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Feathering the NEST

23rd March, 2011

The 2008 Pensions Act introduced a number of notable changes to the UK’s pension regime. One the most far reaching is undoubtedly the compulsion on employers to enrol all employees automatically in a “Qualifying Pension Scheme”.

This is going to be a staged process between 2012 and 2016, starting with the largest employers down to the smallest. With an ageing population, a large pensions gap and a notable national debt the reasoning behind compulsory funding is relatively obvious – the more an individual can provide for themselves in retirement, the less the state needs to.

If the employer already has a pension scheme it will need to be tested against the minimum for a “Qualifying Scheme”.

The Government has designed simple qualifying criteria for Company Schemes:

  • Does it permit auto-enrolment?
  • Are eligible employees auto-enrolled within 90 days of joining the company?
  • Does it have a default investment fund?
  • Does it deliver a minimum accrual rate or minimum contribution?If the company scheme passes these relevant criteria, then it will qualify. If the employer does not have a scheme they will need to set one up, or improve their existing scheme to meet the requirements.

    If there is no qualifying scheme then the employer must enrol employees in the NEST (National Employment Savings Trust) scheme.

    NEST

    The scheme is designed to reach a notable number of lower paid, private sector employees with no access to pension schemes (estimated by the NEST corporation to be 750,000).

    NEST sees the introduction of compulsory personal pensions, with compulsory funding levels – both from the employee and the employer. This the first time we have seen compulsory funding into non-state schemes and sees a marked change from the Stakeholder regime that is currently in force.

    Eligibility
    Eligible employees will be:

  • between 22 and State Retirement Age
  • earning in excess of £7,475 per annum…
  • ….and be employed in the UK.
    However, other groups will be able to request joining the scheme e.g. those aged between 16 and 22, or earning between £5,720 and £7,475.It is important to note that income in this case includes elements that at this time could be deemed ‘non-pensionable‘ such as maternity pay, overtime and bonuses.

    Employees will be automatically enrolled in NEST, unless their employer has a qualifying scheme. Individuals can opt out but need to pro-actively select this option every three years.

    KEY POINT – the scheme is designed to cover the majority of employees, not just permanent or full time workers

    Funding Levels
    By the time NEST is fully implemented (October 2017) an individual’s NEST account will be receiving contributions of 8% of their employed income – 4% from the employee, 1% from tax relief on those contributions and 3% from their employer. These funding levels are to be phased in from the inception of NEST in 2012.

    The maximum funding in a year is a gross amount of £3,600 – the same as the current ‘non-earning‘ threshold.

    KEY POINT – this will increase a business’ wage bill due to the employer contributions. It will also potentially reduce an employee’s take home pay if wages are not increased to replace the compulsory pension contribution.

    Time Frame
    Larger employers will be the first to join NEST, starting in October 2012. The ‘phasing‘ process is complicated and is best shown via the Pension Regulator’s own website:

    www.thepensionregulator.gov.uk/pensions-reform/duty-dates-timeline

    The intention is for all firms to be fully integrated into the scheme by October 2017.

    KEY POINT – it is important to identify when a company is due to join auto-enrolment and compulsory funding

    The Scheme Itself
    NEST is designed to be a low cost pension option, with Annual Management Charges capped at 0.3% and arranged fees capped at 2%. Due to the low cost it is expected that the investment choices will be very limited with most individuals enrolling in a ‘default‘ fund.

    It is portable. NEST is NOT an employer’s pension scheme. It belongs to the employee and will move with the individual from job to job.

    Transfers will not be permitted from the scheme except in “very limited” circumstances; we assume the main exemption will be as part of divorce settlements. However the full definition of “very limited” is yet to be clarified.

    KEY POINT – limited investment choices, and inability to transfer benefits to other schemes in the future may make NEST inflexible and unlikely to meet the requirements of more sophisticated investors (remembering that today’s trainee is tomorrow’s Chief Executive).

    Alternatives
    An employer cannot encourage employees to opt out. The Pension Regulator website states the following:
    It is against the law for an employer to actively encourage an individual to opt-out…..

    KEY POINT – NEST is not a fait accompli for businesses, although offering a ‘Qualifying Pension Scheme‘ is.

    Summary

    We believe that NEST offers challenges to businesses and that while it may appear some time away it is important to prepare for the impact it could have. At Innes Reid we will be happy to discuss how NEST may affect your business, and to discuss potential alternatives to auto-enrolment.

    This is based upon current information and legislation as at March 2011. The NEST scheme and the rules for “Qualifying Pension Schemes” are still subject to review and, therefore, it is possible that these rules may change prior to implementation.

    This article was kindly written for us by Tom Lowman of Innes Reid. Tom can be contacted on 01244 347583 or via email at [email protected]

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