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Auto-enrolment advice: why small firms are big business

A multitude of small businesses are expected to seek help with their auto-enrolment staging over the next two years.

Later this year large numbers of small employers will reach their staging deadline for auto-enrolment. These businesses, all with 50 staff or less, will be under huge pressure to comply with complex rules and demanding administrative duties. The question for them is: ‘Who ya gonna call?’

IFAs who heard JargonFree Benefits chief executive Steve Bee’s (pictured) call to arms at the 2013 New Model Adviser® Conference may have already prepared their firms for the multitude of small businesses that will need help with auto-enrolment compliance.

Since then many advice firms have become unsure of the demand for IFA support, particularly among small firms with limited resources. However, the National Employment Savings Trust (Nest) expects high demand for intermediary support and stresses that, although small firms will turn to their accountants first, accountants will in turn need to work with IFAs.

Nest’s research into this emerging collaborative market indicates how IFAs can catch the rising tide of small business demand.

Later this year large numbers of small employers will reach their staging deadline for auto-enrolment. These businesses, all with 50 staff or less, will be under huge pressure to comply with complex rules and demanding administrative duties. The question for them is: ‘Who ya gonna call?’

IFAs who heard JargonFree Benefits chief executive Steve Bee’s (pictured) call to arms at the 2013 New Model Adviser® Conference may have already prepared their firms for the multitude of small businesses that will need help with auto-enrolment compliance.

Since then many advice firms have become unsure of the demand for IFA support, particularly among small firms with limited resources. However, the National Employment Savings Trust (Nest) expects high demand for intermediary support and stresses that, although small firms will turn to their accountants first, accountants will in turn need to work with IFAs.

Nest’s research into this emerging collaborative market indicates how IFAs can catch the rising tide of small business demand.

Intermediary opportunity

According to Nest, 74% of employers expect to turn to an external party – an IFA, accountant or payroll provider – for help with preparing for auto-enrolment (see chart 1). However, Nest chief executive Tim Jones thinks smaller businesses are more likely to approach accountants than other intermediaries.

‘When you [look at] micro employers, the proportion of those planning to use an accountant rises to 70%. If you’re a big firm, your accountancy [department] hasn’t been doing your automatic enrolment. That’s for your employee benefit consulting arm. Micros turn to their accountant for everything.’

Accountant knowledge gap

Despite small firms’ natural preference for accountants, Nest’s report shows auto-enrolment knowledge differs widely across the IFA, accountancy and payroll sectors (see chart 2). Accountants know the least.

Payroll bureaux top the knowledge pile: 92% claimed to ‘know a lot’ about auto-enrolment, compared with 90% of IFAs and 67% of accountants; and 6% claimed to ‘know a little’ about the changes, compared with 8% of IFAs and 28% of accountants.

In 2014 the Pensions Regulator found varying levels of understanding among the different intermediary types when it came to the detail of the auto-enrolment rules. Only 40% of accountants were aware that an employer must complete a ‘declaration of compliance with the appropriate government body’, compared with 87% of IFAs, it found.

Working together

Jones said: ‘A lot of [accountants] are saying they want to work with an IFA.’ (See charts 3 and 4 on page 17)

Collaboration can have mutual benefits, as Brentwood-based IFA Sterling & Law’s head of auto-enrolment Laurence Sanderson discovered when it began working with a local accountancy.

The firm recently formalised a strategic partnership with THP Chartered Accountants. For the past six months it has been working with THP to develop a fully integrated auto-enrolment payroll solution for the accountant’s 600 business clients.

‘Our immediate goal was to establish strategic relationships with accountants who operate on behalf of their clients,’ said Sanderson.

‘We are witnessing significant growth in other areas of corporate and individual advice as a direct result of auto-enrolment. Many of the employers we are dealing with have never accessed financial advice before. We now have unprecedented access to business owners and workers across a wide range of advice areas.’

Sanderson hopes this activity will increase over the next year, not just from small business owners hitting their staging date, but also from larger firms that have already enrolled and want to review the arrangements they initially put in place.

Software support

Buying in support will be crucial to staging for small businesses that do not have the staff numbers or an existing HR set-up to push through the required changes themselves. However, employers looking for a helping hand will have to compete with thousands of others.

A further 16,000 employers will be auto-enrolling in the final quarter of the 2014/15 tax year. That number will increase by 94,000 in the first quarter of the 2015/16 financial year.

This is a ‘massive step up’, said David Nash, senior policy adviser at the Federation of Small Businesses. The micro sector in particular will constitute the biggest challenge. ‘They’re not pensions experts, so they won’t in many cases have an active scheme in place or a dedicated HR professional,’ he said.

The solution is to find software that will help do the job. ‘Not all small firms will have the sophisticated software packages they might need to facilitate compliance; 16% of businesses in the Nest report said they don’t have paid-for [payroll] software,’ said Nash.

Lorraine Laryea, a solicitor and commercial adviser at the Recruitment & Employment Confederation, said most small firms did not yet have technology to perform the task, resulting in a ‘software gap’.

‘Some of the things clients found caused them difficulties early on [included] finding suitable software that would help them to implement a pension scheme. The early implementation of real-time information may have delayed the availability of this software from the outset,’ she said.

Nash believes there are two solutions. First, ‘clear, free guidance, support from intermediaries’ and keeping the costs of compliance low. ‘The lower the compliance costs [and] the administrative burden, the more likely these businesses are going to be able to raise contributions over time,’ he said.

His second solution is for the government to ‘do nothing’. ‘We don’t want to see any major policy changes until at least 2017. The industry is already slightly distracted by the onset of pension freedoms in April 2015. We don’t want any more distractions that will take the industry away from the critical task at hand.’

Bottle neck

All this sounds like a great opportunity for advisers to get stuck in, but the sheer level of demand for intermediary intervention has the potential to create chaos, according to Mazars Employee Benefits senior manager Renny Wickham.

While some employers may be clued up about the changes they need to make, they may not realise they are among thousands of other businesses doing the same thing.

This will be exacerbated by a distribution gap: there are not enough IFAs with the knowledge or set-up to help small businesses with auto-enrolment.

‘It’s like everybody turning up at the station at the same time to buy a train ticket,’ said Wickham. ‘Added to that, employers turning to intermediaries is an issue because there is still a lack of expertise in the industry. If you take the number of employers that are staging and divide it by the number of intermediaries that are out there, you’ll find there are quite a lot of companies with a lot of work to do, and they may not themselves have the resources they need to manage that.’

Small employers in particular also want to limit their expenditure. ‘The employer wants to pay the absolute minimum,’ said Wickham. ‘That, coupled with their in-house capability where they are at the moment – probably lucky to have an HR or payroll professional – makes for a challenging two years ahead of us.’

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