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For the first time in history, UK employers are being required to provide pension contributions for employees. This is a significant change in policy, as employers have always been given the choice to provide benefits for employees as they see fit, generally providing benefits that the employees value, or that otherwise aid recruitment or retention of staff.

For a lot of firms in the construction industry, cash benefits, such as improved pay and performance bonuses, are the most attractive to employees, and pensions are not generally offered.

This new law has stopped just short of forcing employees to be in a pension scheme when they actively don鈥檛 want to be, but aims to capture all the employees who are lethargic on the subject. Under the rules, all employees (within certain age and pay parameters) are automatically enrolled into a pension scheme, and can then choose to come out again, although their employer cannot encourage them to do so and the process to do so is designed to discourage opting out by all but the most determined.

In addition, those who opt out must be re-enrolled (and can then choose to opt out) every three years, which presumably will lead, in the long run, to most employees staying within the scheme simply to avoid the extra effort of repeatedly leaving it.

Although the headline issue for many firms has been the extra cost, in practice the biggest concern has been administration

This 鈥渁uto-enrolment鈥� obligation for employers is being rolled out over time, having started in October 2012 with the biggest employers. However, from 2014, the law starts to apply to much smaller companies.

For instance, by February 2014, companies or groups employing 250 or more employees must auto-enrol them, and by June 2014 this includes those that employ 62 people or more. The calculation relates to the number of employees on 1 April 2012, so can throw up slightly strange numbers for expanding or contracting businesses, but in general the rules are now going to apply to smaller and medium-sized businesses.

Although the headline issue for many firms has been the extra cost, in practice the biggest concern has been the administration of the auto-enrolment of employees. The rules for auto-enrolment are complex, requiring employers to examine difficult issues about who they employ, on what basis, and requiring an advance knowledge of the levels of pay on any payslip (a particular challenge where there are workers with varying income, depending on output or bonuses).

To date, employers have coped with this with significant effort, but generally to good effect. Inevitably it has been easier for the larger employers, which often have pension arrangements in place and generally have a significant in-house HR and payroll team.

In 2014 we will see SMEs, such as mid-scale and smaller businesses in the construction industry, try to roll out a pension arrangement for the first time, with the added complexities of having to identify the employees who are eligible, dealing with employees who opt out and putting employees into the pension arrangement without their consent.

The lack of an existing infrastructure is not the only reason that this is going to be an entirely different challenge for these smaller employers.

Auto-enrolment, as the government intended, is giving rise to a much greater demand for simple, money purchase pension arrangements, and providers are not particularly enthused about small contributions from individuals who are not interested in cross selling.

The holdings of so-called 鈥渟mall pots鈥� of pension benefits for individuals who have only contributed minimally into the scheme for a short while before moving jobs is expensive and unprofitable for the pension provider. As a result, it is expected that most providers will be willing to offer to provide pensions
only for a small number of new auto-enrolment businesses going forward, and many smaller businesses will struggle to find a provider for their new auto-enrolment scheme. Employers can use the National Employment Savings Trust (NEST), which has been set up specifically to provide in thesecircumstances, but this is subject to statutory restrictions, and so is unlikely to be attractive to employees (and won鈥檛 be available for the best paid).

The construction industry is one of many that are going to see auto-enrolment as a significant challenge over 2014 and beyond. Resources will have to be diverted to deal with a complex benefit provision that is new to employer and employees alike.

The challenge for most employers will be complying with the legislation, while ensuring that employees are enthused and appreciate the value of the benefit.

Rosalind Connor is a partner in the pensions team at international law firm Taylor Wessing