The Introduction of NEST - Existing Proposals

The Introduction of NEST – Existing proposals

• From 2012 it will be law that all employers in the UK will have to offer a workplace pension scheme to their eligible employees, unless they operate an alternative ‘qualifying' scheme.
• NEST is designed to be low cost pension scheme any employer can use to meet their duties. 
• Initially the Annual Management Charge was set at 0.3%, but is now likely to be around 0.5%.
• NEST, will operate as an occupational (trust-based) pension scheme, with a Government appointed body acting as the Trustee Board. ·         It is intended as a pension vehicle for lower earners who do not have access to a good company scheme.
• They will have a limited fund range, with a default fund for those who do not make a choice.
• There will be a minimum contribution of 8% of band earnings, and a maximum contribution of £3,600 (increased with earnings from 2005). 

Entry will be by auto enrolment.

Automatic enrolment and compulsory contributions

Employers will have to automatically enrol all eligible employees in a qualifying pension scheme, and make compulsory contributions. Employees eligible for enrolment will be:

• All employees who are aged between 22 and State Pension Age., who are not in a qualifying pension, and
• earn more than £5,035 pa (increased with earnings inflation from 2007).  

Individuals who meet the above criteria are known as eligible jobholders. 

Employees aged between 16 and 22 can choose to join and, if they do, the employer will need to pay at least the minimum contribution on their behalf, and 

Individuals can choose to opt out; however, employers will need to re-enrol them in the scheme at least once every 3 years.

Staging

Employers will be staged into their new responsibilities between October 2012 and September 2016. 

Larger employers will be the first to adopt their duties, followed by medium and then smaller firms.  Any new firms that are established between April 2012 and March 2016 will adopt the rules at the end of the staging period. 

Employers will be able to elect for an earlier automatic enrolment date (on or after 1st October 2012) if they wish. 

Once employer duties have commenced, a one month joining window will exist giving employers the flexibility to undertake the necessary administrative tasks at times to suit them.

Phasing

The minimum contribution levels will be phased in over a period of three years to help employers adjust gradually to the additional costs of compulsory contributions.  For Defined Contribution schemes, the minimum contribution requirements are:

• Contributions will be based on Band earnings - i.e. earnings between £5,035 and £33,500, for 2006/07, with these amounts being indexed each year in line with earnings growth. 
• Contributions will be phased in over three years from 2012.
• Much higher contributions are generally allowed to other pension schemes
• Initially NEST will not allow transfers either in, or out until at least 2017. 

To gain an exemption from having to offer the NEST scheme, Employers can run their own ‘qualifying’ scheme. 

The scheme will need to match the following criteria: 

• It must permit auto enrolment. At the moment, UK legislation doesn't allow employers to automatically enrol employees into a contract-based scheme such as a Group Personal Pension, Group Stakeholder or Group Self Invested Personal Pension Scheme. However the UK Government has agreed with the EU that employers operating workplace pension schemes (an employer sponsored pension scheme to which the employer contributes) will be allowed to use automatic enrolment.
• The contribution levels must be a minimum of 3% employer and a total of at least 8% contribution overall.  Where contributions are based on total salary as opposed to banded earnings, this means the % may be lower.
• Employers are not required to use an existing arrangement in meeting their duties for all existing or new staff.  This means that if contribution rates vary for different groups of employees within a firm, the employer could for example, utilise a combination of an existing group personal pension and NEST with each scheme containing its own category of employees. 
• A qualifying defined contribution scheme cannot compel a member to make any choices (including investment decisions) or provide any information before enrolling.  It cannot include any rules which prevents eligible jobholders from joining (i.e. a waiting period before entry to the scheme is allowed – although an exception does apply – see below. 
• The regulations will permit a probationary period of up to three months, if employers operate a ‘Quality Qualifying Workplace Pension Scheme’.  A defined contribution scheme will qualify as such if the total contributions are at least 11% of members qualifying earnings.  At least 6% of this must be paid by the employer. 
• If it is a contracted out final salary scheme it must deliver a minimum accrual rate of 1/80th of pensionable earnings , or
• A minimum of1/120th if it is a contracted in final salary scheme. 
• Any employees who have previously opted out of any existing pension scheme which permitted auto enrolment will need to be auto enrolled again (although they do have the choice to opt out).  

What will automatic enrolment mean in practice?

• Pension schemes which currently operate automatic enrolment achieve substantially higher take-up rates than schemes operating on an ‘opt-in' basis. Beyond 2012 schemes will have an increased membership. 
• This in turn will mean a greater cost to employers, both in terms of contributions  and administration. 

Link back to pension reform menu here