HC1494 Work & Pensions CommitteeWritten evidence submitted by Federation of Small Business

The Federation of Small Businesses (FSB) welcomes the opportunity to respond to the above named consultation.

The FSB is the UK’s leading business organisation. It exists to protect and promote the interests of the self-employed and all those who run their own business. The FSB is non-party political, and in excess of 200,000 members, it is also the largest organisation representing micro and small sized businesses in the UK.

Small businesses make up 99.3% of all businesses in the UK, and make a huge contribution to the UK economy. They contribute 51% of the GDP and employ 58% of the private sector workforce.

The submission below is based on an essay we were asked to contribute for a publication entitled published by the Smith Institute We can’t carry on like this!—policy solutions for the under-pensioned. The volume will be launched in September 2011. That essay, commissioned earlier in the year, represents our latest thinking on the issue and addresses the bulk of the issues outlined for consideration in the consultation.

When the concept of automatic enrolment was first announced it was supposed to fully encompass the recommendations of the 2005 Turner report, but the spirit of this seems to have been lost. The Government’s intention to cater for those on low pay without any private pension provision fell by the wayside once the element of choice was introduced. We have always said - and as Turner suggested - that instead of being made to choose a scheme, there should be a good default scheme into which everyone who is not currently saving could be enrolled. Those wanting to save more being able to seek further advice and to choose for themselves. However, the Government backed National Employment Savings Trust (NEST) may not be the best choice for every small business. In addition the burden of compliance with any qualifying scheme is now disproportionate to the benefits gained for any business with less than 10 employees.

1. The economy remains unsettled for everyone, and especially so for many small businesses. Our members are telling us that they are struggling with securing contracts, getting paid on time and obtaining finance from the banks.

2. Unemployment has reached worrying levels with 2.49 million unemployed people in the UK.1 Small business confidence, like the economy as a whole, has flat-lined.2 The positive hiring intentions seen in the past year have slowed with more organisations planning to reduce jobs than employ.3With further public sector cuts still to be felt, it is paramount that small businesses are given the right tools to help boost the recovery and growth.

3. As we continue to live longer and healthier lives, the pensions issue has become more serious. The FSB believes the issue must be addressed to help people save for their future. And being able to work and take retirement at whatever age one chooses to, is just as important.

4. Costs to businesses have steadily risen over the past few years and are unlikely to fall. At the same time, costs to the individual have also increased. We continue to see rises in property prices, the costs of renting a home, increases in fuel prices, and in particular large increases in the cost of energy and food alongside other living costs. All of this means that people will be paying more for day to day living alongside the increasing need to save for their pension. This imbalance of expenditure must be addressed.

5. When the concept of automatic enrolment was first announced it was supposed to fully encompass the recommendations of the 2005 Turner report, but the spirit of this seems to have been lost. The Government’s intention to cater for those on low pay without any private pension provision fell by the wayside once the element of choice was introduced. We have always said—and as Turner suggested—that instead of being made to choose a scheme, there should be a good default scheme into which everyone who is not currently saving could be enrolled.

6. Those wanting to save more being able to seek further advice and to choose for themselves. However, the Government backed National Employment Savings Trust (NEST) may not be the best choice for every small business. In addition the burden of compliance with any qualifying scheme is now disproportionate to the benefits gained for any business with less than 10 employees.

7. The FSB is extremely concerned that employers will not be able to choose a pension scheme suitable for their company or for their employees. Business owners are not pension experts and do not have the confidence to do so.4 Small business owners do not have the HR departments and expert pension resources that a big business has. We welcome Government’s commitment that employers are extremely unlikely to be held liable for their scheme choice when they auto-enrol their employees into a pension scheme. We would additionally welcome a TPR accreditation on all “qualifying schemes” for automatic enrolment. This would inspire small business confidence when choosing a scheme.

8. However, given the way the proposals are being implemented, the FSB believes that there should be an exemption for micro-businesses—those with less than 10 employees—from the requirement to automatically enrol to enable both employers and employees to make their own choices in their best interests.

9. Our research shows that 60% of small business owners believe that pensions should be an individuals’ responsibility.5 The Government’s intention to ensure that qualifying employees are automatically enrolled into a pension scheme presents a substantial financial, but more notably a substantial administrative burden for small business owners.

