Recently I was talking with someone who used to be pension manager to one of our large retailers. She wrote to me over the weekend. She’d realised that the people doing payroll for the 1.2m employers still to stage auto-enrolment aren’t as smart about pensions as she is.
Last week I realised how little payroll agents knew about pensions at all as their size of clients have never had a scheme, not even for the business owners. I spent yesterday afternoon rewriting my ‘introduction to AE’ course to explain tax relief and the whole concept of salary sacrifice.
We have a bigger problem than I realised: the micros will turn to the accountants, not just for pension selection (that the accountants don’t want to do) and compliant and cost effective payroll admin of pensions (that they have no experience of). The assumption from the payroll agents is: if they want salary sacrifice they’ll ask and they tell us what tax relief method to use. Florists are Us and Joe’s cafe won’t know what to ask and the result is a recipe for disaster
So let’s look at the five things payroll have to know, if we aren’t going to end up in a mess.
- TAX(relief) ; the administration of pension tax relief at the payroll level isn’t hard but you have to know what you are doing. The tax relief is credited to a member’s pension pot, the member has a payroll deduction net of tax, even if he or she isn’t paying tax that month/week.
- NATIONAL INSURANCE(salary exchange); Employees can elect to have their pension contributions paid by the employer in “exchange” for a reduction in salary. This means that national insurance is not liable on the pension contribution saving a lot of NI. It also makes it easier for higher rate taxpayers to get full tax relief on contributions
- PENSION CHOICE; you don’t have to choose NEST, there are many compliant workplace pension providers including the big insurers and schemes like NOW and People’s Pension.
- REGULATION; you don’t have to be regulated to sort out pensions, you don’t need to take regulated advice; you can take decisions for your company without being an IFA.
- DOCUMENTATION; there are many reasons for choosing a workplace pension, payroll support is one of them , member support’s another, investment ,costs and help after retirement all need to be considered. You need help documenting that you’ve considered all this.
Like my correspondent, I am really worried that thousands of companies are gearing up for auto-enrolment being told that it is all about the payroll and forgetting that for members it is all about the pension.
Getting to grips with pensions is tough work for employers who start from a low base (this from last year’s OFT report on workplace pensions)
Until we get basic training on pensions into the training modules produced by the payroll software and until the professional training courses produced by excellent organisations such as CIPP, Payroll World, the CIPD and the ICAEW, the pension issue will be swept under the carpet.
Nowhere is this problem more acute than with the one million SMEs and Micros who will be staging auto-enrolment and have yet to choose a pension for their staff.
In recent months, I have seen accountants and business service organisations struggle with this issue. Payroll and middleware auto-enrolment hubs are of little help. Their job is to help with the infrastructure surrounding the workplace pension, but help with choosing the pension is outside the scope of even the Pension Regulator’s “action plan”.
So we have seen the issue ducked and choice sacrificed for a “no-choice default”. How does this square with the Regulations that clearly state that employers should choose a workplace pension?
And how will employers explain to staff, both at staging and in years to come how they came to choose a pension (and why they did not choose another option)?
Employees are relying on their boss to act for them on this. Bosses cannot palm this decision off on a default suggested by an accountant, an adviser or even by Government.
Even the Government’s own pension NEST, is uncomfortable about this. In recent seminars, NEST has been urging advisers to use NEST on merit, not as the line of least resistance.
Workplace pensions are not all the same, they aren’t all compatible with every payroll, some suit older workforces, some younger, some high earners, other low. The workplace pension will invest the retirement savings of millions of employees who will not have had a pension before.
So we urge payroll to pay attention to the pension .
You don’t have to be ignorant of pensions, http://www.pensionplaypen.com is here to help.