Pensions reform: Impact for SMEs

At organic hr, we get asked about this a lot!  We are not a pensions provider or broker but as a Human Resources Consultancy, employee pay and benefits are part of our operating environment.  As we have a special interest in supporting SMEs, we have put together a quick overview that will hopefully clear up some of the confusion.  The links at the bottom of the page (especially The Pensions Regulator website) contain all of the source material for this article.

What is happening?

Major changes are coming for work-based pensions.  It is going to become mandatory for employers to enrol their employees on to a pension scheme.  There will be minimum defined contributions for both employers and employees, augmented by a government contribution.

Employers will have to automatically enrol jobholders on to the scheme who meet the following criteria:

  • Earn more than the minimum earning threshold (currently £5,304 per year)
  • Are aged between 22 and state pension age
  • Work in the UK

Eventually the total contribution will be 8%, with 3% from the employer, 4% from the employee and 1% from the government.  However, it is important to understand the timescales and the staged introduction of the contributions.

Timescales and staged introduction

Most of the publicity around the changes focuses around the 1st October 2012 date.  However, the pension changes and their associated employer duties will only start to be rolled out then, with a multi-step introduction that has been called ‘staging’.

The largest organisations are first in line but according to current staging information, SMEs (i.e. organisations with 250 personnel or less) will not be impacted until Q1 2014 at earliest and for the smallest employers the relevant time frame is Q1 2016.  That makes quite a difference to the planning process!

In addition, the eventual minimum employer contribution of 3% is being phased in in three steps.  These are as follows:

  • 1 October 2012 to 30 September 2016:  1% employer minimum contribution
  • 1 October 2016 to 30 September 2017:  2%
  • 1 October 2017 onwards:  3%

The changes are very significant and will have a major long term impact upon how employers of all shapes and sizes plan their workforces.

HR considerations for SMEs

Due to general confusion around the subject (and a bit of scaremongering too) many SME owners and managers have been very concerned that from October next year, they will suddenly find their staff remuneration costs increased by 3%.  As can be seen from the timescales and staging information, this simply is not the case – the changes will be more gradual and there will be more time to adjust.

This said, the changes are going to have a major long term impact and it is sensible for SME owners and managers to start thinking now about the impacts for their workforce.  Some of the key questions worth asking are:

  • Imagine that you had to find the extra 3% right now – how readily would your organisation achieve this?  This is the first step in your planning.
  • Is your people management efficient?  It is possible to achieve significant savings by refocusing how you go about the business of attracting, employing, developing and retaining your people.
  • What are your staff growth plans?  How will these changes impact them?
  • How comfortably can you afford your current staffing levels?  If the answer is ‘not very’ then this needs to be addressed now and if restructuring is required this too has to be progressed sooner rather than later.
  • How much scope is there to increase productivity through improved management?  Have you checked?  This is probably the most positive route to covering the increased cost without actually feeling it in the first place!
  • Finally:  Do you currently operate a pension scheme?  Make sure you check if it is a qualifying scheme – you might be fine just as you are!!

Useful links:  Where to look next

http://www.thepensionsregulator.gov.uk/pensions-reform.aspx

http://www.dwp.gov.uk/policy/pensions-reform/

http://www.nestpensions.org.uk/

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