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”.
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.
Existing Employer Pension Schemes
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 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).
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.
• 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.....”
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. The maximum funding in a year is a gross amount of £3,600 – the same as the current ‘non-earning’ threshold
Time Frame
Larger employers will be the first to join NEST, starting in October 2012. The intention is for all firms to be fully integrated into the scheme by October 2017.
The Scheme Itself
• NEST is designed to be a low cost pension option, and therefore is expected to have limited investment options
• 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 generally not be permitted from the scheme
Summary
There are a number of key points regarding NEST and compulsory pension funding:
• the scheme is designed to cover the majority of employees, not just permanent or full time workers and includes elements of pay that, at this time, would be deemed ‘non-pensionable’ such as maternity pay, overtime and bonuses.
• The scheme 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
• it is important to identify when a company is due to join auto-enrolment and compulsory funding so that a firm can be fully prepared
• 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)
• NEST is not a fait accompli for businesses, although offering a ‘Qualifying Pension Scheme’ is.
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.
For more details you are welcome to contact Tom Lowman Tom@innesreid.co.uk
