Businesses should not have to administer pension reforms

7 September 2010

Firms should not be expected to assume the role of administrator for the pension reforms that are set to be introduced in 2012, a leading business group has argued.

New research carried out by the British Chambers of Commerce (BCC) has found that many businesses are concerned at the impact that managing the new auto-enrolment system will have on their time and resources.

Under the proposed scheme, which is due to begin a phased introduction in October 2012, employers will be obliged to enrol all employees in a pension scheme if they are not already in a qualifying scheme. Individual workers, though, can choose to opt out.

Firms will contribute 1 per cent of an employee's salary to the fund initially, with the figure rising to 3 per cent by 2017. Individuals will need to contribute 4 per cent of their salaries to the new scheme, while the government will add a further 1 per cent in tax relief.

But the BCC, after polling its members, has said that there are four main areas of worry for employers.

The first involves the phasing in of the scheme and the effect this will have on the fairness of competition between smaller firms. The BCC pointed out that a small firm staged in for auto-enrolment 12 months before another small firm with which it actively competes will face approximately £960 more in contribution costs than the firm that is staged later.

The second centres on the administration of the scheme. The BCC said that there will be a vast amount of administration, including both one-off set-up processes and recurring paperwork, and that the costs, particularly for businesses with no in-house experience or expertise in this area, will be very high.

The biggest administrative burden for many firms with high staff turnover will be processing new starter enrolments, opt outs and refunds. To tackle this particular problem, the BCC has recommended that employees should not be auto-enrolled into a pension scheme until their thirteenth week of employment.

A third area of concern is how the reforms will affect the relationships between employers and employees. Business experience suggests that for many workers their payslip will be the first they know of their new pension scheme and of their mandatory contribution, and that this may create potential issues.

Lastly, the survey revealed anxieties over the risks to employers that the obligations of the Pension Act 2008 will impose. The BCC argued that new employment regulations will always create a new route for vexatious employees to make claims against businesses, as well as new areas where well meaning businesses can get things wrong.

The BCC report described the current penalty regime as "harsh". A flat rate fine of £400 can be levied by the regulator for any form of non-compliance, including innocent procedural mistakes.

Instead, the BCC proposed, the base fine of £400 for any violation should be reduced to £125 - in line with similar HMRC penalties - for those firms that unintentionally fall foul of the regulations.

David Frost, the BCC's director general, said: "Chambers of Commerce have been supporters of auto-enrolment as a means to boosting retirement income. However, the complex web of regulations that were passed at the beginning of 2010 is not what was expected when the concept was first proposed four years earlier.

"Businesses cannot be expected, nor can they afford, to act as an administrator to make the Pensions Act 2008 run smoothly. Both the set-up and running costs of the reforms are too high, and there is a real risk that, combined with the other employment regulations due to commence in the next few years, they could damage job creation."