10. There has so far been little consideration given to the impact these pension proposals will have on small employers. Currently, only 18% of small businesses offer a pension scheme to employees and 49% feel that pensions are too expensive. Further, only 50% of businesses with a pension scheme contribute towards their employees’ pension.6

11. The average small firm—those with four employees earning an average salary of £25,000 will pay at least an extra £2,550 per year in administration and pension costs. While this may not sound like a significant amount, this amount could be their annual marketing budget or money to go towards expansion.

12. Turning towards the administrative costs for small businesses, Department for Work and Pensions (DWP) modelling has said that it will cost micro firms with up to four employees £46 per person in administration. We believe that this is a gross underestimation of the actual time the process will take and as a result, the cost. While it is not only the financial expenditure, but the lengthy time taken in administering pension payments, this will be a burden on a small business owner who works on every aspect in their business. We already know that those who run small businesses do not work a nine-to-five job, but often are found catching up on regulatory requirements at the kitchen table in the evenings or at the weekends when many employees are enjoying family time, or time off.

13. One member specialising in payroll said:

My payroll manager estimates that the time needed to run payrolls that include pensions already is twice that needed for a larger payroll without the pension add-on. Coupled to the additional explanations to clients, many will take up to three times as long as they do now.

14. The FSB is concerned that because of the complex nature of pensions, the implementation of automatic enrolment, could lead to employers being penalised for a minor error as opposed to deliberate non-compliance. We have suggested all along that a “light touch” will be necessary in helping small businesses to understand the system and to help them to comply. We feel that if there must be a fixed penalty notice, then the level should be reduced from the £400 being proposed to £125, a similar level to a comparable HMRC penalty. However, while the registration process has been made easier, we remain to be convinced that the regulator will take this more difficult option rather than simply fine.

15. Our research has shown that 73% of small businesses are not confident in their ability to choose a pension scheme.7 It is extremely likely that the person undertaking any pension administrative role will inevitably have to be the business owner or occasionally a member of staff. Both these people are in business or are employed by a business because of their skills in their chosen field. They are not, and should not ever be deemed to be the equivalent of a pension or human resources expert found in big businesses.

16. As we have already said, NEST does not meet the Turner recommendations as employers will have to actively choose to join the scheme. What is also worrying is that the tax payer, as well as pension scheme contributors, could end up with a bill for the £379 million NEST subsidy if take-up to the scheme is lower than expected and its target market is not reached. This worst case scenario figure excludes the cost of the Government’s loan, which could end up being as much as £1.275 billion if take-up were low.8

17. NEST has proposed to repay its loan to Government by charging members 1.8% on contributions. However, we have raised concern as to what might happen if NEST cannot repay its debt in time. While the charges are currently low and will be met by the employee only, we remain concerned as to the impact of any potential increase.

18. We are also concerned about the impact of these proposals on staff earning a low income, especially those on the National Minimum Wage (NMW). We still have no indication as to what will happen when auto enrolment starts for those on the NMW—indeed, does the contribution become part of the minimum wage, or are employees going to be seeking an additional increase to cover their pension contributions. Government needs to answer this urgently, as it is a question we have repeatedly been highlighting.

19. There is also real concern if those on low incomes lost entitlement to benefits from the state. Thus any change to pension legislation has to be accompanied by a radical change in the way benefits are administered. For example, the National Association of Pension Funds (NAPF) has indicated that by being automatically enrolled, the poorest workers may lose entitlement to means tested top-ups to the basic state pension which is currently £97 a week.9 This benefits no one. We therefore agree with the NAPF that unless means-testing is addressed, Government could face accusations of mis-selling.

20. It is assumed that most small businesses will choose NEST as their company pension scheme. Given that there are limitations placed on NEST including the contributions cap and the ban on transfers, there will be employers who decide to enrol their employees into other pension schemes. In this case this decision could expose many employees to the possibility that their money is deposited in funds that are not really suitable, thus losing a proportion of savings in higher fee charges. This has been suggested by David Pitt Watson, of Hermes Fund Managers. He adds that “Perhaps even worse, it seems there are no restrictions on how the money will be invested, or adequate standards for the records that providers will need to keep. A recipe, some might say, for fraud.”10 Government has said that it has the powers to prevent excessive charging. We hope that if excessive charges do emerge, Government will be quick to intervene.

21. Joined up and effective communication is paramount. We remain concerned that DWP, NEST and TPR are all issuing different communications in their own right. This must be joined-up and we have long encouraged one simple communication, with simple business friendly language, encompassing all three areas being put into a single source document for all employers and their employees.

