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New compulsory pension plans will harm small firms

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Plans to introduce auto-enrolment pension schemes in 2012 will hamper the ability of smaller employers to run their businesses, it has been claimed.

A new survey from the Institute of Directors (IoD) found that over a half of the businesses polled (57 per cent) thought that the administrative burden imposed by the rules will be high or very high.

The auto-enrolment programme, which will begin its phased introduction in October 2012, means that, over time, employers must include staff in occupational pension schemes, although workers will be granted the opportunity to opt out if they so choose.

Employers and employees will be required to contribute to the funds, the requirement being that firms make a minimum contribution of 3 per cent of employees’ earnings. (For employees the figure is 4 per cent.)

According to the IoD poll, a third of respondents said that the money would come from profits.

The burden, the IoD, is likely to fall hardest on smaller businesses. Data suggest that 95 per cent of the firms that currently do not have any pension arrangements which include employer contributions are SMEs.

It is these firms, the IoD continued, that will have to implement and finance auto-enrolment. The concern is that such businesses lack the specialist human resource functions that larger firms can afford.

Other worries raised by the survey include the effect on salaries. When employers were asked how they would make the 3 per cent contribution, some said they would look at wages rather than take the cost out of profits; a third said they would freeze salaries; while 9 per cent would cut salaries.

As many as one in five employers (20 per cent) are still unaware of the precise legal implications of the new pension plans, which will require them to enrol employees who earn over the income tax personal allowance into a scheme and to make contributions on their behalf.

There also appears to be uncertainty over the proportion of employees who will exercise their right to ‘opt out’ of auto-enrolment.

While 16 percent of employers thought that none of their employees would opt out, 24 per cent of employers believed that the opt-out rate could be as high as a half or more.

An inability to afford the employee contributions was cited by employers (48 per cent) as the biggest single explanation for why workers might opt out.

Miles Templeman, the IoD’s director-general, commented: “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.”