News

August 20, 2010

Micro-businesses “should be exempt” from pension reform

Micro-businesses should be left out of a new legal obligation to enrol staff in pensions schemes, business groups have said, writes Kate Horstead.

Legislation passed by the Labour government, but under review by the Coalition, will force all firms with fewer than 50 staff to sign employees up for a pension scheme between 2014 and 2016.

The Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations will compel businesses to pay at least three per cent of an employee’s earnings into the scheme. The employee will have to contribute four per cent or more.

Currently, firms with five employees or more have to offer them access to a pension scheme, but do not have to contribute. The new regulations will mean an employee would have to opt out of a pension, rather than opt in.

The Federation of Small Businesses’ (FSB) policy chairman, Mike Cherry, said that micro-businesses – firms with no more than ten employees – should be exempt from the scheme because of the costs involved.

“We welcome initiatives to help people save for their future, but we’re concerned that the automatic enrolment pension scheme is going to be an administrative headache for small firms – particularly micro-firms – and will cost them in time and money,” said Cherry. “Small firms don’t feel confident choosing a pension scheme because of its complicated nature.”

The regulations, which passed into law this year, will apply to every employee earning at least £5,035 and aged over 22. Businesses will have to enrol them on their first day of employment.

The Institute of Directors said firms with fewer than five staff only should be exempt from the rules, with all other businesses given a waiting period of three months before enrolling new employees.

However, the head of pensions research at financial service provider Hargreaves Lansdown, Tom McPhail, said exempting micro-firms would “undermine” the legislation.

“There is a massive problem with people not saving for retirement, and most are people who work for small employers,” he said.

McPhail said small firms should be given support to meet their obligations – for example, through a centrally administered National Employment Savings Trust, which was proposed by the previous government.

“This would take away the burden of implementing the regulation, as small firms with limited resources wouldn’t have to do any research or use advisers,” he added. “It would also provide tax relief.”

In a recent Department for Work and Pensions survey, 65 per cent of people said they would stay in a pensions scheme if automatically enrolled. The findings of the consultation will be presented to the minister for pensions on 30 September.

• For more information about workplace pension reform, visit the Pensions Regulator website