Some small businesses could be headed for a pension crisis in the coming years due to failing to understand auto-enrolment pensions. Auto-enrolment has already come into effect for Britain’s biggest companies, with SMEs soon able to join too.


Auto-enrolment is a policy that has been introduced by the government that now means that every employer must automatically enrol workers into a workplace pension scheme if they:
  • are aged between 22 and State Pension age
  • earn more than £9,440 a year
  • work in the UK.

Under this scheme the employee and employer both pay into the pension, beginning with a minimum of 1 per cent annual earnings, later increasing to 8 per cent.


While larger companies are already operating with this new system (partially due to most already having similar measures in place preceding these plans), SMEs are required to enrol all their staff in a company pension scheme unless people specifically opt out.

Small and medium sized enterprises are required to adopt this new system over the next four years, amid worries that auto-enrolment is going to be a difficult and problematic experience for some of them.

Lack Of Understanding

A series of studies have suggested that almost half of SME owners do not understand auto-enrolment. 82 per cent of those asked do not even know a rough estimate of how much cost automatic enrolment would cost their businesses!

Department for Work & Pensions have come under fire as this lack of understanding of the processes, complications and cost of the auto-enrolment of pensions in SMEs has been largely attributed to an ineffective awareness campaign.

The research also found that business owners are failing to prepare for auto-enrolment, with a massive 90 per cent of SME owners not even starting to prepare for this important development. This presents a significant issue for the companies and their advisors, particularly in the light of recent news that many pension providers are declaring they will not accept any AE business from new or existing customers unless stringent criteria is met, and without a minimum of six months’ notice.

Complications of the Process

SME must plan for auto-enrolment, as is it not a simple process. Due to the widespread lack of awareness some sources from private pension providers are worried that an sudden and overwhelming flurry of applications will be received. This would mean they could not be dealt with in a timely fashion and would mean many SMEs failing to meet the deadline of auto-enrolment pensions.

Advice for SME Owners

With this in mind it’s imperative that you take a look at your pensions scheme as a SME owner, in particular giving the following your attention:

Don’t assume your staff are likely to opt-out

The latest figures have suggested that less than 10 per cent of employees have chosen to remove themselves from their company scheme, so by no means expect a significant opt-out rate with your staff.

Don’t leave it too late

Owners with less than 50 employees believe there is still plenty of time to sort out auto-enrolment before the staging deadline of April 2015 and beyond, but many auto-enrolment specialists have already reported a ‘log-jam’ as business owners seek specialist financial advisors, payroll providers and software suppliers.

The Risk

Auto-enrolment is not just about pensions but also about compliance, with TPR already taking its role seriously. 89 enquiries on firms have been launched since October 2012, and most of these were against larger size companies with more resources in place to deal with the change in pensions. The danger is a widespread series of investigations on smaller businesses who have been ill-aware and ill-equipped to deal with this transition.

A Pensions Crisis

The former Downing Street pensions adviser, Ros Altmann is one of many experts who predict that a pensions crisis could be on the cards, partially due to the misunderstanding of auto-enrolment from smaller business.

One big problem is that small and medium-sized enterprises may struggle even to find a pension provider prepared to offer a scheme to all their staff.

Pension Provider Problems

Research by Close Brothers Asset Management warned that many pension providers now view SMEs as a captive market.

Worryingly, the position of power that has been placed on pension providers means they can now pick and choose who they select, denying some SMEs the ability to arrange pensions for part time or temporary staff, despite the legal obligation of SMEs to provide this.

A related issue is that pension providers are struggling with the workload created by auto-enrolment and setting conditions accordingly. 

Scottish Life, for example, has said it won’t accept any auto-enrolment business from new or existing customers without at least six months’ notice. With other providers now following this lead, SMEs that don’t get themselves organised risk missing the deadline to comply with the law.

Close said one-in-five employers yet to auto-enrol have already been warned by their current pension provider that they aren’t guaranteeing access to all.