How to Run a Small Business Pension Scheme

Aug 9th 2011

Since it was announced several years ago, the requirement for small businesses to automatically enroll their staff in pension schemes has been the subject of a lot of criticism from business owners. Opponents argue that for small businesses, pension schemes can be very expensive and the additional burden may stop them from taking on new staff.

Proponents have argued that it protects workers, by ensuring a certain standard of living in older age. Whatever your thoughts on the issue, it is soon going to be a legal obligation to enroll your employees in a pension scheme (unless you’re the only person working for your business).

So what do you have to do, when do you have to do it by, and what are your options? Read on for our guide to understanding the confusing world of automatic pensions schemes.

Important Dates

When will these changes begin? This is not as simple a question as it may seem. Originally there was a single date for all companies to provide an automatic enrollment pension scheme. The implementation has now been staggered, which is good news for small businesses, as they have more time to makes plans for taking on the additional financial burden. On the other hand, it has made the whole system a little more confusing.

The main factors in determining the date by which a small business must provide an automatic pension scheme are the size of the company, the size and type of the company’s PAYE scheme, and whether the PAYE scheme is shared.

Once you have this information to hand, the easiest way to find the right date for your business is to check out this timeline from The Pensions Regulator. The earliest compliance date is 2012, but this is only for the largest employers.

Your Company’s Obligations

So, what are you required to do under this scheme? As employers, you have certain obligations which you must fulfill by your staging date (see above).

• Register with The Pensions Regulator – even if none of your staff qualify for a pension scheme
• Set up a system for automatic enrollment with a qualifying pension scheme (see below)
• Inform employees about the new requirements and their options
• Staff between 16-21 years old, or between state pension age and 74, who are earning over £7,475 per year, must be given the option to opt in to a pension scheme
• Employees are allowed to opt out of a pension scheme if they wish, but businesses will be fined if they try to encourage them to do so in any way
• This applies to contract and temporary workers too, but not agency workers. Those employed through paid services will be covered by the company which runs the service

What Are Your Options?

Although these new schemes place very definite obligations on employers, you do have some choice over the scheme you provide. Your business may use any pension scheme so long as a) it is not restrictive: it does not depend on an individual’s age or demand a probationary period, and b) does not require independent action from the staff for them to join or remain in the scheme.

If you do not wish to spend a lot of time and money researching the many available schemes, the government have set up the National Employment Savings Trust (NEST). This offers reasonable rates, and as a public service it must accept all companies that apply, regardless of the age and earnings of the employees.

Key Figures

• At least 8% of qualifying earnings must be contributed to the scheme by the employer. Of this 8%, at 3% must come from the employer, 4% from the employee, and 1% will come from tax relief
• 3 months is the maximum probation period after which a new employee must be enrolled in a pension scheme
• £7,476 per year is the threshold an employee must reach to begin their automatic contributions

Have you begun to set up a small business pension scheme already? Have you encountered any pitfalls that others should know about? Let us know in the comments section below.

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