Compulsory Workplace Pensions

The requirement for all employers to provide pensions for their employees will start to be phased in from October 2012. Initially only those employers with over 250 employees will be required to introduce schemes. Employers with between 50 and 249 staff will be required to introduce schemes on a phased start date between April 2014 and April 2015 and businesses with 49 or fewer staff will have a phased start date between June 2015 and April 2017.

Whilst large employers will in many cases already have a pension scheme in place into which the required level of contributions are being made, for smaller businesses, the cost implications of the pension changes are substantial. Employees must be automatically enrolled in the pension scheme unless they opt out, or fall into a limited number of exceptions (such as those aged under 22). In this regard, it is important to note that it will be an offence for an employer to induce its employees to opt out. Minimum employer contributions will start at 1% of earnings in the band £5,035 to £33,540 and will increase to 3% of earnings in that band. The cost as a proportion of salary costs will therefore be greatest for employees earning £33,540 (at 2.55%).

Although it may still seem a long time before the rules apply to smaller businesses, the significant compulsory increase in payroll costs is something that businesses should start to plan through their long-term budgets and also when considering the general level of pay reviews in the years leading up to the introduction of the scheme. For small businesses, the burden of these new rules will however extend far beyond the obvious increase in payroll costs. Time will be required to set up and administer the scheme and this burden may be disproportionately large for small businesses.