22. The communications issue is a particular worry given that big businesses are being automatically enrolled a few years before smaller ones. For the pension reforms to work as smoothly as possible there must be greater focus by Government, and representative bodies, to better, and more effectively communicate what is happening, how it is to work, and that big businesses are the first ones to start the process.

23. A survey earlier this year of finance and human resource directors at some of Britain’s biggest companies—who will have to commence auto-enrolment in just over a year—indicated that 40% of finance directors were still not even aware of the October 2012 deadline.11

24. If the communications challenge is not addressed there will be chaos, or if the larger employers leave it too late, there could be a sudden rush that pension providers and NEST will not be able to handle. As a result, providers may become more discerning when it comes to choosing clients, thus putting significant pressures on NEST in its early stages and storing up problems for small businesses and their employees in the future.

25. Furthermore, without good communications in place employers may face difficult conversations when their staff question why a proportion of their earnings is now going into a pension scheme rather than in their pocket. Employers will not be in a position to suggest that saving for a pension is not really a good choice for a particular employee at a particular time. This is why we have always said that employees must be able to choose to “opt-in” rather than choose to “opt-out” to avoid the implications of being accused of employer inducement.

26. One FSB accountant member said:

When the changes came in to the Construction Industry Scheme, it was left to accountants to inform those clients affected. This involved us in a great deal of time and some considerable expense. To expect us to do the same in respect of pensions is not right.

We are not allowed to advise on pensions and independent financial advisers we have spoken to are not keen on dealing with these small schemes. The pension companies won’t want to run any as their fees are being capped and the administration will be so time-consuming. Small employers will be forced to use NEST, but personally I cannot feel comfortable with it.

She added:

Most of our clients want something other than the NEST scheme

27. It is also essential to make the point that not every business is, or needs to be online or in fact uses a computer in their business. A building firm is a prime example. However, NEST is solely an online based service for employers. This means they have to set-up online and administer payroll to NEST online. Their employees however, will be able to communicate with NEST by telephone or letter. The problem is exacerbated by poor broadband provision across the UK. We remain extremely concerned that the NEST online tool will not deliver in a manner that is understandable and workable for small businesses, and are working closely with NEST to ensure this message is taken on board.

Figures from an FSB survey of 1,300 small firms showed that 24% of respondents are dissatisfied with their broadband service. FSB members in the South West have noted that current broadband provision means that many small businesses in rural areas are “timed out” before they can complete their online filing. This has been reported for Defra forms where security protocol prevents the business using someone else’s computer to make the return. Government must ensure that broadband coverage is fast, reliable and “fit for purpose” across the UK before putting a focus on online portals.

29. Some small businesses are having to pay for accountants12 to file accounts online because of earlier experiences again with the HMRC website. The FSB expresses concern that small businesses in areas of poor broadband provision will struggle to access information from TPR or be able to use NEST and that while this is especially so in rural areas, it is also prevalent in urban areas as well.

30. An employer commits a criminal offence if they wilfully fail to enrol, or re-enrol someone automatically, or denies them their rights to opt-in. This can lead to a fine or prison, and a criminal record.13 To go some way to ensure this does not happen, Common Commencement Dates (CCD’s) should be used when employers enrol and re-enrol their employees. Additionally, using these at the beginning of the process also reduces the impact of a small business being staged one or two years ahead of a competitor. Under the changes some small businesses will be staged ahead of others, acting as a barrier to competing on a level playing field for those staged significantly earlier in the process. It is extremely disappointing that throughout this process, Government has failed to “think small first”.

31. We are also extremely disappointed that there has been no further impact assessment looking at the administrative burden and cost to small firms. Our research has shown that 59% of small businesses believe that the pension reform will have a negative impact on their business.14 Despite being promised that regulation would only be introduced as a last resort and that micro-businesses would be exempt from all new domestic regulation, small businesses have not yet been exempted from automatic enrolment into a pension scheme. Having an exemption for micro-businesses would have enabled both employers and employees to make their own choices in their best interests.

32. The FSB is concerned that these reforms as they currently stand will have a significant impact on small businesses. The accumulation of the unknown administrative and fixed financial costs, combined with extra financial burdens such as increases to the minimum wage and increases in employer NICs will act as a barrier to business growth and job creation. The FSB calls on the Government to think again and exclude micro-businesses from automatic enrolment.

26 August 2011