AE staging dates are spread across seven years, but small businesses will have very little time to prepare for rate increases. James Phillips reports
Automatic enrolment (AE) has been rolling out for nearly five years now, with the largest employers giving some of their staff a pension for the first time from 2012.
This roll-out programme is ongoing, with many small and micro-business being drawn in as late as February 2018.
However, this is being undertaken alongside a programme of increasing the contributions for employees, with total minimum contributions to increase from 2% to 5% in April next year, and to 8% in 2019.
For small firms only staging in February 2018, the final staging date, this means they will have just two months before moving to the 5% rate, and fourteen months to prepare for 8%.
On the other hand, businesses who staged in 2012 will have had six years to get ready and are more likely to have enough cash to cover the uplifting.
As the government prepares for its 2017 review of AE, should it consider moving the rate hikes to be more in-line with staging dates?
Punter Southall Aspire principal Alan Morahan believes such a phased approach should have been legislated for, even if it does prove bureaucratically problematic. In particular, he worries that employees of these small firms will feel the hit hardest.
"The largest employers will have had five and a half years to get used to paying pension contributions at the minimum level," he says. "The planned increases have always struck me as being pretty harsh on small employers and their employees.
"There is a danger we will start to see people saying ‘I can't afford that level of deduction in such a short space of time so I might as well opt out right at the outset'.
"It does pose the question of ‘why was not the whole process phased for every employer?' It may take a bit more policing but a period of time greater than is currently being granted doesn't seem to be an unreasonable request."
However, Willis Towers Watson senior consultant David Robbins believes a staged approach would not be fair for larger employers in a free market economy.
Furthermore, if such a phased approach did come into play, it could see small businesses playing catch up with their larger counterparts until tinkering with minimum contribution levels ended.
"Businesses competing with each other ought to be subject to the same laws," Robbins argues. "If the government is saying one business ought to enrol people at a default contribution rate, that must be the same for all businesses."
The road to AE is paved as far back as 2002, when the Turner Review was commissioned, so employees of small businesses can be seen as having to wait as long as 16 years before getting access to a workplace pension.
Furthermore, these employees have arguably lost out on years of contributions, since 2012, simply because their employer was not big enough to stage.
These are concerns echoed by Robbins: "AE has already been delayed and delayed again by successive governments," he says.
"The Turner Commission was set up with a remit to consider whether we should go beyond the purely voluntary system of saving and it's going to be April 2019 before minimum contributions are fully phased in.
"Further delays to that are coming after a very slow gestation and rollout period for the policy."
The People's Pension head of policy Darren Philp also worries such a proposal could create an unnecessary communications and administrative headache.
"If you have different profile and contribution rates, then the communications challenge for The Pensions Regulator [TPR] and the industry does increase quite significantly," he says.
"You'd have different communications depending on the employer's staging date and it could lead to a recipe for confusion. You would have advisers and payroll operating different rules for different people.
"The administrative burden could outweigh any benefit."
Federation of Small Businesses (FSB) policy adviser for employment and pensions Alex Metcalfe agrees that communication should be a focus, with the challenge existing enough without further tweaks.
"For a lot of small employers, it's just building awareness at this point," he says. "We're reaching that testing point for our membership of how well this rolls out.
"We were happy to see this phased approach from large employers to smallest, and how TPR has adopted some lessons while implementing this policy.
"Most of it has been in communications. It's about at what point is it most effective to get in touch, and how can you make sure employers comply?
"TPR's focus is on educate and enable before you get to the point of enforcement. That's been a particularly good policy for small employers, where it can often just be an information gap rather than any malicious intent."
However, any delay in raising contribution levels could impact the industry's understanding of the success of AE, with full results not known until as late as 2025.
Hargreaves Lansdown pensions analyst Nathan Long believes such an approach would be too complex and may in fact knock back any progress into the next decade.
"This evidence-based policymaking should capture the experience of both large and small employers," he argues. "Staggering increase hikes based on staging date would either kick this particular can too far down the road or lead to decisions made without full insight."
But Morahan argues providing a greater period of time for phasing in the contribution increases could actually provide better results for AE. By increasing contributions slowly, opt-out rates could be stemmed and success could be improved.
"If we see very significant opt-out rates as a result of these very shortly timed increases, we may end up by 2019 thinking that what we thought was quite successful in 2016 doesn't look quite so successful now," he states.
"The opt-out rates might be substantially higher and that might be driven as a result of the very short-term increases for these smaller employers that have staged late in the process.
"Either way there could be questions to be asked. There has to be real concern that these levels of increases could scare the horses."
AE is not the only issue that small businesses are currently facing, with changes hitting them left, right and centre in a range of areas.
The FSB's Metcalfe explains these businesses are also getting to grips with the national living wage (which is due to go up in April), changes in dividend taxation, and ongoing concerns relating to Brexit.
"There's this combination of additional costs, which are a concern for small businesses, but there's also a broad acknowledgement that AE is a good thing.
"There could also be room for doing economic impact assessments for how the rollout is impacting the smallest employers before we get to 2019.
"There are a lot of different costs coming to bear for small businesses and it's making sure they are bearing those costs well and taking a holistic approach."
There are a large number of small employers entering the market for the first time in the next two years that will find contribution rates increasing quite fast.
One solution to this is that these small employers simply budget for the higher payments, rather than making the incremental changes. This is an approach that appears to have been taken by some small employers, with a recent survey by the People's Pension showing 37% of small employers were paying above the 1% statutory level.
Furthermore, although Morahan believes that new employers setting up between now and 2019 should be given a longer period to phase in increases, he believes any new company setting up after the 8% total minimum contribution is implemented in 2019 should begin at that level.
"It's part of the budgeting in the same way they have to budget for any other staff-related costs, such as National Insurance," he says. "If the business case doesn't stack up, don't start the business."
There are arguably both disadvantages and advantages to having phased contribution increases in line with staging dates. It allows smaller businesses to prepare better for increases and their employees to get used to paying an additional sum out of their pay each month.
Equally, such a proposal would see the same employees waiting longer and longer to build up a pension that the industry already worries will be inadequate, while presenting both a communications and assessment nightmare.
This year's AE review may see these concerns considered, but could there be a middle ground?
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