Changes to auto-enrolment pensions will have a “substantial” effect on small businesses, the Federation for Small Businesses (FSB) has warned, after minimum contributions for employers rose from 1 per cent to 3 per cent last weekend.
The trade body said the recent increase in minimum contributions would have both financial and capacity implications for smaller employers.
The warning comes as new research by the Institute for Fiscal Studies (IFS) shows auto-enrolment has caused a dramatic increase in the number of workers employed by small businesses – those with between two and 29 employees – participating in workplace pensions.
“The costs involved for small employers are substantial, in terms of both expenditure, and indeed their time, as they have grappled with finding a good provider and setting up whole new systems,” said Mike Cherry, FSB national chairman. “Now the 3 per cent rate has hit, the burden will be greater still.”
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On 6 April, minimum contributions to auto-enrolment pensions increased to 8 per cent of wages, up from 5 per cent. Of this, employers will now be required to contribute 3 per cent, up from 1 per cent.
While larger businesses seem to be taking the increase in their stride, the extra cost – which will be felt in earnest when the first salary payments are made this month – could be more onerous on smaller firms.
The changes could also have a significant effect on employees, who will see their minimum contributions increase to 5 per cent, up from 3 per cent. Cherry said organisations needed to keep an eye on opt-out rates which, if too high, could undermine pension schemes.
“While small business owners are absolutely committed to helping employees save, auto-enrolment has already cost them significant amounts of time and money,” said Cherry. “The government should rule out any further increases to the minimum auto-enrolment contribution rate for employers.”
Cherry’s comments come as the IFS research shows the introduction of auto-enrolment has meant seven in 10 (70 per cent) of UK workers employed by small businesses were now on workplace pensions, increasing participation rates by approximately 45 percentage points since the system was introduced in 2012.
Commenting on the report, Guy Opperman, minister for pensions, said: “Automatic enrolment has been an extraordinary success, transforming pension saving and improving the retirement prospects of more than 10 million workers already.
“As this report shows, small business owners all over the UK have made this possible, with participation rates estimated to have been increased from 26 per cent to 70 per cent due to automatic enrolment. This radical reform is creating a new relationship between the employee and their employer.”
Despite the effects the increase in contributions are expected to have on small businesses, Danny Cox, head of communications at Hargreaves Lansdown, agreed auto-enrolment had “revolutionised retirement saving in the UK”.
The investment firm had predicted that, in real terms, the increase in minimum contributions means an employer will now contribute £55 a month to the average UK employee’s pension pot, up from £37.
The average employee can now expect to see £30 of their wages go towards their pension each month, and see their total pension savings increase by an estimated £55,000.
“The increased cost on employers has been phased in over time so firms have had the opportunity to adapt. Pension contributions are a valuable employee benefit which firms use to attract and retain good people. This is true of small and large firms alike,” added Opperman.
“[But] even with the higher contribution levels, there is still a big gap between what people are and should be saving.
“The focus now needs to switch to getting people to understand how paying in more personally or improving their investment returns will boost their income or allow early retirement.”