Auto-enrolment: More perk than pain?

We’re now at the final stage of auto-enrolment for Workplace Pensions. Employer contributions have increased from 2 per cent to 3 per cent from April this year, bringing the total contributions up to 8 per cent. Back when auto-enrolment first came in, it caused concern among SMEs, has their concern increased along with contributions?

Surprisingly, not really, says Fabian Taylor, independent financial adviser at law firm Nelsons. In his view, SMEs have learned to live with the Workplace Pension: “They have coped quite well with the latest increase. It’s been advertised so far in advance that there’s been a lot of time for companies to plan for the initial financial burden.”

Beyond merely coping with the changes, some employers are getting ahead of the game and embracing the Workplace Pension as a perk to entice the best talent. “If you can say that you offer a generous pension, it helps to attract workers, whereas if you’re paying the statutory minimum because you have to do it, I don’t think it reflects quite as well.”

Go beyond 3 per cent

However, those are the most enterprising businesses – many are unaware that they can offer more within the limits of auto-enrolment.

Because the law lays out the minimum contributions for employers along with the minimum total, many employers think it’s prescriptive, says Michael Steed, head of tax at BPP – i.e. that they must pay in 3 per cent to the 8 per cent pension contribution. However, 3 per cent is actually the minimum for employers and 8 per cent is the total, and it’s up for grabs who pays the rest. 

“Why not split it and go 4 per cent and 4 per cent? Or if you’re a very generous employer, why not pay all 8 per cent? The employer will always get 19 per cent corporation tax relief on it, which is why going up a bit is not a bad thing.”

A lot of the schemes are relief at source, Steed explains, which means that whatever you pay into the pot you only have to pay 80 per cent of it – HMRC pays the other 20 per cent.

Steed sees the whole thing as a big opportunity for businesses, but that’s not always the view of the businesses themselves: “There’s a dull acceptance of the Workplace Pension. You still get employers who try to get their employees to opt out, but if you opt out now you have to come back and deal with it again in three years’ time. It’s a revolving door.”

Embrace or endure

Those recognising it as a perk are grabbing it with both hands. It’s around a 50/50 split among Fabian Taylor’s clients between those that have embraced the Workplace Pension and those that are ‘enduring’ it. He agrees that more education needs to be done: “Accountants have helped to make this clearer for SMEs, but there is definitely an education piece to implement there, particularly if SMEs want to be able to compete for talent.”

The most enterprising businesses are extending beyond the minimum requirements in order to offer something more appealing for employees. As a result, a lot of their questions are about pension providers – accountants would do well to source the services of a financial adviser to ensure that they nail this. “In a lot of cases, employers are offering more, so the employee is paying less. There is flexibility in terms of how much an employer offers.”

Matching the contributions of their employees up to a certain level is a preferred approach for many SMEs, says Taylor, while others take on more of the minimum 8 per cent contribution. Either way, it’s giving them a competitive advantage over those that see the Workplace Pension as nothing but a burden.

Mark Rowland is a freelance journalist

Further reading:

The Workplace Pension as a perk

• By contributing beyond the 3 per cent minimum, you can offer a company perk without significantly increasing your costs, thanks to the reliefs involved – there’s no reason why you can’t pay the entire 8 per cent.
• Use relief at source schemes to claim tax relief of 20 per cent on your pension contributions

Employee eligibility:

In order to be in the system in the first place, employees should be ‘eligible job holders’. An eligible job holder is a person between 22 and the state pension age who is earning at least £10,000 per annum.