Dated: 17 June 2011

A survey of IoD members published today reveals how auto-enrolment pensions, commencing in 2012, are likely to burden firms with significant costs relating to employer contributions and administration.

• When employers were asked how they would make the 3 per cent contribution of employees’ salaries, 34 per cent said they would have to pay for it from profits. 57 per cent of employers said that the added time burden derived from auto-enrolment will be very high or high, versus 10 per cent who thought it would be very low or low.
• The survey also revealed that the burden is likely to fall hardest on small firms. Feedback from IoD members indicates that 95 per cent of firms that do not have any pension arrangements for employees into which the employer contributes are SMEs. It is precisely these firms that will have to implement and finance auto-enrolment. This is particularly concerning since these businesses lack the specialist human resource functions that big firms can afford and are struggling to cope with their existing employment law obligations already.

Commenting, Miles Templeman, Director-General of the IoD, said:

“The Government shouldn’t underestimate the cost burden that auto-enrolment is going to place on small firms. Bigger businesses will mostly have pension arrangements for employees set up. Of course we need to improve retirement provision in the UK, but yet again it’s the small entrepreneur who is hit.

“Since the Government isn’t prepared to change course on what’s essentially a major piece of employment regulation, it needs to compensate for this burden with an equally significant deregulation elsewhere. Phasing in auto-enrolment buys us some time, but the private sector can’t be expected to bounce back and create new jobs in the longer run if the Government keeps dropping new cost burdens on firms.”

Key points from the survey:

• Auto-enrolment will hurt the finances of small firms in particular. Many employers – 43 per cent according to the survey – do not have any pension arrangements for employees into which the employer contributes, so these firms will be affected directly by the new auto-enrolment obligations. The survey showed that 95 per cent of the 43 per cent are SMEs. When employers were asked how they would make the 3 per cent contribution of employees’ salaries, 34 per cent said they would have to pay for it from profits.
• As the nature of auto-enrolment obligations become clearer to employers, employers are increasingly concerned about the administrative burden. 57 per cent of employers said that the added time burden derived from auto-enrolment will be very high or high, versus 10 per cent who thought it would be very low or low.
• Employees’ salaries could be hit by auto-enrolment. When employers were asked how they would make the 3 per cent contribution of employees’ salaries some said they would look at employee salaries rather than take the cost out of profits – specifically, 33 per cent said they would freeze salaries and 9 per cent would decrease salaries.
• Many employers are still unaware that they will be required to set up and fund employee pensions. 20 per cent of employers are not aware that there will be legislation, commencing in 2012, that requires them by law to enrol employees who earn over the income tax personal allowance, into a pension scheme and to make contributions on their behalf.
• There is great uncertainty about what proportion of employees will exercise their right to ‘opt out’ of auto-enrolment. 16 percent of employers thought that none of their employees would opt out. But 24 per cent of employers said that they thought the opt-out rate could be as high as 51 per cent or more. Tellingly, 29 per cent said that they had no view on what the opt-out rate would be. An inability to afford the contributions was cited by employers (48 per cent) as the biggest single explanation for why employees might opt out. Employees will have to pay in 4 per cent of band earnings.