The Outsauce perspectivePensions auto-enrolment— act now or pay laterThe implications of the Pensions Act foragencies and contractors
So what is auto-enrolment?It is estimated that 11 million people within the UK aren’tcurrently saving for retirement.With an aging population massively underprepared to cover the cost of livingin their later years, the Government took matters into its own hands in 2008with the introduction of the Pensions Act.From October 2012 auto-enrolment into pension schemes was introduced;with every company over time required to enrol its workers into a qualifyingworkplace pension scheme if they are not already in one. Who does it affect? In essence, anyone who could be defined as a ‘worker’. Which in technical terms means any individual who has entered into works with: • A contract of employment, or • contract to perform work or services personally, who is not A undertaking the work as part of their own business. This of course encompasses many contractor freelancers working ‘umbrella’ and those that choose to work ‘agency PAYE’. Under the Act, it rests with the employer to ensure adherence to the obligations. Which for agencies means that any contractors employed directly by you and supplied to your clients, are your responsibility.
In practice, what are the implications for contractorfreelancers and employers?Contractor freelancers:Automatic enrolment removes the issue of inertia for workers in planning or setting upa pension. If you don’t want one, for whatever reason, the onus is now on you to opt outof your employers’ pension scheme. And the Government doesn’t want to make it easy— even if you opt out now, you’ll be opted back in every three years.Despite the obvious long-term benefit of providing for retirement, for the many alreadyfeeling the pinch, an additional cut to take home pay may be too much to bear right now.And though many umbrella businesses and agencies paying contractors PAYE are likelyto shoulder at least part of the financial burden of employer’s contributions to remaincompetitive, it is likely that some of this will be passed down the chain in the guise ofincreased margins, meaning a financial double whammy for you.For agencies and umbrella businesses:Aside from automatically enrolling your own employees into a pensionscheme, if you’re engaging contractors via PAYE, it means that you arepotentially now obliged to provide a suitable pension scheme for those Employer tipwho remain opted in, and cover the employers’ contributions. There’s lots of great guidanceFor umbrellas, this means the responsibility rests with you, not your for employers on the Pensions’agency client. Regulator website:The point at which you will have to introduce your scheme dependson your size; with staging dates staggered according to business size. http://thepensionsregulator.gov.uk/For those with 120,000 employees on their books, that means now. employers/detailed-guidanceThe majority will follow over the next 12 to 18 months.The financial burden meanwhile will start relatively low at 1%, but willrise to 3% by October 2013.
What are the challenges?1. Who’s going to fund the contribution?There are three places the onus for the employers’ contribution can rest; with the agency,the end client or the umbrella. As with AWR, umbrella providers are likely to be the firstport of call, but they will of course have to accrue the necessary capital from somewhere— so margins may be seen to rise.Margin aside, this solution doesn’t allow for the cost involved in managing the scheme.2. Who is going to handle the administration?If it isn’t enough that agencies have been burdened with AWR, auto-enrolment addsan additional layer of bureaucracy and investment.Aside from decisions around pension scheme providers and the regulatory burdenconnected to the legislation, the administration required to adapt processes andcontracts of employment, not to mention make payment to the chosen pension scheme,threatens to be hugely onerous on agencies.Do you bolt the financial administration onto your payroll? Can your existing technologyinfrastructure handle the administration around enrolment and payment?And don’t forget that it’s a three-year cycle. All employees must be opted in again afterthree years — which for the employer means additional administration around informingthem and waiting for their response. Any proactive questioning around whether they’dsimply like to ‘opt out again’ will be considered enticement by the Pensions Regulatorand swiftly followed by a heavy financial penalty.3. What are the side issues?One man limited companies (PSCs) are exempt from the Regulations at present, so anycontractors operating in this way will side-step the issue for now. With administrativebenefits to both the contractor and employer of working under PSC status, many maybe encouraged to take the PSC route. Beware the spectre of IR35 and MSC legislationthough; PSC is only suitable for longer-term contractors earning a higher rate and anyemployer seen to encourage a change to their contractors’ way of working to avoidauto-enrolment could be heavily penalised.
So what are your options?1. Ignore itNot recommended. If you’re an agency or umbrella, at some point soon your businesswill be subject to the Regulations. It’s important to get your house in order now.Inducing your workers to opt-out of the scheme will be severely frowned upon,with penalties including heavy fines and even imprisonment for non-compliance.If you’re a contractor and would prefer to opt-out, be aware of the staging date— though auto-enrolment is being introduced gradually, with only the largest employersimpacted right now, it would be foolhardy to think that this legislation won’t affectyou for a while. If you are employed through an umbrella company, they are likely tobe considered a large employer, which means your staging date won’t be far away.2. Agree your approach nowThe better prepared employers are now, the less complicated the process is likely tobe when your staging date kicks in.If you haven’t already done so, consider the most appropriate pension scheme for yourbusiness. The Pensions Regulator advises asking the following questions of providers:• Question 1. Are you able to demonstrate how the costs and charges paid represent value for money?• Question 2. Who is responsible for different aspects of running the scheme and who can I contact if things go wrong?• Question 3. How do we know that those running our scheme are capable of doing so? (check that they’re authorised by the Financial Services Authority)• Question 4. How are members’ interests protected and represented?• Question 5. When money is invested, how are these assets protected?• Question 6. How can we be sure that members understand the different investment choices on offer?• Question 7. What flexibility is there around contribution levels above the minimum requirement?• Question 8. Are you able to demonstrate the extent to which you comply with the Pensions Regulator’s record-keeping guidance?• Question 9. Who will be the designated point of contact for members should they have any questions, comments or complaints about their pension?• Question 10. What arrangements will be in place to assist members at retirement?There is a view in the market that schemes from NEST, the National EmploymentSavings Trust, will be the preferred choice, but there are others out there which may bemore suited to your business and your way of working. As with any purchase, shop around— this is a long term investment.If you’re an agency referring your contractors to an umbrella, check the scheme they areimplementing to make sure it is suitable and compliant, alongside their strategy to dealwith the administration and employers’ contributions.
ConclusionAuto-enrolment will inevitably mean an additional financialand administrative burden on businesses already undereconomic and regulatory pressure, but its intentions are good.It’s important then to consider its long-term impact and makesure you are set up to deal with it effectively and compliantlywhen your turn for implementation comes round.www.outsauce.netFind out more about ourfully compliant AWR model.0330 100 email@example.com