In December 2006, the Government published a White Paper outlining its workplace pension reforms, including proposals for NEST (the National Employment Savings Trust) – previously called Personal Accounts.
These reforms aim to increase the amounts people save for their retirement in order to supplement their pension income. It is clearly apparent that the state pension cannot be relied upon to fund one’s retirement in its entirety.
At around £100 per week it is hardly enough to cover the grocery bills, let alone provide people with all the income they will require once they stop working for a living.
As the government’s flagship proposal under pensions reform, the NEST scheme, due to come into effect from 2012, will put in place pension provision for millions of low to moderate earners who are not currently saving for their retirement and will have wide-ranging effects across every field of business.
There is a lot to be gained by starting to prepare now and ensure appropriate provisions are put in place before the legislation takes effect. To provide an indication of what will be required, employers will be obliged to auto-enrol new and existing employees into a personal “defined contribution” plan (i.e. contribution levels for employee and employer are set at outset) unless they opt out and, from October 2017, a minimum employer contribution of 3% of salary will be required.
Details of how the contribution levels (both employee and employer) will be structured, as well as other key features of the proposed legislation, can be seen in Table 1.
The time-scales are shown in Table 2.
Key features of NEST schemes
As a new form of simple and low cost pension scheme, NEST will be introduced as part of the workplace pension reforms and will have the following key features:
1. Governance
NEST will be a trust-based occupational pension scheme. It will be regulated in the same way as existing trust-based defined contribution schemes.
2. Charges
NEST will provide people with access to a simple, low-cost pension scheme. The charges are expected to be:
- a 2% charge on the value of each contribution to cover NEST’s start-up costs;
- an annual management charge of 0.3% of the value of the fund. Whilst this is significantly less than most occupational stakeholder or group personal pension plans, the fund range and flexibility of the contract will be severely limited as a result. This may lead to a number of firms choosing to implement their own arrangements, that comply to NEST legislation, rather than using the Government’s standard NEST compliant scheme.
3. Investment choice
Workers will be automatically enrolled into the default fund but there is likely to be a choice of other investment funds, which may include options such as social, environmental and ethical investments. Those not wishing to make an investment choice will stay in the default fund, although it is clear that the fund range will be somewhat limited in order to keep to the low-cost charging structure.
Some firms, as a duty of care to their employees, may wish to implement their own private arrangements that offer greater investment flexibility whilst still complying with NEST criteria. However, this is likely to come at an additional cost to the members.
Anyone who joins NEST will be able to continue to save in the scheme even after they leave the workplace or move to an employer that does not use NEST. Therefore, the individual policies created within NEST will be highly portable and can be transported between employers throughout an individual’s working life.
The self-employed and single person directors are not eligible for auto-enrolment but will be able to join NEST.
4. Opting out
Employers will need to automatically enrol their eligible workers into a qualifying pension scheme and make contributions to it. Workers will be able to opt-out of their employer’s scheme if they choose not to participate. However, the government is likely to make this process rather labour intensive in order to prevent people from opting-out immediately and procrastinating yet further about how they will provide a replacement income in retirement.
Workers who give notice during the formal opt-out period will be put back in the position they would have been in if they had not become members in the first place, which may include a refund of any contributions taken following automatic enrolment.
5. Transfers
Transfers into and out of NEST will not be allowed (except in specific limited circumstances). This will be reviewed in 2017.
6. Contribution limits
There will be an annual contribution limit of £3,600 (in 2005 earnings’ terms) into NEST. This will be uprated by earnings year on year and the limit will be reviewed in 2017.
However, individuals should be aware that they will still be eligible to contribute to other pension arrangements alongside NEST if they so wish and the NEST scheme need not be their only source of pension funding.
Summary
From sometime between 2012 and 2016 (dependent on the size of the business from largest to smallest), employers will have to automatically
enrol all eligible employees in a qualifying pension scheme and make contributions to their plan.
It is therefore imperative that business owners are made aware of these proposed changes to pension legislation and start to identify the impact these changes will have on their business.
Ideally, they should consult their independent financial adviser or accountant to talk through the possible implications of this and the various options available to them.
Will their existing scheme allow the business to meet the requirements of the legislation or does a suitable contingency plan need to be devised? It is also worth considering the administration requirements of the legislation and ensuring it is compliant with the government’s requirements. Additional staff resource of systems may be required as a result.
- The author can be contacted at: Allchurch Bailey Wealth, 93 High Street, Evesham, Worcs. WR11 4DU; telephone 01386 442597, e-mail andrew.neale@abwealth.co.uk; website www.abwealth.co.uk
