This article relates to the forthcoming introduction of the National Employment Savings Trust (NEST) which comes into force in October 2012. It highlights a number of the key issues, which will affect all employers over the next six years, whilst NEST is integrated into the UK pension system.
Employers will be receiving written guidance from the regulators as to their responsibilities and, of course, how the new system will operate. This guidance, which is available online, covers the extent of the employer’s duties across 9 individual guides.
Furthermore the Financial Services Authority (FSA), which has overall jurisdiction, has also finalised its rules covering such topics as automatic enrolment and employers offering alternative schemes, such as GPP’s.
Treatment of Different Worker Groups
Three main groups of workers are affected by NEST be they full-time employees or contract workers.
- Eligible Job Holders: Must be automatically enrolled between the age of 22 and State Pension age. They will earn over a threshold, which at this stage is likely to be the income tax personal allowance – £7,475 in the tax year 2011/12. However, the Government has indicated that it wishes to increase this to £10,000 per annum. This affects all workers working in the UK regardless of their nationality, the location of the employer company or the length of their stay in the UK.
- Non-Eligible Job Holders: Have the right to opt into the Pension Scheme with the same basic rules as eligible job holders. They are under age 22 or over State Pension age, but under 75 years. Similarly they may be earning under the current threshold.
- Entitled Workers: This final group are very low earners (less than the NIC primary threshold) who are also not job holders. Although they have the right to ask the employer to make pension arrangements for them, the employer will not have to contribute.
Self-employed sole employee directors and non-executive directors are beyond the scope of automatic enrolment. Employers can defer automatic enrolment for up to three months of the employee starting service.
In a Defined Contribution (Money Purchase) arrangement, the minimum contribution is 8% of qualifying earnings, with at least 3% paid by the employer.
At the present time it is based on 2010/11 tax year (qualifying earnings are between £5,715 and £38,185). This includes all sources such as overtime, bonuses and commissions.
For those companies who operate pension schemes on basic salary only, they must meet one of the 3 basic requirements.
- 9% of pensionable earnings/at least 4% payable by the employer contribution
- 8% of pensionable earnings/at least 3% payable by the employer (pensionable earnings at least 85% of total pay for all members).
- 7% of pensionable earnings/3% employer (all pay must be pensionable)
Although this does complicate matters this will permit more employer pension schemes to qualify under NEST regulations.
Review, Implementation & Management Service
Chartwell’s review, implementation and management service is of great help to employers trying to navigate through this complex legislation.
NEST suitable Investment Strategy
Although the choice is unlikely to be quite as wide ranging as those offered by Group Personal Pension Schemes, there has been a recent introduction of so called ‘Lifestyling Funds’, which permit a gradual reduction in high risk funds as the pension member moves towards retirement age in order to reduce volatility and potential capital erosion of funds as they reach retirement.
The default NEST options are referred to as ‘Target Date Funds’, where risk is governed by the individual’s proximity to retirement. This is in 3 phases as follows:
- Foundation Phase: For 5 years, on members joining from age 22, they adopt a generally low risk position, so as not to discourage the member from continuing with membership of the NEST pension
- Growth Phase: Aiming to offer returns of 3% plus inflation for most of the term of membership
- Consolidation Phase: Approximately 10 years from retirement, with a gradual move to lower risk funds, to reduce the possibility of capital erosion
Both Ethical and Sharia, as well as lower growth & higher risk funds, will also be available. It is likely that these options will satisfy the majority of NEST members.
Preparing for Employer Duties
Last but no means least, the pensions regulator has now issued a document (Guide No.2) which details the responsibility of the employer, in respect of auto enrolment, implementation and management on behalf of the membership.
This details several key areas below, which I will not cover in this article, but would be happy to discuss:
- Initial assessment of eligible groups
- Selecting a NEST compatible scheme and contribution level
- Announcement and roll out to members
- Establishing and management of a suitable payroll/collection system
- Dealing with new members and opt out instructions
- Reviewing scheme suitability on a regular basis
It is quite clear that this simple initial concept may be incredibly burdensome to many employers, particularly those who do not operate pension schemes at the present time.
Unlike Stakeholder in 2001, this is a compulsory pension scheme and both the Government and Pension Regulator made clear that they will not tolerate any employer non-compliance.