Until recently, a workplace pension was often the preserve of those working for medium or large-sized employers, with regular company contributions ensuring workers were able to build up a sum that they would then exchange for an annuity on reaching retirement age.
The introduction of the Pensions Act in 2008 gradually changed that, however, introducing auto-enrolment, and making it compulsory for every small employer to offer a contributory scheme to staff. Employees can choose to opt out but employers cannot press them to do so. So far, opt-out rates have been less than 10 per cent.
Initially it was the bigger companies that had to comply. But from 1 October 2017 new businesses with staff had to offer a workplace pension, with both employer and employee paying in 1 per cent of salary, and those that failed to comply facing fines from the Pensions Regulator.
This year, things have changed again, with the minimum contribution levels for both employer and employee rising from 6 April. Contributions stand at 5 per cent of salary, with 2 per cent coming from the employer and 3 per cent from employees.
For small businesses, this represents another cost, following rises in the National Living Wage and business rates. FSB has called for the Employment Allowance to be increased to £4,000 from its current rate of £3,000 to reflect the additional rises, warning that they will hit the smallest firms hardest.
“Many have set up auto-enrolment schemes only in the past few months,” says Mike Cherry, FSB National Chairman. “Small businesses in labour-intensive industries such as retail, construction and childcare will feel the impact of this rise most acutely. These sectors are already beset by high inflation and skills shortages.
“Small business owners want to see employees save, but more needs to be done to help firms absorb high labour costs. That starts with increasing the Employment Allowance to £4,000. At the same time, new incentives need to be put in place to encourage the self-employed, who miss out on auto-enrolment, to save for the future.”
The rate for both employees and employers will increase further in April 2019, rising to a total of 8 per cent, with 5 per cent coming from employees and 3 per cent from employers. The hope is in the longer term this will enable people to build up significant pension pots which, together with a state pension, will eventually allow them to retire, avoiding the prospect of people having to work into old age on account of a lack of provision.
For small business owners, it’s important to ensure employees understand the extra value they are receiving from employer contributions to their pension, particularly if this is in place of a pay rise. Pension providers should regularly update employees on how much they are saving, and how their pension is performing.
FSB Workplace Pensions offers members a rescue service for firms that have missed their duty start date or fallen behind with their auto-enrolment duties.
For more information, visit fsb.org.uk/benefits