Are small businesses heading for a pensions disaster? One year after auto-enrolment came into effect for Britain’s largest companies, smaller businesses will soon also have to join the system, which requires employees to enrol all their staff in a company pension scheme unless people have specifically opted out.
While the first 12 months of auto-enrolment passed by with few hitches, this period was always going to be something of a phoney war. The largest employers generally had pension schemes that already met the auto-enrolment criteria, as well as access to specialist pension advice in-house and externally, to help with the transition to the new requirements.
Many smaller businesses, which must all sign up to auto-enrolment over the next four years – in tranches of companies grouped by number of employees – do not share those advantages. And there are increasingly worrying signs that auto-enrolment is going to be an unpleasant experience for a good number of them.
Ros Altmann, the former Downing Street pensions adviser, is just one of several industry gurus who fear a car crash.
“The real challenges are yet to come,” she warned. “Employers have no idea of the complexities they could face and need to be warned about preparing well ahead.”
One big problem is that small and medium-sized enterprises (SMEs) may struggle even to find a pension provider prepared to offer a scheme to all their staff.
Research by Close Brothers Asset Management warned that pension providers, for whom employees now represent a captive market, have become increasingly picky about whom they want to accept.
They may turn down economically unattractive temporary and part-time staff, for example, even though employees are legally required to offer such workers access to a pension. Close said one-in-five employers yet to auto-enrol have already been warned by their current pension provider that they aren’t guaranteeing access to all.
A related issue is that pension providers are struggling with the workload created by auto-enrolment and setting conditions accordingly. Scottish Life, for example, has said it won’t accept any auto-enrolment business from new or existing customers without at least six months’ notice. With other providers now following this lead, SMEs that don’t get themselves organised risk missing the deadline to comply with the law.
It’s a similar story at the firms which provide the administration processes that sit between employer and pension provider, particularly in the software sector. Many of these firms are warning it will now take many months for them to get new customers up and running.
Nor are the compromise solutions particularly appealing. Nest, the Government-backed pension scheme aimed at employers who can’t or don’t want to use a pensions-industry provider, is charging an initial fee of 1.8 per cent on contributions, as well as an ongoing annual fee of 0.3 per cent. The high, upfront cost will make it expensive for all but those who stick with Nest over the very long term.
Then there is the cost to SMEs of members’ contributions. The experience over the past year has been that opt-out rates have been much lower than expected – somewhere between 10 and 25 per cent of staff.
If SMEs see similar take-up of auto-enrolment, the cost of their compulsory contributions may come as a nasty surprise. And that’s leaving aside the fact that there is an increasingly vociferous campaign for higher minimum contributions.
Business expansion can be short-lived, says bank
How quickly after launch do small businesses reach the limits of their growth potential?
Far more speedily than you might imagine, according to research from Barclays Bank.
It says the typical small and medium-sized enterprise (SME) will see growth plateau after just four years. In some sectors, the crunch point comes even sooner, the bank reckons. In the technology industry, for example, headroom runs out after just two years.
The research is based on a survey of 500 SMEs and the bank says it adds to the case for a greater effort in the export market by smaller companies. While many SMEs are nervous about trading overseas, those businesses that have taken the plunge say the barriers previously holding them back turned out to be psychological rather than real – 86 per cent of exporting SMEs told Barclys the experience had been as successful as they hoped.
“What strikes me about our research is how successful at exporting SMEs are,” says Simon Nicholson, head of international at Barclays’ business banking division.
“This is despite 60 per cent claiming to have fallen into it, or only looking at it when an overseas customer got in touch.”
Rising prices inflame small firms’ anger
British Gas’s decision last week to raise gas and electricity prices by around 10 per cent will hit small and medium-sized enterprises (SMEs) disproportionately hard, says John Allan, the national chairman of the Federation of Small Businesses.
More than two-in-five SMEs are currently on contracts with British Gas according to the trade body.
The latest increases by energy suppliers will add to pressure on policymakers to offer more protection to SMEs. Unlike in the consumer sector, there are few requirements on energy providers to make prices publicly available for comparison. SMEs also complain of being locked into lengthy supply contracts – while several companies have promised to stop automatically rolling small businesses over from one contract to another when the first expires, others have refused.
Small businessman of the week: Barnaby Lashbrooke, founder, Time Etc
I founded my first business when I was only 17. It was a web-hosting company I ran from my bedroom in my parents’ house and it grew very rapidly.
I sold the company in 2006 for a couple of million pounds and launched Time Etc the following year.
It started out as a virtual assistant business aimed at entrepreneurs – what had always stuck me when running my first company was that there was all sorts of help I needed for which I couldn’t justify hiring staff.
The needs that entrepreneurs have come to us with have really changed – they want anything from credit control to blog writing. So last year we launched a new service that gives entrepreneurs access to freelancers who can do those jobs for them, and it is already adding more than £300,000 a year to our revenues.
We find the right person for each job that the entrepreneur has, and we offer a money-back guarantee if they’re not satisfied.
The idea is that small businesses can find any service they need without having to hire someone. And they’re in total control of what they spend – we charge a single hourly fee and they can set a limit on the total cost of the project.