NEST on the back of a brown envelope
We’ve written quite a bit about NEST and auto-enrolment recently. It’s the pension monster coming over the hill for UK employers.
In this post we wanted to share with you some work that we had been doing with a prospective client of ours. After all why keep all the good stuff to ourselves! We’re spending quite a bit of our time looking at the financial impact of the new pension rules and helping employers understand the impact. To do this we really need to be talking to the HR and Finance Director as the new rules will affect both areas – but in radically different ways. In this post we are going to look at our discussions with the Finance Director of one of our prospective clients. It involves the back of an envelope calculation in true pension consultancy fashion!
EHF Manufacturing
EHF Manufacturing is a successful company in Leicester that’s involved in manufacturing – seems to be a rarity these days. The owners manage the business. We deal a lot with owners and managers. It’s a sector the market that we really enjoy working in. There’s nothing to beat giving advice to the people who actually own the business.
Where are we starting from?
EHF Manufacturing employs 116 employees. There are 16 employees in Management and Admin and 100 employees in manufacturing and sales. The total payroll shown in the accounts is £2,100,000. Crudely that gives an average salary of £17,600 give or take.
The existing pension cost is £40,000 per annum. This works out at less than 2% of payroll. It all points towards a really low take up of pension membership. Not good as far as the new rules are concerned. With average salaries of £17,600 per annum these are exactly the section of the UK workforce that the government want to force to save through workplace pension schemes. So far so good – unless you write the cheques that is.
Where do we need to get to?
We’ve been talking to the Directors about some succession planning and they are looking at an exit in the next five to seven years. It’s a profitable company with a good market and should be relatively easy to sell.
We started to work out the cost impact of enrolling everybody in some sort of pension scheme. We assumed that about 80% of employees were not covered by any pension scheme. That’s 92 employees that EHF Manufacturing is going to have pay pension contributions for.
The good news for the Finance Director is that the staging date when EHF Manufacturing will have to start paying for the 92 employees is 1 June 2014. So they have some time to work out their NEST survival strategy.
The back of the brown envelope
If none of the 92 employees opt-out of NEST (or the EHF Manufacturing Scheme) it’ll cost the company as follows:
| Time Period | Employer Contribution | Estimated Annual Cost |
| June 2014 – September 2016 | 1% | £11,040 |
| October 2016 – September 2017 | 2% | £22,080 |
| October 2017 onwards | 3% | £33,120 |
Is it Exit stage right for the Directors?
You’ll see that this makes a dent on the profit margin of the business. Will this deter investors or purchasers? What about the management and admin time spent implementing and communicating this to employees? This will all take place slap bang in the middle of the time when the Directors are looking to exit from the business.
NEST Survival Strategy
Although these calculations were all done on the back of an envelope (an HMRC one at that!) with a set of accounts the solution will take more organisation. We’ll be talking to EHF Manufacturing about:
- Their pay reviews over the next few years to build up a reserve for NEST.
- Salary Exchange as a way of reducing the impact.
- How the message needs to get out to employees.
- Whether EHF Manufacturing use NEST or their own pension scheme
We’ll be looking to prepare a NEST Survival Strategy for EHF Manufacturing. We’ve shown you our homework we’d love to see yours. What are you doing about auto enrolment and factoring in the cost and upheaval into your business plans from 2012 onwards. We’d love to hear. Leave a comment and let us know what you’re thinking.
Remember – A dwarf on a giant’s shoulders sees the further of the two.
The Small Print
Please take a few minutes to read our disclaimers here.
Related Articles
- Small firms ‘failing’ on pensions (bbc.co.uk)
- Auto-enrolment is “extortionate expense” for small firms (telegraph.co.uk)