The administrative burden of stakeholder pensions

With just three days to go before the first 'stakeholder pensions' become available, many small businesses are still unaware that they may be legally obliged to arrange one on behalf of their staff.

But if they haven't caught on by October 6 this year, they may face a £50,000 fine.

So what are the essential elements of this new government pension scheme, and how does it affect small businesses?

All businesses employing more than five people must offer a basic pension, known as a stakeholder pension, to their employees by October 2001 at the latest. Minimum employee payments have been set at £20 a month, but the employer isn't obliged to contribute.

However, the employer must bear the administrative burden of deducting contributions from each employee's wage packet and channelling them into the pension fund every month. Also, employers will be responsible for scanning the pensions market and consulting with staff in order to decide which scheme the company should sign up to before the October 2001 deadline.

Officially, employers have a six-month window starting on April 6 to select and join a stakeholder pension scheme, although some providers have been offering them since October last year, according to the Department of Social Security.

Annual charges for membership are limited to 1% of contributions a year, but the providers may levy additional fees if specialist advice is sought.

Last year, the government agreed to exempt companies employing fewer than 5 people, after small business lobbies argued that complying with the new regulations would put them under intolerable administrative strain.

Companies which already offer occupational schemes are also exempted, but only if their employees contribute at least 3% of annual earnings.

The new regulations are explicitly targeted at some 4 million workers in the £9,000 to £18,000 a year wage bracket who are currently relying solely on the basic state pension. A steady rise in life expectancy, which has massively increased payouts by pension funds, together with a decline in the rate of return on those funds' investments, means that most state contributions are no longer enough to guarantee that future pensioners will have enough to live on.

According to one gloomy set of pension industry calculations, one in three pensioners will be forced to live on income support by 2050.

From the employer's point of view, the main potential stumbling block is that selecting a particular stakeholder pension may expose the company to legal action if the provider later goes bankrupt, or underperforms the market. Even if the final regulation explicitly precludes employer liability, relations between workers and bosses would suffer in such a scenario.

Business lobbies, while broadly in favour of the plan, are also concerned over the administrative costs involved.

It will take quite a lot of time, and new payroll systems will be required. There will be particular challenges for companies that operate manual payroll systems, said Mark Thomas, Policy Advisor at the Confederation of British Industry.

Many employers are also concerned that the government will oblige them to start contributing towards their employees' pension funds once the new scheme is up and running.