In 2008 the UK government published its Pensions Act setting out in law the pension reforms designed to address a pensions crisis threatening to cause financial hardship to a generation of workers.  The pensions crisis is the result of an ageing population, longer life expectancy, inadequate saving for retirement and decreased pension fund value following a period of financial instability.

The key feature of the reforms is the requirement that all employers must automatically enrol their employees in to a workplace pension scheme. The phasing in of auto-enrolment will begin in 2012 with businesses employing more than 30,000 people, then those with more than 350 staff in 2013 and finally those with less than 350 staff from 2014. The last two digits of a firms PAYE scheme reference number will determine the exact date when they must commence auto-enrolment.

Employees who are eligible for auto-enrolment will be those over 22 years of age and earning more than £5,035 per annum regardless of length of service. Those aged between 16 and 22 and earning less than £5,035 can request that their employer enrols them. All employees have the option to opt out of auto-enrolment if they wish but must then be re-enrolled every 3 years.

The Government will offer a default scheme in the form of the National Earnings Savings Trust (NEST) for employers who have not got an approved alternative.

In the long run minimum contributions will be set at 8% of qualifying earnings between £5,035 and £33,500 of which 3% must be from the employer. This level of contributions will be phased in starting at 2% in 2012, rising to 5% in 2016 and then 8% from 2017.

In June 2010 the newly elected UK coalition Government ordered a review of how to support the auto-enrolment process. The reviews terms of reference indicate that some of the requirements set out in the 2008 act will be adjusted in light of the deterioration in the economic climate. The Auto-enrolment minimum earnings threshold may be increased, the minimum age for enrolment may be increased, a minimum firm size for enrolment may be introduced, a minimum employee service duration is a possibility as are contributions based on basic earnings rather than qualified earnings. However, the magnitude of the pensions crisis and the scale of the UK Governments budget deficit dictate that concessions are likely to be modest at best.

Approximately 40% of the UK's economic output is produced by small firms meaning the Government will put their role in addressing the crisis at the heart of its reforms. Currently, cost and administrative burden mean small businesses are unlikely to offer a pension scheme to employees and when auto-enrolment finally forces them to do so many will need advice and support. The complexity of setting up then running a pension scheme is considerable and small firms with modest human and financial resources will almost certainly need some assistance from either a public or private entity.

The Government's budgetary predicament means it is unlikely that significant public assistance will be provided aside from making the NEST scheme relatively straightforward. Small businesses will most likely seek assistance from their accountant to help with the auto-enrolment process. The benefits of being able to avoid the day to day administration of a pension scheme will outweigh the extra accountancy costs. An accountant will have the skills and experience to set up and administer a scheme considerably quicker and to a higher degree of accuracy than most small businesses.

Outsourcing the administration of a pension scheme will ensure the correct contributions are made and reduce the legal risk associated with the scheme. Payroll processing is often done in house by small firms and will need modification to accommodate deductions of pensions contributions. Outsourced payroll processing will greatly simplify auto-enrolment and will be more cost effective in the long term.

Author Richard Barlow works at McGregors Corporate, an accountancy firm with offices throughout the East Midlands. For further information about cost effective pension and payroll outsourcing come to: => http://www.freepayroll.org.uk