Why the confusing auto enrolment fee structure is damaging small business productivity

Small businesses are spending valuable time trying to understand the auto enrolment fee structure offered by pension providers, study shows

New research, conducted on behalf of workplace pension provider Smart Pension, has revealed that businesses with no previous pension experience have found deciphering complicated combination fees charged by some providers a time-consuming burden which takes them away from the important job of running their company.

An overwhelming 83% of survey respondents – 300 small businesses owners and managers turning-over up to £5m a year – said they would prefer to see all workplace pension charges as a capped, all-in-one fee.

Today’s small and medium enterprises and early-stage firms often grow via outsourcing contracts, hiring occasional staff or employing between one to nine people. They are run by time-poor but tech-savvy individuals with limited budget, complex staffing arrangements and often no pension experience.

Setting up a workplace pension can be a scary new duty that’s just another thing on the long to-do list. And, while the race is to make sure their business complies with the new pension regulations without being hit with hefty fines, the onus rests with the business founder to find the best deal out there for both the business and employees on top of just making sure the company runs smoothly.

Will Wynne, co-founder and managing director of Smart Pension, said: “Small and medium enterprises often have little or no experience of crunching through the different levels of charges and costs – and whether in fact this adds up to a good deal for themselves and their employees in the short and longer term.

“Compared with larger firms with a bigger budget and a finance team, small firms are spending a disproportionate amount of time crunching the numbers to make sure they are getting the best deal when they could be getting on with the job in hand – running and growing a successful business.

“What the charge cap covers and doesn’t cover is confusing for employers and savers alike – and getting it wrong can hit their employees’ pockets. Front-loaded flat fees and combination charges hammer workers who have jobs lasting only a few years and the lower paid – and in some cases these can wipe out any savings in left deferred pots.

“The one thing business owners said they were in favour of was simplifying things.  A fixed charge cap, as a single percentage, set at a reasonable level that includes all costs along the way makes perfect sense to these busy owners who are clearly frustrated by the complex charging levels imposed by many providers.”

The fact that combination charges can be particularly damaging to those on lower salaries and short term contracts hit the news this week.  According to Wynne this has only compounded the confusion for employers going through the process.

And, because providers are allowed to add combination charges, it’s very difficult to work out which scheme will work the best.

The overwhelming consensus of the small businesses surveyed was that an all-in-one-fee capped by the government, would offer a more workable alternative for confused small business owners and allow them to get on with what matters.

The charge cap is set by government and applies to general administration and investment costs on employee workplace pensions, while transaction costs from investment trading fall outside the cap – so can be added on.

The survey showed 57% of small business founders said they felt upfront costs were unnecessary while another 36% said they were unfair. The survey also found that 39% of small business owners felt transaction charges drained pension pots and third said added costs were harder to budget for – and 31% said they were hard to keep track of.

One of the mandatory, ongoing responsibilities for employers before, during and after switching on auto enrolment, is to consistently and regularly communicate with staff about workplace pension

The survey reports that 53% of small business owners said they felt being able to say the charge cap would always stay the same would be a more effective message to help encourage more of their staff to save for their retirement. (The responsibility for engagement rests with the employer, and the fine for not doing so is £400).

The government is currently considering changes to the charge cap on default funds as part of the current Automatic Enrolment (AE) review.  There are suggestions that the charge cap should be lowered from the current 0.75%.

Wynne added: “The charge cap debate is a bit of a red herring, that distracts from the usurious additional fees that many providers are levying. What should happen is that we do away with confusing (and often disgracefully expensive) additional charges that can be chalked up on top of the percentage fee. All charges should be rolled into a single overall percentage charge cap. This would create full transparency and comparability of costs to employees, and result in much better value for money for members.”

Smart Pension has written a comprehensive, free-to-download e-book which is designed to help the founders of small and medium enterprises and start-ups decode auto enrolment. Download it for free here.