The SME’s Guide to Setting Up Employee Pensions

A good pension scheme can help attract and retain talented employees, showing them that you, as a business, are invested in their long-term financial security. However, adhering to pension regulations is a legal requirement in the UK, and failure to comply can result in significant penalties.

This guide provides a step-by-step approach to setting up an employee pension scheme.

Understanding Your Legal Obligations

The Pensions Act 2008 introduced automatic enrolment, which requires employers to enrol eligible workers into a pension scheme, as part of the Government’s effort to ensure that more people who live and work in the UK save for retirement.

As an employer in the UK, you have several responsibilities:

• Identifying Eligible Employees: Automatic enrolment applies to workers aged between 22 and the State Pension age who earn over £10,000 per year.

• Staging Dates: Depending on the size of your business, you have a specific date by which you must have a pension scheme in place, known as your ‘staging date’. New companies have different obligations.

• Ongoing Responsibilities: These include maintaining the pension scheme, enrolling new employees and managing requested opt-outs.

Preparing Your Scheme

Start by identifying who among your team needs to be enrolled. Workers outside the auto-enrolment criteria can choose to opt in, so you must include everyone in this process. Workers earning below £6,240 can request to join your pension scheme but won’t require employer contributions.

There are two main types of pension schemes:

• Defined Benefit: DB schemes provide a guaranteed income upon retirement based on salary and years of service. Due to their higher costs and complexity, these are rare among small businesses in the UK.

• Defined Contribution: With DC schemes, your pension provider invests your contributions. Subsequently, your retirement income depends on investment performance. These are more common and suitable for smaller companies.

Landing on a Pension Provider

Consider popular providers known for their reliability and ease of use. The big three in the UK are:

• NEST: A straightforward and Government-backed option.

• NOW: Pensions: Known for simplicity and low fees.

• The People’s Pension: Praised for flexibility and customer support.

When choosing a provider, consider several key factors to ensure you select the best option for your business and employees. Compare associated costs, including administrative fees and fund management charges, and opt for a provider with transparent and competitive pricing.

Assess the level of support provided, including customer service, online tools and resources. Good administrative support can simplify scheme management and enhance your team’s experience.

Look for feedback from other businesses of a similar size and type to gauge user satisfaction. If you’re still unsure, seek professional advice from a financial advisor who can consider your business’s unique needs.

Building Your Structure

Before launching your pension scheme, determine the contribution structure. The total minimum contribution rate is 8% of qualifying earnings, with at least 3% contributed by the business. You can allow your team to contribute more if they wish.

Consider implementing ‘salary sacrifice’ arrangements, where employees can agree to reduce their wages in exchange for pension contributions. This approach can offer tax and National Insurance benefits for both employer and employee.

Communicating With Your Team

There are specific communications you must provide to your employees as a non-negotiable. Inform all eligible employees in writing that you have automatically enrolled them in your pension scheme, including all details on contribution levels, the right to opt out, and how to do so.

After enrolling, employees have a one-month window to opt out. If they do so, they must receive a full refund of all contributions.

It’s also advisable to keep employees informed and engaged with their pension. You should provide regular updates on the pension scheme’s performance and send out annual statements. Consider offering resources and sessions to help employees understand their options and the importance of retirement planning.

Integrating With Payroll

Ensuring that your payroll system is compatible with your chosen pension scheme is crucial. You will need to set up your payroll software to automatically deduct pension contributions from employees’ salaries and make the corresponding employer contributions. This automation reduces your business's administrative burden.

Keep your payroll software up-to-date and in sync with the pension scheme’s requirements to avoid mistakes or compliance issues. Maintain proper records of contributions, enrolments, opt-outs and related comms. You must retain this information for a minimum of six years.

Remaining Compliant

The Pensions Regulator reserves the right to conduct compliance checks to ensure that employers meet their duties, so ensure you're prepared to provide documentation on request.

You must re-enrol eligible employees who have opted out every three years. When this happens, you should re-assess your workforce and communicate the re-enrolment process and their rights.

Totting Up

By following the steps outlined in this guide and taking your responsibilities as an employer seriously, you can provide your team with valuable financial security and support their long-term retirement goals.

Remember to stay informed and seek advice when needed. If you have any further questions, reach out to the relevant authorities, providers or financial advisors for guidance.

Funding Your Contributions

Funding a pension scheme may be a financial juggling act for small businesses with a tight budget. Fortunately, options are available to help you bridge the gap in the short term.

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