Advice crucial for small and micro employers

Despite their tiny size compared to household-name conglomerates, the UK’s micro (1 to 9 employees) and small (10 to 49 employees) employers play a pivotal part in the wider economy. They generated over £870bn of turnover in 2012, a quarter of all UK businesses, and are the bread and butter to nearly one third of our private sector workforce. Yet they face key decisions in the near future leading to their auto-enrolment staging date.

Employers need to understand what pension scheme should be offered and how they will deal with their employees’ diverse set of circumstances. Employees need to feel confident about what is being done for them, whether they should participate, the proportion of their earnings they should invest and their perception of financial risk.

Get any of these things wrong and the cost will be at best a tainted employee/employer relationship, and at worst an adversely affected economy.

A recent survey revealed a mixed picture on readiness for the reforms. Among small firms there has been some progress in contributing to such schemes. Now 70 per cent contribute a pension to at least half their staff, up 20 per cent on 2012. However, under 20 per cent of micro firms offer a scheme.

The survey suggests small firms have greater knowledge of the reforms, whereas, for micro firms, knowledge is low and unchanged since last year. So why the mixed picture? While the 10 to 49-employee firms seem clear that auto-enrolment is coming, there may still be uncertainty among the smaller firms that it will apply to them.

Clause 34 of the newly debated Pensions Bill leaves open the possibility of revising who is caught by the auto-enrolment reforms. While some argue the government is merely maintaining flexibility, others warn it breathes new life into a 2011 recommendation by venture capitalist Adrian Beecroft to exempt firms with five or less staff. The government pushing back the staging date for firms with fewer than 30 employees does not dispel uncertainty. So the government must do all it can to clarify that auto-enrolment applies to all employers and that they should start preparing as soon as possible.

In confronting these issues in implementing the reforms, small employers clearly need professional financial advice. In choosing a pension for firms, financial advisers remain the first choice for small firms with nearly half surveyed using this option, representing more than 500,000 businesses.

For setting up and running a scheme, nearly one-third of small employers (about 60,000 businesses) would turn to an IFA, increasing significantly for more higher turnover firms.

Research determines that ‘one-off tailored advice on setting up a pension scheme’ and ‘ongoing tailored advice on the pension scheme’ are the services firms desired and are most likely prepared to pay for. Presentations and individual financial advice were the least-preferred options, although one-third of firms would be prepared to pay for these services as well.

There were three indicators. First, those surveyed who said they understood the changes were more likely to choose these sources of external advice for help with implementation.

Second, small employers were much more likely to want to pay for these services than micro ones, reflecting the higher number of employees they have to deal with but also their patterns of awareness of the reforms and their perception of the closeness of the staging dates.

Finally, firms with a turnover of £500,000-plus were up to 15 per cent more likely to want to pay for these services, whereas less successful firms were up to 10 per cent less likely.

This suggests that advisers looking to offer a tailored service proposal should do their homework on their client’s turnover beforehand.

In the next four years, at least 500,000 small business employers are likely to need the service of financial advisers to prepare for auto-enrolment. Not every adviser will be interested in giving pensions advice to small businesses. Some might have their clear preferences in other markets, but others might just need to feel more confident in their knowledge.

Laurence Baxter is head of policy and research for the Personal Finance Society

Key points

The advice given to small businesses from advisers could prove pivotal to the success of employee auto-enrolment.

Employers need to be clear on the kind of pension scheme that should be offered to their employees, along with their varied circumstances.

‘One-off tailored advice on setting up a pension scheme’ and ‘ongoing tailored advice on the pension scheme’ topped the list of services required by SMEs, according to research.