Anthony Hilton: The big pensions challenge facing small firms

Not many people living in London think of themselves as employers once you get outside the seriously expensive bits like Chelsea, Kensington or St John’s Wood.

But a surprising number are once you count in au pairs, childcare, cleaners, drivers or gardeners.

Even fewer of these “employers” will be aware that if these people working for them have turned 22 and earn a little over £10,000 a year, they will probably soon have to be auto-enrolled into a pension scheme.

Whether a 25-year-old Polish childminder whose plan is only to stay here for two years wants a British pension in his or her old age is beside the point — the responsibility is on the employer to enrol the person, and the person can then opt out if they want to.

But any problems experienced by this group will be as nothing compared with the angst felt by literally millions of small businesses in the next few months as the requirement to enrol their employees begins to bite.

A window cleaner acting as a sole trader will not be made to enrol himself but a suitably paid helper carrying his buckets will have to be signed up — a process known as “staging”.

We are entering what will be by far the most complicated and risky part of the slow-motion roll-out of the programme designed to auto-enrol almost the entire workforce not already covered into an employer-based pension scheme.

Thus far, it has applied to the biggest firms and has mostly been hailed as a success because fewer than 10% of those dropped into the pension pot have jumped straight out.

As a result, more than half the previously unpensioned population now has some cover. But because auto-enrolment has so far just been a requirement for bigger firms, all those people have come from only about 54,000 companies, which is around 3% of the total.

The real challenge comes now. A way has to be found to get small businesses and the people they employ to sign up without the whole system degenerating into chaos.

According to the pensions regulator of the 1.8 million small-firm employers who will be required to stage between now and 2018, two thirds employ between one and four workers while 16% employ five to nine people and one in six has between 10 and 49.

Research by firms such as Now Pensions, a leading provider in Denmark that is trying to establish itself here, suggests that the majority of these firms will have no existing pension scheme and will have little to no idea about what is expected of them in setting one up — or about the compliance requirements thereafter.

Now Pensions’ proposal, outlined in a press release last week, is to offer a service that provides all the advice the small business needs and takes on much of the responsibility for providing a workable system. In return, the company intends to levy a monthly service charge of £40 per employer —about £500 a year.

This is not what the Government had in mind when it set up the scheme but it might well be what is needed to keepthe roll-out on course. Handling vast numbers of people in complicated schemes where contributions are small, are likely to vary from month to month and will last only as long as he person stays in the job is not what most pension providers want to do. The low cash flows and high cost of administration mean it is very hard for them to make money.

Now Pensions recognises this, which is why it wants to charge a fee.

There is something else that should be causing the Government sleepless nights. Contrary to expectations, far more pension companies came forward as potential providers in the early days than it had expected.