There were press reports this weekend that the government plans to abolish its plans to get small businesses to contribute to employee pension plans.
The Telegraph speculated that small firms with fewer than 50 employees would be exempt from the new ‘auto-enrolment’ requirements for the National Employment Savings Trust (NEST).
Larger businesses will still be subject to the new auto-enrolment rules when they are introduced next year.
Given the current economic climate, it makes sense to spare small business owners from the costs of compulsory pension contributions.
The new pension rules could cost as much as £3bn a year according to figures from the Department for Business. Of that figure, around £444m in the first year would pay for administration costs alone.
Could these rumoured changes to the rules for pension auto-enrolment spell the death of NEST before it has even started?
One feature of NEST is a 1.8% initial charge on contributions, in addition to the 0.3% annual management charge. This 1.8% ‘contribution charge’ is there to pay for the set-up costs of the scheme and will remain in place until these set-up costs have been repaid.
With fewer potential members of NEST, the time it will take to repay the costs incurred to establish NEST is bound to lengthen significantly.
Whilst NEST Corporation believes the combined 1.8% initial charge and 0.3% annual charge is broadly equivalent to a 0.5% annual charge, which still makes the scheme broadly competitive with a private sector pension scheme delivered without the benefit of advice, they may need to redo their analysis based on fewer potential members.
Relieving small businesses of this cost burden at a time when many are struggling due to the economic climate makes sense.
The move, if confirmed in the Autumn Statement, could however be viewed as somewhat short-sighted as it will mean less private provision for retirement incomes.
With all of us living for longer and returns from investments generally lower, we need to save more for retirement and potentially work later. Deferring NEST for small businesses is both good and bad news.
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