All employers will eventually have to provide a workplace pension following an independent review of automatic enrolment.
The decision to include microemployers in the reforms, announced by pensions minister Steve Webb last week in a briefing at the Nest Corporation headquarters, follows a period of intense industry pressure.
Influential lobbying groups, including the National Association of Pension Funds, the Association of British Insurers and the Confederation of British Industry, opposed a small firm exemption. Government expects the plans to cost firms £3.2bn a year by 2017.
However, Webb says excluding the 800,000 employers with four or less employees could have erected a “barrier to growth” as companies would have faced a cost “cliff edge” if they wanted to take on a fifth member of staff. Institute for Fiscal Studies research fellow Paul Johnson, who led the three-person review, says this extra cost could have exceeded £1,500.
Mace & Jones head of employment law Martin Edwards says: “These are clearly fundamental changes affecting all small business. They will carry significant cost and firms will need to factor this cost into financial planning.”
The earnings threshold at which people aged 22 and over are auto-enrolled into a pension has increased from £5,035 to £7,445, with the point at which pension contributions become payable aligned with the National Insurance primary threshold. People earning between £5,035 and £7,445 will be able to enrol themselves and receive the employer contribution.
The review, which Webb says the Government “fully accepts”, has also introduced amendments to cut the administration burden placed on employers.
An optional three-month waiting period before an employee needs to be auto-enrolled will be implemented to prevent employers with high staff turnover having to enrol and unenrol a significant number of employees every year. The measure will deliver an estimated £130m employer contribution saving.
The biggest employers which are scheduled to be brought into the reforms in October and November 2012 will be allowed to automatically enrol from July 2012 if they want to do so.
The report urges the Department for Work and Pensions to review “as a matter of urgency” the issue of pension transfers so people are able move funds into and out of Nest come 2017.
Legal & General pensions strategy director Adrian Boulding says: “You should be able to pick up your pension and take it with you.”