Living wage puts pensions centre stage

Next April sees the introduction of the national living wage, which will increase earnings from £6.70 to £7.20 per hour. There’s been plenty of debate about its impact on businesses of all sizes, but not enough attention has been paid to how the extra few pence will affect another big legislative shake-up – pension auto-enrolment.

The last three years has seen auto-enrolment rolled out across the country and within the next few months it will begin to apply to even the smallest firms. With at least one provider claiming more than a quarter of businesses are waiting until just a month prior to their staging date before sorting out their workplace pension, it has not been without its challenges. As businesses grapple with getting their auto-enrolment affairs in order, they must also brace themselves for how the introduction of the living wage will affect employee pensions.

Focused on dealing with the introduction of the living wage, businesses must also plan simultaneously for its impact upon auto-enrolment

Fifty pence an hour might not sound like much, but for a whole tranche of employees it will mean they earn an extra £5,000 a year. Given that the earnings trigger for auto-enrolment is £10,000 a year, businesses need to work out how many of their staff will be newly eligible for workplace pensions.

Of course, businesses need to be clued up about auto-enrolment in any case. Staff are eligible if they are at least 22 and under state pension age, earn more than £10,000 a year and work, or usually work, in the UK. So far, more than five million people have been enrolled. Any business with one or more members of staff will be required to offer a workplace pension scheme.

This is only the beginning though. By October 2018, small businesses will have to contribute 3 per cent of an employee’s salary into a qualifying pension scheme. By 2020, this will be an additional £560 a year per employee for those who are paid the living wage. Focused on dealing with the introduction of the living wage, businesses must also plan simultaneously for its impact upon auto-enrolment.

The penalties for failing auto-enrolment can be substantial, so however tricky it may seem to set up a pension scheme, businesses have no option but to get it right. The good news is that, with the right preparation, firms can minimise the potential burden associated with auto-enrolment.

First, firms must have enrolled all eligible job-holders into a pension scheme by the time their staging date arrives. Businesses must, therefore, assess their workforce to determine if they need to be enrolled.

Ensuring the right pension scheme is in place is paramount to offering a quality benefit to employees. Investing time to research options will pay off in the long term. Business owners who already have a pension scheme in place may think they can automatically use this for auto-enrolment, yet this needs to be verified with the pension provider. For more information, employers should seek advice from an independent financial adviser, accountant or payroll provider.

Smaller businesses managing a scheme without a specialist in-house payroll and HR team may struggle to cope with the time and cost required for auto-enrolment. Using payroll software which is both up to date and automatically compliant with the latest HMRC legislation will help to reduce administration, simplify the processes and remove the heavy lifting for smaller businesses.

Last but not least, under the new rules employers are responsible for communicating the workplace pension changes and ensuring their workforce is aware of their rights under the legislation. It’s critical, therefore, that businesses get their employees onside and open the lines of communication early. The best way of doing this is to provide staff with the correct information in writing, ensuring they are fully aware of their options and manage expectations in advance, including the right to opt out.

This is without doubt a time of great upheaval for businesses of all sizes. With the right partners, however, it’s a journey they don’t have to undertake on their own.