternative finance industry has been growing at a much sharper rate than the high street. It isn't only because of the number of businesses with bad credit applying, it's also businesses with good credit taking advantage of the flexible finance solutions being made available.
Two products that might be helpful in raising additional finance to boost your cash flow might be:
Unsecured business loan - You borrow a fixed lump sum and agree to pay it back over an agreed period. It isn't secured against any stock, building or asset you may have. Many unsecured loans are taken out by companies that cannot get a traditional loan from the bank.
Bad credit loans - Many lenders are now offering this as a specific category. For businesses with poor or less than perfect credit scores - alongside the more pragmatic form of credit scoring, preferred by alternative lenders - loans are available for exactly those sort of companies that don't have a great credit score but do have a good balance sheet.
Don’t let bad credit risk funding for your small business. A poor credit history doesn't have hold you or your business back benefitting from a business loan that can help with your cash flow and make it easier to incorporate the cost of automatic enrolment in your business.