New pension reform legislation means business owners will soon be legally obliged to enrol qualifying employees into a pension scheme – get around this by choosing to outsource services instead.

The new legislation, which comes into force in October 2012, means all businesses – whatever their size – will be required to comply. Whereas previously businesses had a choice as to whether they would even offer a pension scheme for their employees to join, soon all businesses must enrol staff in a scheme and contribute to it. Contributions start at 1% in 2012 for larger businesses and will rise to 3% for all businesses by 2017. To qualify, employees must be at least 22 years old, have not yet reached state pension age, earn more than the minimum earnings threshold (£7,475 per year) and work in the UK.

Financial and Strategic Implications

The new legislation will hit businesses both financially and strategically. The Department for Work and Pensions has found that the large majority of businesses are very small, and two-thirds have less than five employees. These very small businesses do not have a dedicated HR resource, so they lack the funds and experience to set up a pension scheme and oversee it properly. The administrative burden will most likely fall on business owners and directors themselves, creating conflicts with other business commitments. Businesses may feel the only alternative is to scale back business plans or recruitment drives because of cost or administrative implications.

One Solution – Outsource Services

Pension contributions are only one of the many costs that are saved when a business decides to outsource services. When you outsource services, you no longer retain the costs for pension contributions as well as National Insurance contributions, bonuses, holiday pay and sick pay. You also save on physical costs such as office space and utility bills. Quality of service provision will remain the same, and all the money you save can be reinvested in other areas.

However, as we have seen, if you outsource services you also remove the administrative headache of enforcing the upcoming pension legislation for new employees. This allows you to focus on the things you do best, such as managing standards and developing new business. The extra office space might even allow you to increase the number of fee-earners in your business if you do eventually decide to invest in a dedicated HR resource.

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