A 'NEST-egg' for workplace pension savers? (01/2010)

NEST (National Employment Savings Trust), the new name of the forthcoming workplace pension scheme, was announced on 7 January by the Personal Accounts Delivery Authority (PADA).  The name was selected after nearly a year's extensive research amongst potential stakeholders and seems to be well supported by both individuals and employers.

PADA is responsible for designing and introducing the infrastructure for NEST, which will be handed over to a new not-for-profit trustee corporation called NEST Corporation, at which time PADA will cease to be operational. But with the new name in place it's opportune to remind you about the key points of the scheme.

The NEST timetable[1]

Three transitional phases will take NEST from launch to the full level of basic contributions over a period of five years. This phasing (which has now been extended twice from an original three years) will avoid the trustee corporation being overwhelmed and spreads the cost for employers and employees.

Phase 1 - October 2012 to October 2016

All employers will be required to implement NEST or a Qualifying Workplace Pension Scheme (QWPS) as an alternative. This requirement will be phased in over a three-year period beginning in October 2012. It will start with the largest employers and end with the smallest employers over some 30 ‘staging dates' within this period.

Each employer will be informed of their staging date by the Pensions Regulator 12 months in advance, with a further reminder 3 months before.  With effect from each employer's staging or start date, auto-enrolment responsibilities will apply and the contributions required during this phase will total 2% of band earnings[2], split as follows:

• Employer = 1% of band earnings
• Employee = 0.8% of band earnings
• Tax relief = 0.2% of band earnings
  

Phase 2 - October 2016 to October 2017

From October 2016 Phase 2 arrangements will apply, which require a significant increase in contribution levels to 5% of band earnings, split as follows:

• Employer = 2% of band earnings
• Employee = 2.4% of band earnings
• Tax relief = 0.6% of band earnings
  

Phase 3 -October 2017 onwards

From October 2017 all employers and members will be required to contribute a combined total of 8% of band earnings, split as follows:

• Employer = 3% of band earnings
• Employee = 4% of band earnings
• Tax relief = 1% of band earnings

Employers using a QWPS as an alternative to NEST, will have to pay the full Phase 3 employer contribution level from the outset, and ensure that the total contribution is at least equivalent to 8% of band earnings.

Auto-enrolment

Whether the employer uses the NEST scheme or a QWPS, they will be obliged to automatically enrol all eligible employees into the scheme within one month of their Automatic Enrolment Date (AED).  However it should be noted that contributions accrue from the AED and must be deducted on the first pay day after that date.  During Phase 1 the AED is most likely to be the employer's staging date, but after implementation the AED could be the date a worker becomes eligible for auto-enrolment:

• The date a jobholder starts working for an employer
• The date a worker earns over the qualifying earnings threshold and is eligible for auto-enrolment
• The jobholder's 22nd birthday

Employers may be permitted to auto-enrol from a specific date prior to their staging date, provided that date is after October 2012 and the regulator is informed[3].  The Employers' Duties Regulations 2010 will describe employer duties in detail.

Opting out of NEST or a QWPS

All employees have the right to opt-out of the scheme and can exercise that right only once they have become an active member of it, because the right to opt-out applies to membership of the scheme and not to automatic-enrolment itself. This means that employers should move swiftly to enrol employees because otherwise deductions might occur before the employee has the time to complete the opt-out forms. While contribution refunds are expected to be available they will only apply to those employees who opt-out within the one month opt-out period.

It will be possible for individuals to opt-out of pension saving at a later date - without a refund - and it will also be possible for an employee to opt back into pension saving after opting out, although the employer will only be obliged to honour this right once in any 12 month period.

What will the investment options look like?

PADA published its findings from extensive consultation on Investment in November 2009.  Rather than setting out recommendations on the subject it concludes that there was broad understanding and support from the participants for the objective of creating a simple, low cost scheme. However, they have identified the need for further research and analysis, so we are no nearer to understanding what the investment funds and options will look like.

Are the contributions limited?

NEST allows a maximum annual contribution of £3,600 (based on 2005 levels). While this is higher than 8% of the maximum band earnings, it is still considerably less than many will need to contribute to provide for a decent level of income in retirement. Given the absence of any retirement planning advice from the scheme, the chances are that the majority will simply contribute the minimum levels and expect that to provide a decent pension. They are highly unlikely to make alternative arrangements for further pension savings.

Can benefits be transferred into NEST from other schemes?

No transfers will be allowed in or out of the scheme. The Government's justification for this stance is that NEST is designed to complement existing schemes and to allow transfers might threaten this. However, this stance will be reviewed in 2017.

What will the scheme's charging structure be?

A number of charging structures were considered and proposed for personal accounts throughout the public consultation in 2008, although none has yet been decided upon.  The charging structure will also be affected by the investment options available under the scheme which are also yet to be finalised.  When the charging structure is announced, pension providers are highly likely to develop products mirroring the NEST scheme, perhaps with slightly lower charges and service extras.[4]

What is Aspira's view?

We wholeheartedly support auto-enrolment and the promotion of retirement saving by individuals, but have a number of concerns about the NEST scheme:

• Lack of investment fund choice and personalised investment advice
• Restricted contribution level (maximum £3600 per year)
• Inability to transfer funds in or out
• Lack of personalised retirement planning advice
  

And finally...

With a General Election in sight, further uncertainty remains about NEST and its implementation. Indeed, Theresa May, Shadow Secretary for Work and Pensions, has already said that the Tories would bring in new savings and pensions regulations, as well as bring forward auto-enrolment[5]. 

For the time being, there is no imperative for action. But the picture will become clearer by the end of 2010 and by then there may be less than two years before the landscape changes dramatically.

Derek Miles
Managing Director, Aspira Corporate Solutions LLP
January 2010

[1] The Pensions (Automatic Enrolment) Regulations 2009, Government Response to the Consultation, Department for Work and Pensions (DWP), September 2009

[2] Band Earnings include overtime, bonuses and other monetary payments within the NEST earnings band. This will be set by reference to the Primary Threshold and the Upper Earnings Limit for National Insurance contributions in the year 2006/07, i.e. £5,035 and £33,540 respectively, uprated annually in line with average earnings.

[3] DWP consults on second batch of auto-enrolment regulations - Update 2, Jonathan Stapleton, Professional Pensions Online, 24 September 2009

[4] Up close and personal, James Phillipps, p22, Corporate Adviser, July 2009

[5] Conservatives' pension plans, threesixty Round Up, threesixty Services, 23 November 2009

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