A local accountant is calling for a pensions rethink amid concerns that the automatic enrolment system is too costly and unnecessarily burdensome for SMEs.
Matt Bailey, Managing Director at Howards Chartered Certified Accountants of Stafford, agrees that people need to save into a pension to ensure a decent standard of living in retirement because the state pension simply isn’t enough. He’s also in favour of auto enrolment, but has misgivings where smaller firms are concerned.
He says: “Auto enrolment is designed to encourage people to start saving earlier and to save more to build their pension, but it is costly and creates too much of an administrative headache for smaller businesses, especially owner-managed companies and sole traders.
“Pension saving isn’t just the employer’s responsibility. Ultimately, saving for retirement comes down to lifestyle choice as people decide on their priorities at different stages in their lives and budget accordingly.”
Finance industry experts estimate that £260,000 and £445,000 is required for a comfortable retirement, so someone in their thirties should be saving around £800 a month if they are to stand any chance of building this size of pension pot.
In 2012, to promote the pension saving habit, the government introduced automatic enrolment, whereby business owners set up a company pension scheme, to which both employer and employee contribute, and signed up their workforce. Since 2015 the legislation has also applied to SMEs – businesses that typically employ from 1 to 249 employees – who incur heavy fines for non-compliance.
At auto enrolment launch the employer’s contribution was 1% of the employee’s salary but this level increases to three per cent in April. Employees, who currently pay 3% of their salary into their company pension scheme, will see their contribution rise to 5%.
According to Pension Trends, a report by the Association of Consulting Actuaries, this is a significant issue since there is a direct link between a rise in the employee minimum pension contribution and staff opting out. If staff opt out, the pension scheme remains in place but is dormant and the employer still has to foot the bill.
Matt continues: “As well as cost, the big problem with auto enrolment is administration. In smaller firms this tends to fall on an owner-manager who is already coping with a host of other responsibilities.
“In general auto enrolment is a force for good and has been hailed a success for bigger businesses. However, I believe the government needs to review the pensions policy for SMEs, since auto enrolment is a contributory factor in many firms deciding not to employ staff, with a knock-on effect on business expansion.